As filed with the Securities and Exchange Commission on November 9, 2001
Securities Act Registration No. Investment Company Registration No.
811-10501
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 [ ]
AMENDMENT No. 4 [ ]
BlackRock Municipal 2018 Term Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock Municipal 2018 Term Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
Copies to:
Michael K. Hoffman, Esq. [ ]
Skadden, Arps, Slate, Meagher & Flom LLP [ ]
Four Times Square [ ]
New York, New York 10036 [ ]
Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================
Proposed Proposed
Amount Being Maximum Maximum Amount of
Title of Securities Price Offering Aggregate Registration
Being Registered Registered per Unit Offering Price(1) Fee
-------------------------------------------------------------------------------
Preferred Shares,
$.001 par value 40 shares $25,000 $1,000,000 $250(2)
===============================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such dates as the Commission, acting
pursuant to said Section 8(a), may determine.
BlackRock Municipal 2018 Term Trust
CROSS REFERENCE SHEET
Part A--Prospectus
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover Cover page
Item 2. Inside Front and Outside Back Cover Page Cover page
Item 3. Fee Table and Synopsis Prospectus Summary
Item 4. Financial Highlights Financial Highlights
(unaudited)
Item 5. Plan of Distribution Cover Page; Prospectus
Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; The
Trust's Investments
Item 8. General Description of the Registrant The Trust; The Trust's
Investments; Risks;
Description of Preferred
Shares; Certain
Provisions in the
Declaration of Trust
Item 9. Management Transfer Management of the Trust;
Custodian and Agent;
Auction Agent
Item 10. Capital Stock, Long-Term Debt, and Description of Preferred
of Other Securities Shares; Description
Common Shares; 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 Additional Table of Contents for
the Statement of
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 Objectives and Policies Investment Objectives
and Policies; Investment
Policies and Techniques;
Portfolio Transactions
and Brokerage
Item 18. Management Management of the Trust;
Portfolio Transactions
and Brokerage
Item 19. Control Persons and Principal Holders of
Securities Management of the Trust
Item 20. Investment Advisory and Other Services Management of the Trust;
Experts
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions
and Brokerage
Item 22. Tax Status Tax Matters
Item 23. Financial Statements Report of Independent
Auditors; Financial
Highlights (unaudited)
Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement
PROSPECTUS
[LOGO]
$[ ]
BlackRock Municipal 2018 Term Trust
Auction Rate Municipal Preferred Shares ("AMPS")
("Preferred Shares")
[ ] Shares, Series [ ]
Liquidation Preference $25,000 per share
---------------
Investment Objectives. BlackRock Municipal 2018 Term Trust (the
"Trust") is a recently organized, diversified, closed-end management
investment company. The Trust's investment objectives are:
o to provide current income that is exempt from regular Federal income
tax; and
o to return $15 per common share (the initial public offering
price per common share) to holders of common shares on or about
December 31, 2018.
Portfolio Contents. The Trust will invest primarily in municipal bonds
that pay interest that is exempt from regular Federal income tax. The Trust
will invest in municipal bonds that, in the opinion of the Trust's
investment advisor and sub-advisor, are underrated or undervalued. Under
normal market conditions, the Trust expects to be fully invested in these
tax-exempt municipal bonds. The Trust will invest at least 80% of its total
assets in municipal bonds that at the time of investment are investment
grade quality. Investment grade quality bonds are bonds rated within the
four highest grades (Baa or BBB or better by Moody's Investor Service, Inc.
("Moody's"), Standard & Poors Ratings Group ("S&P") or Fitch IBCA, Inc.
("Fitch")) or bonds that are unrated but judged to be of comparable quality
by the Trust's investment advisor and sub-advisor. The Trust may invest up
to 20% of its total assets in municipal bonds that at the time of
investment are rated Ba/BB or B by Moody's, S&P or Fitch or bonds that are
unrated but judged to be of comparable quality by the Trust's investment
advisor and sub-advisor. Bonds of below investment grade quality are
regarded as having predominately speculative characteristics with respect
to the issuer's capacity to pay interest and repay principal, and are
commonly referred to as "junk bonds." The Trust intends to actively manage
the maturity of its bonds and expects bonds in its portfolio to have an
initial dollar weighted average maturity of approximately 17 years under
current market conditions. Over time, the dollar weighted average maturity
of the Trust's portfolio is expected to shorten as the remaining term of
the Trust shortens. The Trust cannot ensure that it will achieve its
investment objective.
Term Trust. The Trust seeks to return $15 per common share to common
shareholders on or about December 31, 2018 (when the Trust will terminate)
by actively managing its portfolio of municipal obligations which will have
an average final maturity on or about such date and by retaining each year
a percentage of its net investment income, but continuing to maintain its
status as a regulated investment company for Federal income tax purposes.
No assurance can be given that the Trust will achieve its investment
objectives.
Investing in the Preferred Shares involves risks that are described in
the "Risks" section beginning on page [ ] of this prospectus. The minimum
purchase amount of the Preferred Shares is $25,000.
---------------
Per Share Total
Public offering price $ $
Sales load $ $
Proceeds, before expenses, to the Trust $ $
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 underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to
purchasers, in book-entry form, through the facilities of The Depository
Trust Company on or about [ ], 2001.
---------------
[ ]
---------------
The date of this prospectus is [ ], 2001
You should read the prospectus, which contains important information
about the Trust, before deciding whether to invest in the Preferred Shares
and retain it for future reference. A Statement of Additional Information,
dated [ ], 2001, containing additional information about the Trust, has
been filed with the Securities and Exchange Commission and is incorporated
by reference in its entirety into this prospectus. You may request a free
copy of the Statement of Additional Information, the table of contents of
which is on page [ ] of this prospectus, by calling (888) 825-2257 or by
writing to the Trust, or obtain a copy (and other information regarding the
Trust) from the Securities and Exchange Commission's web site
(http://www.sec.gov).
The Preferred Shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The Trust is offering [ ] shares of Series [ ] Auction Rate Municipal
Preferred Shares. The shares are referred to in this prospectus as
"Preferred Shares." The Preferred Shares have a liquidation preference of
$25,000 per share, plus any accumulated, unpaid dividends. The Preferred
Shares also have priority over the Trust's common shares as to distribution
of assets as described in this prospectus. It is a condition of closing
this offering that the Preferred Shares be offered with a rating of "Aaa"
from Moody's and "AAA" from S&P.
The dividend rate for the initial dividend rate period will be [ ]%
for Series [ ]. The initial rate period is from the date of issuance
through [ ], 2001 for Series [ ]. For subsequent rate periods, Preferred
Shares pay dividends based on a rate set at auction, usually held weekly.
Prospective purchasers should carefully review the auction procedures
described in this prospectus and should note: (1) a buy order (called a
"bid order") or sell order is a commitment to buy or sell Preferred Shares
based on the results of an auction; (2) auctions will be conducted by
telephone; and (3) purchases and sales will be settled on the next business
day after the auction.
The Preferred Shares are redeemable, in whole or in part, at the
option of the Trust on the second business day prior to any date dividends
are paid on the Preferred Shares, and will be subject to mandatory
redemption in certain circumstances at a redemption price of $25,000 per
share, plus accumulated but unpaid dividends to date of the redemption,
plus a premium in certain circumstances. The Trust intends to redeem all of
the Preferred Shares no later than the last dividend payment date prior to
December 31, 2018 (when the Trust will terminate).
Preferred Shares are not listed on an exchange. You may only buy or
sell Preferred Shares through an order placed at an auction with or through
a broker-dealer that has entered into an agreement with the auction agent
and the Trust or in a secondary market maintained by certain
broker-dealers. These broker-dealers are not required to maintain this
market, and it may not provide you with liquidity.
Dividends on Preferred Shares, to the extent payable from tax-exempt
income earned on the Trust's investments, will be exempt from regular
Federal income tax in the hands of owners of such shares. All or a portion
of the Trust's dividends may be subject to the Federal alternative minimum
tax. The Trust is required to allocate net capital gains and other taxable
income, if any, proportionately between common and preferred shares,
including the Preferred Shares, based on the percentage of total dividends
distributed to each class for that year. The Trust may at its election give
notice of the amount of any income subject to Federal income tax to be
included in a dividend on a Preferred Share in advance of the related
auction. If no such notice is given, solely by reason of the fact that a
taxable allocation was made retroactively as a result of a redemption of
all or part of the Preferred Shares or the liquidation of the Trust, the
Trust will be required to pay additional amounts to holders of Preferred
Shares in order to adjust for their receipt of income subject to regular
Federal income tax.
TABLE OF CONTENTS
Page
----
Prospectus Summary...................................................... 4
Financial Highlights (Unaudited)........................................ 7
The Trust............................................................... 9
Use of Proceeds......................................................... 9
Capitalization (Unaudited).............................................. 9
Portfolio Composition................................................... 10
The Trust's Investments................................................. 10
Risks................................................................... 14
Management of the Trust................................................. 17
Description of Preferred Shares......................................... 19
The Auction............................................................. 26
Description of Common Shares............................................ 29
Certain Provisions in the Agreement and Declaration of Trust............ 29
Repurchase of Common Shares............................................. 31
Tax Matters............................................................. 31
Underwriting............................................................ 32
Custodian and Transfer Agent; Auction Agent............................. 33
Legal Opinions.......................................................... 33
Available Information................................................... 34
Table of Contents for the Statement of Additional Information........... 35
APPENDIX A Tax Equivalent Yield Table................................... A-1
---------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should
not rely on it. We are not, and the underwriters are not, making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this prospectus is
accurate only as of date of this prospectus. Our business, financial
condition and prospects may have changed since that date.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders
and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information
the Trust collects, how the Trust protects that information and why, in
certain cases, the Trust may share information with select other parties.
Generally, the Trust does not receive any non-public personal
information relating to its shareholders, although certain non-public
personal information of its shareholders may become available to the Trust.
The Trust does not disclose any non-public personal information about its
shareholders or former shareholders to anyone, except as permitted by law
or as is necessary in order to service shareholder accounts (for example,
to a transfer agent or third-party administrator).
The Trust restricts access to non-public personal information about
its shareholders to employees of the Trust's investment advisor and its
affiliates with a legitimate business need for the information. The Trust
maintains physical, electronic and procedural safeguards designed to
protect the non-public personal information of its shareholders.
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in our Preferred Shares. You
should read the more detailed information contained in this prospectus, the
Statement of Additional Information and the Trust's Statement of
Preferences of Auction Rate Municipal Preferred Shares (the "Statement")
attached as Appendix A to the Statement of Additional Information.
Capitalized terms used but not defined in this prospectus shall have the
meanings given to such terms in the Statement.
The Trust................................ BlackRock Municipal 2018 Term
Trust is a recently organized,
diversified, closed-end
management investment company.
The Trust will distribute
substantially all of its net
assets on or about December 31,
2018, when the Trust will
terminate. Throughout the
prospectus, we refer to
BlackRock Municipal 2018 Term
Trust simply as the "Trust" or
as "we," "us" or "our." See
"The Trust." The Trust's common
shares are traded on the New
York Stock Exchange under the
symbol "BPK". See "Description
of the Common Shares." As of [
], 2001, the Trust had [ ]
common shares outstanding and
net assets of $[ ].
Investment Objectives.................... The Trust's investment
objectives are to provide
current income exempt from
regular Federal income tax and
to return $15 per common share
(the initial offering price per
common share) to holders of
common shares on or about
December 31, 2018. No assurance
can be given that the Trust
will achieve its investment
objectives.
Investment Policies...................... The Trust will invest primarily
in municipal bonds that pay
interest that is exempt from
regular Federal income tax. The
Trust will invest in municipal
bonds that, in the opinion of
BlackRock Advisors, Inc.
("BlackRock Advisors" or the
"Advisor") and BlackRock
Financial Management, Inc.
("BlackRock Financial
Management" or the
"Sub-Advisor") are underrated
or undervalued. Underrated
municipal bonds are those whose
ratings do not, in the
Advisor's or Sub-Advisor's
opinion, reflect their true
creditworthiness. Undervalued
municipal bonds are bonds that,
in the Advisor's or
Sub-Advisor's opinion, are
worth more than the value
assigned to them in the
marketplace. Under normal
market conditions, the Trust
expects to be fully invested in
these tax-exempt municipal
bonds. The Trust will invest at
least 80% of its total assets
in municipal bonds that at the
time of investment are
investment grade quality.
Investment grade quality bonds
are bonds rated within the four
highest grades (Baa or BBB or
better by Moody's, S&P or
Fitch) or bonds that are
unrated but judged to be of
comparable quality by the
Advisor and the Sub-Advisor.
The Trust may invest up to 20%
of its total assets in
municipal bonds that at the
time of investment are rated
Ba/BB or B by Moody's, S&P or
Fitch or bonds that are unrated
but judged to be of comparable
quality by the Advisor and the
Sub-Advisor. Bonds of below
investment grade quality are
regarded as having
predominately speculative
characteristics with respect to
the issuer's capacity to pay
interest and repay principal,
and are commonly referred to as
"junk bonds." The Trust intends
to actively manage the maturity
of its bonds and expects bonds
in its portfolio to have an
initial dollar weighted average
maturity of approximately 17
years under current market
conditions. Over time, the
dollar weighted average
maturity of the Trust's
Portfolio is expected to
shorten as the remaining term
of the Trust shortens. See "The
Trust's Investments."
The Trust seeks to return $15
per common share to holders of
common shares on or about
December 31, 2018 (when the
Trust will terminate) by
actively managing its portfolio
of tax-exempt municipal
obligations which will have an
average final maturity on or
about such date and by
retaining each year a portion
of its net investment income,
but continuing to maintain its
status as a regulated
investment company for Federal
income tax purposes.
Investment Advisor....................... BlackRock Advisors will be the
Trust's investment advisor and
BlackRock Advisors' affiliate,
BlackRock Financial Management,
will provide certain day-to-day
investment management services
to the Trust. Throughout the
prospectus, we sometimes refer
to BlackRock Advisors and
BlackRock Financial Management
collectively as "BlackRock."
The Offering............................. The Trust is offering [ ]
shares of Series [ ] Preferred
Shares at a purchase price of
$25,000 per share. Preferred
Shares are being offered by the
underwriters listed under
"Underwriting." The Trust
intends to redeem all of the
Preferred Shares no later than
the last dividend payment date
prior to December 31, 2018
(when the Trust will
terminate).
Risk Factors Summary..................... Risk is inherent in all
investing. Therefore, before
investing in the Preferred
Shares you should consider
certain risks carefully. The
primary risks of investing in
the Preferred Shares are:
o if an auction fails you
may not be able to sell
some or all of your
shares;
o because of the nature of
the market for Preferred
Shares, you may receive
less than the price you
paid for your shares if
you sell them outside of
the auction, especially
when market interest rates
are rising;
o a rating agency could
downgrade the rating
assigned to the Preferred
Shares, which could affect
liquidity;
o the Trust may be forced to
redeem your shares to meet
regulatory or rating
agency requirements or may
voluntarily redeem your
shares in certain
circumstances;
o in extraordinary
circumstances, the Trust
may not earn sufficient
income from its
investments to pay
dividends;
o if interest rates rise,
the value of the Trust's
investment portfolio will
decline, reducing the
asset coverage for the
Preferred Shares. This
risk is increased during
the early years of the
Trust when it will invest
primarily in long-term
bonds which fluctuate more
in price than shorter-term
bonds;
o if an issuer of a
municipal bond in which
the Trust invests
experiences financial
difficulty or defaults,
there may be a negative
impact on the income and
net asset value of the
Trust's portfolio;
o the Trust may invest up to
20% of its total assets in
securities that are below
investment grade quality
which are regarded as
having predominately
speculative
characteristics with
respect to the issuer's
capacity to pay interest
and principal; and
o as a result of the
terrorist attacks on the
World Trade Center and the
Pentagon on September 11,
2001, some of the United
States securities markets
were closed for a four-day
period. These terrorist
attacks and related events
have led to increased
short-term market
volatility and may have
long-term effects on
United States and world
economies and markets. A
similar disruption of the
financial markets could
impact interest rates,
auctions, secondary
trading, ratings, credit
risk, inflation and other
factors relating to the
securities.
For additional risks of
investing in the Trust, see
"Risks" below.
Trading Market........................... Preferred Shares are not listed
on an exchange. Instead, you
may buy or sell the Preferred
Shares at an auction that
normally is held weekly, by
submitting orders to a
broker-dealer that has entered
into an agreement with the
auction agent and the Trust (a
"Broker-Dealer"), or to a
broker-dealer that has entered
into a separate agreement with
a Broker-Dealer. In addition to
the auctions, Broker-Dealers
and other broker-dealers may
maintain a secondary trading
market in Preferred Shares
outside of auctions, but may
discontinue this activity at
any time. There is no assurance
that a secondary market will
provide shareholders with
liquidity. You may transfer
shares outside of auctions only
to or through a Broker-Dealer
or a broker-dealer that has
entered into a separate
agreement with a Broker-Dealer.
The table below shows the first
auction date for the Preferred
Shares and the day on which
each subsequent auction will
normally be held for the
Preferred Shares. The first
auction date for the Preferred
Shares will be the business day
before the dividend payment
date for the initial rate
period for each series of
Preferred Shares. The start
date for subsequent rate
periods will normally be the
business day following the
auction date unless the
then-current rate period is a
special rate period or the
first day of the subsequent
rate period is not a business
day.
Series First Auction Date* Subsequent
------ ------------------- ----------
[ ] [ ] [ ]
* All Dates are 2001.
Dividends and Rate Periods............... The table below shows the
dividend rate for the initial
rate period on the Preferred
Shares offered in this
prospectus. For subsequent rate
periods, Preferred Shares will
pay dividends based on a rate
set at auctions, normally held
weekly. In most instances,
dividends are also paid weekly,
on the day following the end of
the rate period. The rate set
at auction will not exceed the
maximum applicable rate. See
"Description of Preferred
Shares--Dividends and Dividend
Periods."
The table below also shows the
date from which dividends on
the Preferred Shares will
accumulate at the initial rate,
the dividend payment date for
the initial rate period and the
day on which dividends will
normally be paid. If the day on
which dividends otherwise would
be paid is not a business day,
then your dividends will be
paid on the first business day
that falls after that day.
Finally, the table below shows
the number of days of the
initial rate period for the
Preferred Shares. Subsequent
rate periods generally will be
seven days. The dividend
payment date for special rate
periods of more than seven days
will be set out in the notice
designating a special rate
period. See "Description of
Preferred Shares--Dividends and
Dividend Periods--Designation
of Special Dividend Periods."
Number
Dividend of Days
Date of Payment Subsequent of
Initial Accumulation Date for Dividend Initial
Dividend at Initial Initial Rate Payment Rate
Rate Rate* Period* Day Period
[ ]... [ ]% [ ] [ ] [ ] [ ]
____________
* All Dates are 2001.
Special Tax Considerations............... Because under normal
circumstances the Trust will
invest substantially all of its
assets in municipal bonds that
pay interest that is exempt
form regular Federal income
tax, the income you receive
will ordinarily be exempt from
Federal income tax. Your income
may be subject to state and
local taxes. All or a portion
of the income from these bonds
will be subject to the Federal
alternative minimum tax, so
Preferred Shares may not be a
suitable investment if you are
subject to this tax or would
become subject to such tax by
investing in Preferred Shares.
Taxable income or gain earned
by the Trust will be allocated
proportionately to holders of
Preferred Shares and common
shares, based on the percentage
of total dividends paid to each
class for that year.
Accordingly, certain specified
Preferred Shares dividends may
be subject to income tax on
income or gains attributed to
the Trust. The Trust may give
notice before any applicable
auction of the amount of any
taxable income and gain
included in a dividend to be
distributed for the period
relating to that auction. If no
such notice is given, solely by
reason of the fact that a
taxable allocation was made
retroactively as a result of a
redemption of all or part of
the AMPS or the liquidation of
the Trust, the Trust will be
required to pay additional
amounts to holders of Preferred
Shares in order to adjust for
their receipt of income subject
to regular federal income tax.
See "Tax Matters" and
"Description of Preferred
Shares--Dividends and Dividend
Periods."
Ratings.................................. The Preferred Shares are expected
to be issued with a rating of
"Aaa" from Moody's and "AAA"
from S&P. In order to maintain
this rating, the Trust must own
portfolio securities of a
sufficient value and with
adequate credit quality to meet
the rating agencies'
guidelines. See "Description of
Preferred Shares--Rating Agency
Guidelines and Asset Coverage."
Redemption............................... The Trust may be required to
redeem shares if, for example,
the Trust does not meet an
asset coverage ratio required
by law or to correct a failure
to meet a rating agency
guideline in a timely manner.
The Trust voluntarily may
redeem Preferred Shares under
certain conditions. See
"Description of Preferred
Shares--Redemption" and
"Description of Preferred
Shares--Rating Agency
Guidelines and Asset Coverage."
Liquidation Preference................... The liquidation preference for
shares of each series of
Preferred Shares will be
$25,000 per share plus
accumulated but unpaid
dividends. See "Description of
Preferred Shares--Liquidation."
Voting Rights............................ The holders of preferred
shares, including Preferred
Shares, voting as a separate
class, have the right to elect
at least two trustees of the
Trust at all times. Such
holders also have the right to
elect a majority of the
trustees in the event that two
years' dividends on the
preferred shares are unpaid. In
each case, the remaining
trustees will be elected by
holders of common shares and
preferred shares, including
Preferred Shares, voting
together as a single class. The
holders of preferred shares,
including Preferred Shares,
will vote as a separate class
or classes on certain other
matters as required under the
Trust's Agreement and
Declaration of Trust, as
amended and restated, the
Investment Company Act of 1940
(the "Investment Company Act")
and Delaware law. See
"Description of Preferred
Shares--Voting Rights," and
"Certain Provisions in the
Agreement and Declaration of
Trust."
FINANCIAL HIGHLIGHTS (Unaudited)
Information contained in the table below shows the unaudited operating
performance of the Trust from the commencement of the Trust's investment
operations on October 30, 2001 through [ ], 2001. Since the Trust was
recently organized and commenced investment operations on October 30, 2001,
the table covers less than [ ] weeks of operations, during which a
substantial portion of the Trust's portfolio was held in temporary
investments pending investment in municipal securities that meet the
Trust's investment objectives and policies. Accordingly, the information
presented may not provide a meaningful picture of the Trust's future
operating performance.
For the Period
October 30,
2001*
Through
[
], 2001
Per Common Share Operating Performance:
Net asset value, beginning of period.......................... $ [ ]
Net investment income......................................... [ ]
Net unrealized gain on investments............................ [ ]
Net increase from investment operations....................... [ ]
Capital charge with respect to issuance of common shares ..... [ ]
Net asset value, end of period................................ $ [ ]
Market value, end of period................................... $ [ ]
Total Investment Return....................................... [ ]%
Ratios To Average Net Assets Of Common Shareholders:
Operating Expenses ........................................... [ ]
Net investment income......................................... [ ]
Supplemental Data:
Average net assets of common shareholders (000)............... $ [ ]
Portfolio turnover............................................ [ ]%
Net assets of common shareholders, end of period (000)... $ [ ]
===============================================================================
* Commencement of investment operations.
The information above represents the unaudited operation performance
for a common share outstanding, total investment return, ratios to average
net assets and other supplemental data for the periods indicated. This
information has been determined based upon financial information provided
in the financial statements and market value data for the Trust's common
shares.
THE TRUST
The Trust is a recently organized, diversified, closed-end management
investment company registered under the Investment Company Act. The Trust
was organized as a Delaware business trust on September 7, 2001, pursuant
to an Agreement and Declaration of Trust, as later amended and restated,
governed by the laws of the State of Delaware. The Trust will distribute
substantially all of its net assets on or about December 31, 2018, when the
Trust is expected to terminate. On October 30, 2001, the Trust issued an
aggregate of 14,700,000 common shares of beneficial interest, par value
$.001 per share, pursuant to the initial public offering and commenced its
investment operations. The Trust's common shares are traded on the New York
Stock Exchange under the symbol "BPK". The Trust's principal office is
located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its
telephone number is (888) 825-2257.
The following provides information about the Trust's outstanding
shares as of October [ ], 2001.
Amount held by
--------------
Amount the Trust or Amount
------ ------------ ------
Title of Class Authorized for its Account Outstanding
-------------- ---------- --------------- -----------
Common Unlimited 0 14,700,000
Preferred Unlimited 0 0
Series [ ] [ ] 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $_________
after payment of the estimated offering costs. The Trust will invest the
net proceeds of the offering in accordance with the Trust's investment
objectives 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 approximately 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.
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Trust as of [
], 2001, and as adjusted to give effect to the issuance of the Preferred
Shares offered hereby.
Actual As Adjusted
------ -----------
Shareholder's Equity:
Preferred Shares, $.001 par value, $25,000
stated value per share, at
liquidation value; unlimited
shares authorized (no shares issued; [ ]
shares issued, as adjusted).................... $ [ ] $ [ ]
Common shares, $.001 par value per share;
unlimited shares authorized,
14,700,000 shares outstanding................... [ ] [ ]
Paid-in surplus......................................... [ ] [ ]
Balance of undistributed net investment income.......... [ ] [ ]
Accumulated net realized gain/loss from
investment transactions.......................... [ ] [ ]
Net unrealized appreciation/depreciation
of investments................................... [ ] [ ]
Net assets......................................... [ ] [ ]
* None of these outstanding shares are held by or for the account of the Trust.
PORTFOLIO COMPOSITION
As of [ ], 2001, approximately [ ]% of the market value of the Trust's
portfolio was invested in long-term municipal securities and approximately
[ ]% of the market value of the Trust's portfolio was invested in
short-term municipal securities. The following table sets forth certain
information with respect to the composition of the Trust's investment
portfolio as of [ ], 2001, based on the highest rating assigned.
Value
Credit Rating -----
(000) Percent
----- -------
AAA/Aaa*................................
$ %
AA/Aa ................................
A/A ................................
BBB/Baa .
BB/Ba
Unrated+................................
Short-Term..............................
----- -------
TOTAL.............................. 100%
----- -------
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of
principal and interest.
+ Refers to securities that have not been rated by Moody's, S&P or Fitch,
but that have been assessed by BlackRock as being of comparable credit
quality to rated securities in which the Trust may invest. See "The Trust's
Investments--Investment Objectives and Policies."
THE TRUST'S INVESTMENTS
Investment Objectives and Policies
The Trust's investment objectives are to provide current income exempt
from regular Federal income tax and to return $15 per common share to
holders of common shares on or about December 31, 2018. No assurance can be
given that the Trust will achieve its investment objectives.
The Trust will invest primarily in municipal bonds that pay interest
that is exempt from regular Federal income tax. Under normal market
conditions, the Trust expects to be fully invested (at least 95% of its net
assets) in tax-exempt municipal bonds and generally will invest at least
80% of its total assets in such tax-exempt municipal bonds. Under normal
market conditions, the Trust will invest at least 80% of its total assets
in investment grade quality municipal bonds. Investment grade quality means
that such bonds are rated, at the time of investment, within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are
unrated but judged to be of comparable quality by BlackRock. Municipal
bonds rated Baa by Moody's are investment grade, but Moody's considers
municipal bonds rated Baa to have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity for issuers of municipal bonds that are rated BBB or Baa
(or that have equivalent ratings) to make principal and interest payments
than is the case for issuers of higher grade municipal bonds. The Trust may
invest up to 20% of its total assets in municipal bonds that are rated, at
the time of investment, Ba/BB or B by Moody's, S&P or Fitch or that are
unrated but judged to be of comparable quality by BlackRock. Bonds of below
investment grade quality (Ba/BB or below) are commonly referred to as "junk
bonds." Bonds of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal. These credit quality policies
apply only at the time a security is purchased, and the Trust is not
required to dispose of a security if a rating agency downgrades its
assessment of the credit characteristics of a particular issue. In
determining whether to retain or sell a security that a rating agency has
downgraded, BlackRock may consider such factors as BlackRock's assessment
of the credit quality of the issuer of the security, the price at which the
security could be sold and the rating, if any, assigned to the security by
other rating agencies. Appendix A to the Statement of Additional
Information contains a general description of Moody's, S&P's and Fitch's
ratings of municipal bonds. The Trust may also invest in securities of
other open- or closed-end management 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. See "--Other Investment Companies,"
"--Tax-Exempt Preferred Shares" and "--Initial Portfolio Composition."
The Trust seeks to return $15 per common share to holders of common
shares on or about December 31, 2018 (when the Trust will terminate) by
actively managing its portfolio of tax-exempt municipal obligations, which
will have an average final maturity on or about such date, and by retaining
each year a percentage of its net investment income, but continuing to
maintain its status as a regulated investment company for Federal income
tax purposes. The purpose of retaining a portion of the net investment
income is to enhance the Trust's ability to return to investors $15 per
common share outstanding upon the Trust's termination. Such retained net
investment income will generally serve to increase the net asset value of
the Trust. However, if the Trust realizes any capital losses on
dispositions of securities that are not offset by capital gains on the
disposition of other securities, the Trust may return less than $15 for
each common share outstanding at the end of the Trust's term. In addition,
the leverage caused by the Trust's issuance of Preferred Shares may
increase the possibility of incurring capital losses and the difficulty of
subsequently incurring capital gains to offset such losses. However,
BlackRock believes that it will be able to manage the Trust's assets so
that the Trust will not realize capital losses which are not offset by
capital gains over the life of the Trust on the disposition of its other
assets and retained net investment income. Although neither BlackRock nor
the Trust can guarantee these results, their achievement should enable the
Trust, on or about December 31, 2018, to have available for distribution to
holders of its common shares $15 for each common share then outstanding.
The Trust will invest in municipal bonds that, in BlackRock's opinion,
are underrated or undervalued. Underrated municipal bonds are those whose
ratings do not, in BlackRock's opinion, reflect their true
creditworthiness. Undervalued municipal bonds are bonds that, in the
opinion of BlackRock, are worth more than the value assigned to them in the
marketplace. BlackRock may at times believe that bonds associated with a
particular municipal market sector (for example, electrical utilities), or
issued by a particular municipal issuer, are undervalued. BlackRock may
purchase those bonds for the Trust's portfolio because they represent a
market sector or issuer that BlackRock considers undervalued, even if the
value of those particular bonds appears to be consistent with the value of
similar bonds. Municipal bonds of particular types (for example, hospital
bonds, industrial revenue bonds or bonds issued by a particular municipal
issuer) may be undervalued because there is a temporary excess of supply in
that market sector, or because of a general decline in the market price of
municipal bonds of the market sector for reasons that do not apply to the
particular municipal bonds that are considered undervalued. The Trust's
investment in underrated or undervalued municipal bonds will be based on
BlackRock's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise, relative to the
market, to reflect their true value. Any capital appreciation realized by
the Trust will generally result in capital gains distributions subject to
Federal capital gains taxation.
The Trust may purchase municipal bonds that are additionally secured
by insurance, bank credit agreements or escrow accounts. The credit quality
of companies which provide these credit enhancements will affect the value
of those securities. Although the insurance feature reduces certain
financial risks, the premiums for insurance and the higher market price
paid for insured obligations may reduce the Trust's income. Insurance
generally will be obtained from insurers with a claims-paying ability rated
Aaa by Moody's or AAA by S&P or Fitch. The insurance feature does not
guarantee the market value of the insured obligations or the net asset
value of the common shares. The Trust may purchase insured bonds and may
purchase insurance for bonds in its portfolio.
During temporary defensive periods, including the period during which
the net proceeds of this offering are being invested, and in order to keep
the Trust's cash fully invested, the Trust may invest up to 100% of its net
assets in liquid, short-term investments, including high quality,
short-term securities that may be either tax-exempt or taxable. The Trust
may not achieve its investment objective under these circumstances. The
Trust intends to invest in taxable short-term investments only if suitable
tax-exempt short-term investments are not available at reasonable prices
and yields. If the Trust invests in taxable short-term investments, a
portion of your dividends may be subject to regular Federal income tax.
The Trust cannot change its investment objectives 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
Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects, such as roads or public
buildings, to pay general operating expenses or to refinance outstanding
debt. Municipal bonds may also be issued for private activities, such as
housing, medical and educational facility construction or for privately
owned industrial development and pollution control projects. General
obligation bonds are backed by the full faith and credit, or taxing
authority, of the issuer and may be repaid from any revenue source. Revenue
bonds may be repaid only from the revenues of a specific facility or
source. The Trust also may purchase municipal bonds that represent lease
obligations. These carry special risks because the issuer of the bonds may
not be obligated to appropriate money annually to make payments under the
lease. In order to reduce this risk, the Trust will only purchase municipal
bonds representing lease obligations where BlackRock believes the issuer
has a strong incentive to continue making appropriations until maturity.
The municipal bonds in which the Trust will invest pay interest that,
in the opinion of bond counsel to the issuer, or on the basis of another
authority believed by BlackRock to be reliable, is exempt from regular
Federal income tax. BlackRock will not conduct its own analysis of the tax
status of the interest paid by municipal bonds held by the Trust. The Trust
may also invest in municipal bonds issued by United States Territories
(such as Puerto Rico or Guam) that are exempt from regular Federal income
tax. In addition to the types of municipal bonds described in the
prospectus, the Trust may invest in other securities that pay interest that
is, or make other distributions that are, exempt from regular Federal
income tax and/or state and local personal taxes, regardless of the
technical structure of the issuer of the instrument. The Trust treats all
of such tax-exempt securities as municipal bonds.
The yields on municipal bonds are dependent on a variety of factors,
including prevailing interest rates and the condition of the general money
market and the municipal bond market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. The market
value of municipal bonds will vary with changes in interest rate levels and
as a result of changing evaluations of the ability of bond issuers to meet
interest and principal payments.
The Trust will actively manage the maturity of its bonds and expects
bonds in its portfolio to have an initial dollar weighted average maturity
of approximately 17 years, but the initial weighted average maturity of
obligations held by the Trust may be shortened, depending on market
conditions. Over time, the dollar weighted average maturity of the Trust's
portfolio is expected to shorten as the remaining term of the Trust
shortens.
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 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 management 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 will remain subject to payment of the Trust's advisory and other fees
and expenses with respect to assets so invested. Holders of common shares
will therefore be subject to duplicative expenses to the extent the Trust
invests in other investment companies. BlackRock will take expenses into
account when evaluating the investment merits of an investment in an
investment company relative to available municipal bond investments. In
addition, the securities of other investment companies may also be
leveraged and will therefore be subject to the same leverage risks to which
the Trust is subject. As described in this prospectus in the sections
entitled "Risks" and "Preferred Shares and Leverage," the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. Investment companies may have investment policies that
differ from those of the Trust. In addition, to the extent the Trust
invests in other investment companies, the Trust will be dependent upon the
investment and research abilities of persons other than BlackRock. The
Trust treats its investments in such open- or closed-end investment
management companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Trust may also invest up to 10% of its total assets in preferred
interests of other investment funds that pay dividends that are exempt from
regular Federal income tax. A portion of such dividends may be capital gain
distributions subject to Federal capital gains tax. Such funds in turn
invest in municipal bonds and other assets that generally pay interest or
make distributions that are exempt from regular Federal income tax, such as
revenue bonds issued by state or local agencies to fund the development of
low-income, multi-family housing. Investment in such tax-exempt preferred
shares involves many of the same issues as investing in other open- or
closed-end management investment companies as discussed above. These
investments also have additional risks, including liquidity risk, the
absence of regulation governing investment practices, capital structure and
leverage, affiliated transactions and other matters, and concentration of
investments in particular issuers or industries. The Trust will treat
investments in tax-exempt preferred shares as investments in municipal
bonds.
High Yield Securities
The Trust may invest up to 20% of its total assets in securities rated
below investment grade such as those rated Ba or lower by Moody's and BB or
lower by S&P or securities comparably rated by other rating agencies or in
unrated securities determined by BlackRock to be of comparable quality.
These lower grade securities are commonly known as "junk bonds."Securities
rated below investment grade are judged to have speculative characteristics
with respect to the interest and principal payments. Such securities may
face 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.
Lower grade securities, though high yielding, are characterized by
high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding,
higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Trust to sell certain
of these securities or could result in lower prices than those used in
calculating the Trust's net asset value.
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or
no return on your investment or that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in Preferred Shares.
Interest Rate Risk
Interest rate risk is the risk that bonds, and the Trust's net assets,
will decline in value because of changes in interest rates. Generally,
municipal bonds will decrease in value when interest rates rise and
increase in value when interest rates decline. The value of longer-term
bonds fluctuates more in response to changes in interest rates than does
the value of shorter-term bonds. Because the Trust, in its early years,
will primarily invest in long-term bonds, the value of the Trust's
investment portfolio will fluctuate more in response to changes in market
interest rates than if the Trust invested primarily in shorter-term bonds.
The Trust issues Preferred Shares, which pay dividends based on short-term
interest rates. The Trust then uses the proceeds from the sale of Preferred
Shares to buy municipal bonds, which pay interest based on long-term rates.
Both long-term and short-term interest rates may fluctuate. If short-term
interest rates rise, the Preferred Shares dividend rates may rise so that
the amount of dividends paid to holders of Preferred Shares exceeds the
income from the portfolio securities purchased with the proceeds from the
sale of Preferred Shares. Because income from the Trust's entire investment
portfolio (not just the portion of the portfolio purchased with the
proceeds of the Preferred Shares offering) is available to pay Preferred
Share dividends, however, Preferred Share dividend rates would need to
greatly exceed the yield on the Trust's portfolio before the Trust's
ability to pay Preferred Share dividends would be impaired. If long-term
rates rise, the value of the Trust's investment portfolio will decline,
reducing the amount of assets serving as asset coverage for the Preferred
Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through an
auction process. In the auction, holders of Preferred Shares may indicate
the dividend rate at which they would be willing to hold or sell their
Preferred Shares or purchase additional Preferred Shares. The auction also
provides liquidity for the sale of Preferred Shares. An auction fails if
there are more Preferred Shares offered for sale than there are buyers. You
may not be able to sell your Preferred Shares at an auction if the auction
fails. Also, if you place hold orders (orders to retain Preferred Shares)
at an auction only at a specified dividend rate, and that rate exceeds the
rate set at the auction, you will not retain your Preferred Shares.
Finally, if you buy shares or elect to retain shares without specifying a
dividend rate below which you would not wish to buy or continue to hold
those shares, you could receive a lower rate of return on your shares than
the market rate. See "Description of Preferred Shares" and "The
Auction--Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions you may not
be able to sell any or all of your shares or you may not be able to sell
them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Trust has designated a special rate period (a rate period of more
than seven days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market.
Broker-dealers that maintain a secondary trading market for Preferred
Shares are not required to maintain this market, and the Trust is not
required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. Preferred Shares are not
listed on a stock exchange or the NASDAQ stock market. If you sell your
Preferred Shares to a broker-dealer between auctions, you may receive less
than the price you paid for them, especially if market interest rates have
risen since the last auction.
Ratings and Asset Coverage Risk
While it is expected that Moody's will assign a rating of "Aaa" to the
Preferred Shares and S&P will assign a rating of "AAA" to the Preferred
Shares, such ratings do not eliminate or necessarily mitigate the risks of
investing in Preferred Shares. Moody's or S&P could downgrade Preferred
Shares, which may make your shares less liquid at an auction or in the
secondary market. If Moody's or S&P downgrades Preferred Shares, the Trust
may alter its portfolio or redeem Preferred Shares in an effort to improve
the rating, although there is no assurance that it will be able to do so to
the extent necessary to restore the prior rating. The Trust may voluntarily
redeem Preferred Shares under certain circumstances. See "Description of
Preferred Shares--Rating Agency Guidelines and Asset Coverage" for a
description of the asset maintenance tests the Trust must meet.
Credit Risk
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of risk that
the issuer will lose its ability to make interest and principal payments,
which could have a negative impact on the Trust's net asset value or
dividends. The Trust may invest up to 20% of its total assets in municipal
bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that are
unrated but judged to be of comparable quality by BlackRock. Bonds rated
Ba/BB or B are regarded as having predominately speculative characteristics
with respect to the issuer's capacity to pay interest and repay principal,
and these bonds are commonly referred to as junk bonds. These securities
are subject to a greater risk of default. The prices of these lower grade
bonds are more sensitive to negative developments, such as a decline in the
issuer's revenues or a general economic downturn, than are the prices of
higher grade securities. Lower grade securities tend to be less liquid than
investment grade securities. The market values of lower grade securities
tend to be more volatile than is the case for investment grade securities.
Municipal Bond Market Risk
Investing in the municipal bond market involves certain risks. The
amount of public information available about the municipal bonds in the
Trust's portfolio is generally less than that for corporate equities or
bonds, and the investment performance of the Trust may therefore be more
dependent on the analytical abilities of BlackRock than would be a stock
fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in which the Trust may
invest, also tends to be less well-developed or liquid than many other
securities markets, which may adversely affect the Trust's ability to sell
its bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest
and principal may be diminished in general economic downturns and as
governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations or on the ability of municipalities to levy taxes. Issuers of
municipal bonds might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Trust could experience delays in
collecting principal and interest and the Trust may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Trust may take possession
of and manage the assets securing the issuer's obligations on such
securities, which may increase the Trust's operating expenses. Any income
derived from the Trust's ownership or operation of such assets may not be
tax-exempt.
Reinvestment Risk
Reinvestment risk is the risk that income from the Trust's bond
portfolio will decline if and when the Trust invests the proceeds from
matured, traded, prepaid or called bonds at interest rates that are below
the portfolio's current earnings rate. A decline in income could affect the
Trust's ability to pay dividends on the Preferred Shares. The Trust's
income and distrbutions may decline over the term of the Trust as the
dollar weighted average maturity of the Trust's portfolio securities
shortens.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the
value of money. As inflation occurs, the real value of the Preferred Shares
and distributions declines. In an inflationary period, however, it is
expected that, through the auction process, dividend rates on the Preferred
Shares would increase, tending to offset this risk.
Economic Sector Risk
The Trust may invest 25% or more of its total assets in municipal
obligations of issuers in the same economic sector, including without
limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a state's
legislature for payment; obligations of state and local housing finance
authorities; municipal utilities systems or public housing authorities;
obligations of hospitals or life care facilities; and industrial
development or pollution control bonds issued for electrical utility
systems, steel companies, paper companies or other purposes. This may make
the Trust more susceptible to adverse economic, political or regulatory
occurrences affecting a particular state or economic sector. For example,
health care related issuers are susceptible to Medicare, Medicaid and other
third party payor reimbursement policies, and national and state health
care legislation. As concentration increases, so does the potential for
fluctuation in the value of the Trust's assets.
High Yield Risk
Investing in high yield bonds involves additional risks, including
credit risk. The value of high yield, lower quality bonds is affected by
the creditworthiness of the issuers of the securities and by general
economic and specific industry conditions. Issuers of high-yield bonds are
not as strong financially as those with higher credit ratings, so the bonds
are usually considered speculative investments. These issuers are more
vulnerable to financial setbacks and recession than more creditworthy
issuers which may impair their ability to make interest and principal
payments. Investments in lower grade securities will expose the Trust to
greater risks than if the Trust owned only higher grade securities.
Recent Developments
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the United States securities
markets were closed for a four-day period. These terrorist attacks and
related events have led to increased short-term market volatility and may
have long-term effects on United States and world economies and markets. A
similar disruption of the financial markets could impact interest rates,
auctions, secondary trading, ratings, credit risk, inflation and other
factors relating to the securities.
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of the
Trust, including supervision of the duties performed by BlackRock. There
are eight trustees of the Trust. Two of the trustees are "interested
persons" (as defined in the Investment Company Act). The name and business
address of the trustees and officers of the Trust and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Trust" in the Statement of Additional Information.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor.
BlackRock Financial Management, Inc. acts as the Trust's sub-advisor.
BlackRock Advisors and BlackRock Financial Management both are wholly owned
subsidiaries of BlackRock, Inc., which is one of the largest publicly
traded investment management firms in the United States with $225 billion
of assets under management as of September 30, 2001. BlackRock, Inc. and
its affiliates manage assets on behalf of more than 3,300 institutions and
200,000 individuals worldwide, through a variety of equity, fixed income,
liquidity and alternative investment separate accounts and mutual funds,
including the company's flagship fund families, BlackRock Funds and
BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's
26th largest asset management firm according to Pensions & Investments, May
14, 2001.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 25 funds.
BlackRock has 18 leveraged municipal closed-end funds and six open-end
municipal funds under management and approximately $17.6 billion in
municipal assets firm-wide. Clients are served from the company's
headquarters in New York City, as well as offices in Wilmington, Delaware,
San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan.
BlackRock, Inc. is a member of The PNC Financial Services Group, Inc.
("PNC"), one of the largest diversified financial services organizations in
the United States, and is majority-owned by PNC and by BlackRock employees.
BlackRock Advisors, Inc. manages or managed fourteen other "term
trusts." To date, four of these term trusts have reached their respective
termination dates and have met their investment objective of returning the
initial offering price per share as of their respective termination date.
Past performance is no guarantee of future performance.
Investment Philosophy. BlackRock's investment decision-making process
for the municipal bond sector is subject to the same discipline, oversight
and investment philosophy that the firm applies to other sectors of the
fixed income market.
BlackRock uses a relative value strategy that evaluates the trade-off
between risk and return to seek to achieve the Trust's investment objective
of generating current income exempt from regular Federal income tax. This
strategy is combined with disciplined risk control techniques and applied
in sector, sub-sector and individual security selection decisions.
BlackRock's extensive personnel and technology resources are the key
drivers of the investment philosophy.
BlackRock's Municipal Bond Team. BlackRock uses a team approach to
managing municipal portfolios. BlackRock believes that this approach offers
substantial benefits over one that is dependent on the market wisdom or
investment expertise of only a few individuals.
BlackRock's municipal bond team includes five portfolio managers with
an average experience of 14 years and five credit research analysts with an
average experience of 11 years. Kevin M. Klingert, a managing director,
senior portfolio manager and head of municipal bonds at BlackRock, leads
the team, a position he has held since joining BlackRock in 1991. Mr.
Klingert has over 17 years of experience in the municipal market.
Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice
President at Merrill Lynch, Pierce, Fenner & Smith Incorporated, which he
joined in 1985. The portfolio management team also includes Craig Kasap,
James McGinley, F. Howard Downs and Anthony Pino. Mr. Kasap, CFA, has been
a portfolio manager at BlackRock for over four years and is a member of
BlackRock's Investment Strategy Group. Prior to joining BlackRock in 1997,
Mr. Kasap spent the previous three years as a municipal bond trader with
Keystone Investments Inc. in Boston where he was involved in formulating
the firm's municipal bond investment strategies. Mr. McGinley has been a
portfolio manager and a member of the Investment Strategy Group at
BlackRock since 1999. Prior to joining BlackRock in 1999, Mr. McGinley was
Vice President of Municipal Trading from 1996 to 1999 and Manager of the
Municipal Strategy Group from 1995 to 1999 with Prudential Securities
Incorporated. Mr. McGinley joined Prudential Securities Incorporated in
1993 as an Associate in Municipal Research. F. Howard Downs has been a
portfolio manager since joining BlackRock in 1999. Prior to joining
BlackRock in 1999, Mr. Downs was a Vice President, Institutional Salesman
and Sales Manager from 1990 to 1999 at William E. Simon & Sons Municipal
Securities, Inc. Mr. Downs was one of the original employees of William E.
Simon & Sons Municipal Securities, Inc., founded in 1990, and was
responsible for sales of municipal bonds. Anthony Pino has been a portfolio
manager since joining BlackRock in 1999. Prior to joining BlackRock in
1999, he was a Brokerage Coordinator at CPI Capital. From 1996 to 1999, Mr.
Pino was an Assistant Vice President and trader in the Municipal Strategy
Group at Prudential Securities Incorporated.
BlackRock's municipal bond portfolio managers are responsible for over
70 municipal bond portfolios, valued at approximately $13 billion.
Municipal mandates include the management of open- and closed-end mutual
funds, municipal-only separate accounts or municipal allocations within
larger institutional mandates. In addition BlackRock manages 14 municipal
liquidity accounts valued at approximately $4.6 billion. Currently, the
team manages 18 closed-end municipal funds with approximately $4.6 billion
in managed assets as of September 30, 2001. Of the $4.6 billion in
closed-end municipal funds, six of these funds are municipal term trusts
valued at $2.8 billion and twelve are perpetual trusts valued at $1.8
billion.
BlackRock's Investment Process. BlackRock has in-depth expertise in
the fixed income market. BlackRock applies the same risk-controlled, active
sector rotation style to the management process for all of its fixed income
portfolios. BlackRock believes that it is unique in its integration of
taxable and municipal bond specialists. Both taxable and municipal bond
portfolio managers share the same trading floor and interact frequently for
determining the firm's overall investment strategy. This interaction allows
each portfolio manager to access the combined experience and expertise of
the entire portfolio management group at BlackRock.
BlackRock's portfolio management process emphasizes research and
analysis of specific sectors and securities, not interest rate speculation.
BlackRock believes that market-timing strategies can be highly volatile and
potentially produce inconsistent results. Instead, BlackRock thinks that
value over the long-term is best achieved through a risk-controlled
approach, focusing on sector allocation, security selection and yield curve
management.
In the municipal market, BlackRock believes one of the most important
determinants of value is supply and demand. BlackRock's ability to monitor
investor flows and frequency and seasonality of issuance is helpful in
anticipating the supply and demand for sectors. BlackRock believes that the
breadth and expertise of its municipal bond team allow it to anticipate
issuance flows, forecast which sectors are likely to have the most supply
and plan its investment strategy accordingly.
BlackRock also believes that over the long-term, intense credit
analysis will add incremental value and avoid significant relative
performance impairments. The municipal credit team is led by Susan C.
Heide, Ph.D., who has been, since 1999, Managing Director, Head of
Municipal Credit Research and co-chair of BlackRock's Credit Committee.
From 1995 to 1999, Dr. Heide was a Director and Head of Municipal Credit
Research. Dr. Heide specializes in the credit analysis of municipal
securities and as such chairs the monthly municipal bond presentation to
the Credit Committee. In addition, Dr. Heide supervises the team of
municipal bond analysts that assists with the ongoing surveillance of the
$13 billion in municipal bonds managed by BlackRock.
Prior to joining BlackRock as a Vice President and Head of Municipal
Credit Research in 1993, Dr. Heide was Director of Research and a portfolio
manager at OFFITBANK. For eight years prior to this assignment (1984 to
1992), Dr. Heide was with American Express Company's Investment Division
where she was the Vice President of Credit Research, responsible for
assessing the creditworthiness of $6 billion in municipal securities. Dr.
Heide began her investment career in 1983 at Moody's Investors Service,
Inc. where she was a municipal bond analyst.
Dr. Heide initiated the Disclosure Task Force of the National
Federation of Municipal Analysts in 1988 and was co-chairperson of this
committee from its inception through the completion of the Disclosure
Handbook for Municipal Securities--1992 Update, published in January 1993.
Dr. Heide has authored a number of articles on municipal finance and edited
The Handbook of Municipal Bonds published in the fall of 1994. Dr. Heide
was selected by the Bond Buyer as a first team All-American Municipal
Analyst in 1990.
BlackRock's approach to credit risk incorporates a combination of
sector-based, top-down macro-analysis of industry sectors to determine
relative weightings with a name-specific (issuer-specific), bottom-up
detailed credit analysis of issuers and structures. The sector-based
approach focuses on rotating into sectors that are undervalued and exiting
sectors when fundamentals or technicals become unattractive. The
name-specific approach focuses on identifying special opportunities where
the market undervalues a credit, and devoting concentrated resources to
research the credit and monitor the position. BlackRock's analytical
process focuses on anticipating change in credit trends before market
recognition. Credit research is a critical, independent element of
BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust, the Trust has agreed to pay for the investment
advisory services and facilities provided by BlackRock Advisors a fee
payable monthly in arrears at an annual rate equal to 0.40% of the average
weekly value of the Trust's Managed Assets (the "management fee"). The
Trust will also reimburse BlackRock Advisors for expenses BlackRock
Advisors incurs in connection with performing administrative services for
the Trust. In addition, with the approval of the board of trustees, a pro
rata portion of the salaries, bonuses, health insurance, retirement
benefits and similar employment costs for the time spent on Trust
operations (other than the provision of services required under the
investment management agreement) of all personnel employed by BlackRock
Advisors who devote substantial time to Trust operations or the operations
of other investment companies advised by the Advisor may be reimbursed to
BlackRock Advisors. Managed Assets are the total assets of the Trust, which
includes any proceeds from the Preferred Shares, minus the sum of accrued
liabilities (other than indebtedness attributable to leverage). This means
that during periods in which the Trust is using leverage, the fee paid to
BlackRock Advisors will be higher than if the Trust did not use leverage
because the fee is calculated as a percentage of the Trust's Managed
Assets, which include those assets purchased with leverage.
In addition to the management fee of BlackRock Advisors, the Trust
pays all other costs and expenses of its operations, including compensation
of its trustees (other than those affiliated with BlackRock Advisors),
custodian, transfer and dividend disbursing agent expenses, legal fees,
rating agency fees, listing fees and expenses, 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.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred
Shares. For the complete terms of the Preferred Shares, please refer to the
detailed description of the Preferred Shares in the Statement of
Preferences (the "Statement") attached as Appendix A to the Statement of
Additional Information.
General
The Trust's Agreement and Declaration of Trust, as amended and
restated, authorizes the issuance of an unlimited number of preferred
shares, par value $.001 per share, in one or more classes or series with
rights as determined by the board of trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of [ ]
Preferred Shares, Series [ ]. All Preferred Shares will have a liquidation
preference of $25,000 per share, plus an amount equal to accumulated but
unpaid dividends (whether or not earned or declared). The Trust intends to
redeem all of the Preferred Shares no later than the last dividend payment
date prior to December 31, 2018 (when the Trust will terminate).
The Preferred Shares of each series will rank on parity with any other
series of Preferred Shares and any other series of preferred shares of the
Trust as to the payment of dividends and the distribution of assets upon
liquidation. Each Preferred Share carries one vote on matters that
Preferred Shares can be voted. Preferred Shares, when issued, will be fully
paid and non-assessable and have no preemptive, conversion or cumulative
voting rights.
Dividends and Rate Periods
The following is a general description of dividends and Rate Periods.
Rate Periods. The Initial Rate Period for Series [ ] Preferred Shares
will be [ ] days.
Any subsequent Rate Periods of shares of the Preferred Shares will
generally be seven days. The Trust, subject to certain conditions, may
change the length of Subsequent Rate Periods designating them as Special
Rate Periods. See "--Designation of Special Dividend Periods" below.
Dividend Payment Dates. Dividends on the Preferred Shares will be
payable, when as and if declared by the board of trustees, out of legally
available funds in accordance with the Agreement and Declaration of Trust,
as amended and restated, the Statement and applicable law. Dividends are
scheduled to be paid as follows:
Subsequent Dividend
Series Initial Dividend Payment Dates
Payment Date on Each
[ ] [ ], 2001 [ ]
If dividends are payable on a day that is not a Business Day, then
dividends will be payable on the next business day. In addition, the Trust
may specify different Dividend Payment Dates for any Special Rate Period of
more than 28 Rate Period Days.
Dividends will be paid through the Securities Depository on each
Dividend Payment Date. The Securities Depository, in accordance with its
current procedures, is expected to distribute dividends received from the
Trust in next-day funds on each Dividend Payment Date to Agent Members.
These Agent Members are in turn expected to distribute such dividends to
the persons for whom they are acting as agents. However, each of the
current Broker-Dealers has indicated to the Trust that dividend payments
will be available in same-day funds on each Dividend Payment Date to
customers that use such Broker-Dealer or that Broker-Dealer's designee as
Agent Member.
Calculation of Dividend Payment. The Trust computes the dividends per
share payable on shares of a series of Preferred Shares by multiplying the
applicable rate for shares of such series in effect by a fraction. The
numerator of this fraction will normally be seven (i.e., the number of days
in the Dividend Period) and the denominator will normally be 365 if such
Rate Period consists of seven days and 360 for all other Rate Periods. In
either case, this rate is then multiplied by $25,000 to arrive at dividends
per share.
Dividends on shares of each series of Preferred Shares will accumulate
from the date of their original issue. For each dividend payment period
after the initial dividend period, the dividend rate will be the dividend
rate determined at auction, except that the dividend rate that results from
an auction will not be greater than the maximum applicable rate described
below.
The maximum applicable rate for any rate period for a series of
Preferred Shares will be the applicable percentage (set forth in the
Applicable Percentage Payment Table below) of the reference rate (set forth
in the Reference Rate Table below) for the applicable rate period. The
applicable percentage for a series of Preferred Shares is determined on the
day that a notice of a special dividend period is delivered if the notice
specifies a maximum applicable rate for a special dividend period. If
Moody's or S&P or both shall not make such rating available, the rate shall
be determined by reference to equivalent ratings issued by a substitute
rating agency. If the Trust has provided notification to the auction agent
prior to an auction establishing the applicable rate for a dividend period
that net capital gains or other taxable income will be included in the
dividend determined at such auction, the applicable percentage will be
derived from the column captioned "Applicable Percentage: Notification" in
the Applicable Percentage Table below:
Applicable Percentage Table
---------------------------
Credit Ratings Applicable Percentage Table
-------------- ---------------------------
Applicable Applicable
---------- ----------
Percentage: Percentage:
---------- ----------
Moody's S&P No Notification Notification
------- --- --------------- ------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
"ba3" to "ba1" BB- to BB+ 200% 275%
Below "Ba3" Below BB- 250% 300%
The reference rate used to determine the maximum applicable rate
generally varies depending on the length of the applicable rate period, as
set forth in the Reference Rate Table below:
Reference Rate Table
-------------------------------------
Rate Period Reference Rate
----------- --------------
28 days or less Greater of:
o "AA" Composite Commercial
Paper Rate
o Taxable Equivalent of the
Short-Term Municipal Bond Rate
29 days to 182 days "AA" Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
The "AA Composite Commercial Paper Rate" is as set forth in the table
set forth below:
AA Composite Commercial Paper Rate Table.
Rate Period Special Rate Period AA Composite
----------- ------------------- ------------
Commercial Paper Rate*
----------------------
7 days or less 48 days or fewer 30-day rate
49 days to 69 days 60-day rate
70 days to 84 days Average of 60-day and
90-day rates
85 days to 98 days 90-day rate
99 days to 119 days Average of 90-day and
120-day rates
120 Days to 140 days 120-day rate
141 days to 161 days Average of 120-day and
180-day rates
162 days to 182 days 180-day rate
* Rates stated on a discount basis
If the Federal Reserve Bank of New York does not make available any
such rate, the rate shall be the average rate quoted on a discount basis by
commercial paper dealers to the Auction Agent at the close of business on
the business day next preceding such date. If any commercial paper dealer
does not quote a rate, the rate shall be determined by quotes provided by
the remaining commercial paper dealers.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" means 90%
of an amount equal to the per annum rate payable on taxable bonds in order
for such rate, on an after-tax basis, to equal the per annum rate payable
on tax-exempt bonds issued by "high grade" issuers as determined in
accordance with the procedures set forth in the Statement.
Prior to each dividend payment date, the Trust is required to deposit
with the auction agent sufficient funds for the payment of declared
dividends. The failure to make such deposit will not result in the
cancellation of any auction. The Trust does not intend to establish any
reserves for the payment of dividends.
If an auction for any series of Preferred Shares is not held when
scheduled for any reason, the dividend rate for the corresponding rate
period will be the maximum applicable rate on the date the auction was
scheduled to be held.
Additional Dividends. Under Federal income tax rules applicable to the
Trust, the Trust may, in certain circumstances, allocate net capital gains
or other taxable income to a dividend paid on Preferred Shares after the
dividend has been paid (a "Retroactive Taxable Allocation"). If the Trust
makes a Retroactive Taxable Allocation on the Preferred Shares without
giving advance notice thereof as described under "The Auction--Auction
Proceeds", the Trust will, solely by reason of the fact that such
allocation was made retroactively as a result of a redemption of all or a
portion of the Preferred Shares or liquidation of the Fund, pay to the
holders of Preferred Shares, out of funds legally available therefore, an
additional dividend. The additional dividend will be in an amount equal to
the amount of taxes paid by a holder of Preferred Shares on the Retroactive
Taxable Allocation, provided that the additional dividend will be
calculated:
o without consideration being given to the time value of money;
o assuming that no holder of Preferred Shares is subject to the
Federal alternative minimum tax with respect to dividends
received from the Trust; and
o assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of Preferred Shares at
the maximum marginal regular Federal income tax rate
applicable to individuals or corporations, whichever is
greater, in effect during the fiscal year in question.
Although the Trust generally intends to designate any additional
dividend as an exempt-interest dividend to the extent permitted by
applicable law, it is possible that all or a portion of any additional
dividend will be taxable to the recipient thereof. See "Taxes." The Trust
will not pay a further additional dividend with respect to any taxable
portion of an additional dividend.
The Trust will, within 90 days (and generally within 60 days) after
the end of its fiscal year for which a Retroactive Taxable Allocation is
made, provide notice thereof to the auction agent. The Trust will pay, out
of legally available funds, any additional dividend due on all Retroactive
Taxable Allocations made during the fiscal year in question, within 30 days
after such notice is given to the auction agent.
Restrictions on Dividends and Other Distributions. While the Preferred
Shares are outstanding, the Trust generally may not declare, pay or set
apart for payment, any dividend or other distribution in respect of its
common shares. In addition, the Trust may not call for redemption or redeem
any of its common shares. However, the Trust is not confined by the above
restrictions if:
o immediately after such transaction, the Discounted Value of
the Trust's portfolio would be equal to or greater than the
Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage (see "--Rating Agency
Guidelines and Asset Coverage" below);
o full cumulative dividends on each series of Preferred Shares
due on or prior to the date of the transaction have been
declared and paid or shall have been declared and sufficient
funds for the payment thereof deposited with the auction
agent;
o any additional dividend required to be paid on or before the
date of such transaction has been paid; and
o the Trust has redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory
redemption contained in the Statement.
The Trust generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Trust ranking, as to the
payment of dividends, on a parity with Preferred Shares unless the Trust
has declared and paid or contemporaneously declares and pays full
cumulative dividends on each series of the Preferred Shares through its
most recent dividend payment date. However, when the Trust has not paid
dividends in full upon the shares of each series of Preferred Shares
through the most recent dividend payment date or upon any other class or
series of shares of the Trust ranking, as to the payment of dividends, on a
parity with Preferred Shares through their most recent respective dividend
payment dates, the amount of dividends declared per share on Preferred
Shares and such other class or series of shares will in all cases bear to
each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each
other.
Designation of Special Rate Periods. The Trust may, at its sole
option, declare a special rate period of shares of a particular series of
Preferred Shares. To declare a special rate period, the Trust will give
notice (a "request for special dividend period") to the auction agent and
to each Broker-Dealer. The notice will request that the next succeeding
rate period for the series of Preferred Shares be a number of days (other
than seven) evenly divisible by seven as specified in such notice and not
more than 1,820 days long. The Trust may not request a special rate period
unless sufficient clearing bids for shares of such series were made in the
most recent auction.
Redemption
Mandatory Redemption. The Trust is required to maintain (a) a
Discounted Value of eligible portfolio securities equal to the Preferred
Shares Basic Maintenance Amount and (b) the Investment Company Act
Preferred Shares Asset Coverage. Eligible portfolio securities for these
purposes will be determined from time to time by the rating agencies then
rating the Preferred Shares. If the Trust fails to maintain such asset
coverage amounts and does not timely cure such failure in accordance with
the requirements of the rating agency that rates the Preferred Shares, the
Trust must redeem all or a portion of the Preferred Shares. This mandatory
redemption will take place on a date that the board of trustees specifies
out of legally available funds in accordance with the Agreement and
Declaration of Trust, as amended and restated, the Statement and applicable
law, at the redemption price of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) to the date fixed for
redemption. The number of Preferred Shares that must be redeemed in order
to cure such failure will be allocated pro rata among the outstanding
Preferred Shares of the Trust. The mandatory redemption will be limited to
the number of Preferred Shares necessary to restore the required Discounted
Value or the Investment Company Act Preferred Shares Asset Coverage, as the
case may be.
Optional Redemption. The Trust, at its option, may redeem the shares
of each series of Preferred Shares, in whole or in part, out of funds
legally available therefore. Any optional redemption will occur on the
second business day prior to any dividend payment date at the optional
redemption price per share of $25,000 per share plus an amount equal to
accumulated but unpaid dividends to the date fixed for redemption plus the
premium, if any, specified in a special redemption provision. No shares of
a series of Preferred Shares may be redeemed if the redemption would cause
the Trust to violate the Investment Company Act or applicable law. In
addition, holders of a series of Preferred Shares may be entitled to
receive additional dividends if the redemption causes the Trust to make a
Retroactive Taxable Allocation without having given advance notice to the
auction agent. Shares of a series of Preferred Shares may not be redeemed
in part if fewer than 300 Shares would remain outstanding after the
redemption. The Trust has the authority to redeem the series of Preferred
Shares for any reason. The Trust intends to redeem all of the Preferred
Shares no later than the last dividend payment date prior to December 31,
2018 (when the Trust will terminate).
Liquidation
If the Trust is liquidated, the holders of any series of outstanding
Preferred Shares will receive the liquidation preference on such series,
plus all accumulated but unpaid dividends, plus any applicable additional
dividends payable before any payment is made to the common shares. The
holders of Preferred Shares will be entitled to receive these amounts from
the assets of the Trust available for distribution to its shareholders. In
addition, the rights of holders of Preferred Shares to receive these
amounts are subject to the rights of holders of any series or class of
shares, including other series of preferred shares, ranking on a parity
with the Preferred Shares with respect to the distribution of assets upon
liquidation of the Trust. After the payment to the holders of Preferred
Shares of the full preferential amounts as described, the holders of
Preferred Shares will have no right or claim to any of the remaining assets
of the Trust.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Trust does not include: o the sale of all or
substantially all the property or business of the Trust; o the merger or
consolidation of the Trust into or with any other business trust or
corporation; or o the merger or consolidation of any other business trust
or corporation into or with the Trust.
Rating Agency Guidelines and Asset Coverage
The Trust is required under guidelines of Moody's and S&P to maintain
assets having in the aggregate a Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount. Moody's and S&P have each
established separate guidelines for calculating Discounted Value. To the
extent any particular portfolio holding does not satisfy a rating agency's
guidelines, all or a portion of the holding's value will not be included in
the rating agency's calculation of Discounted Value. The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Trust's
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Trust's portfolio. The amount of
ineligible assets included in the Trust's portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio. The Preferred Shares Basic
Maintenance Amount includes the sum of (a) the aggregate liquidation
preference of the Preferred Shares then outstanding and (b) certain accrued
and projected payment obligations of the Trust.
The Trust is also required under the Investment Company Act to
maintain asset coverage of at least 200% with respect to senior securities
which are equity shares, including the Preferred Shares ("Investment
Company Act Preferred Shares Asset Coverage"). The Trust's Investment
Company Act Preferred Shares Asset Coverage is tested as of the last
business day of each month in which any senior equity securities are
outstanding. The minimum required Investment Act Preferred Shares Asset
Coverage amount of 200% may be increased or decreased if the Investment
Company Act is amended. Based on the composition of the portfolio of the
Trust and market conditions as of [ ], 2001, the Investment Company Act
Preferred Shares Asset Coverage with respect to all of the Trust's
preferred shares, assuming the issuance on that date of all Preferred
Shares offered hereby and giving effect to the deduction of related sales
load and related offering costs estimated at $[ ], would have been computed
as follows:
Value of Trust assets less liabilities not constituting senior = $[ ]= [ ]%
securities ----
-------------------------------------------------------------- $[ ]
Senior securities representing indebtedness plus liquidation value
of the preferred shares
In the event the Trust does not timely cure a failure to maintain (a)
a Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the Investment Company Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the rating
agency or agencies then rating the Preferred Shares, the Trust will be
required to redeem Preferred Shares as described under
"--Redemption--Mandatory Redemption" above.
The Trust may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or S&P. Failure to adopt any
such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the Preferred Shares may, at any time,
change or withdraw any such rating. The board of trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions
and related provisions which have been adopted by the Trust pursuant to the
rating agency guidelines in the event the Trust receives written
confirmation from Moody's or S&P, as the case may be, that any such
amendment, alteration or repeal would not impair the rating then assigned
to the Preferred Shares.
As recently described by Moody's and S&P, a preferred stock rating is
an assessment of the capacity and willingness of an issuer to pay preferred
stock obligations. The rating on the Preferred Shares is not a
recommendation to purchase, hold or sell those shares, inasmuch as the
rating does not comment as to market price or suitability for a particular
investor. The rating agency guidelines described above also do not address
the likelihood that an owner of Preferred Shares will be able to sell such
shares in an auction or otherwise. The rating is based on current
information furnished to Moody's and S&P by the Trust and the Advisor and
information obtained from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The common shares have not been rated by a nationally
recognized statistical rating organization.
The rating agency's guidelines will apply to the Preferred Shares only
so long as the rating agency is rating the shares. The Trust will pay
certain fees to Moody's and S&P for rating the Preferred Shares.
Voting Rights
Except as otherwise provided in this prospectus and in the Statement
of Additional Information or as otherwise required by law, holders of
Preferred Shares will have equal voting rights with holders of common
shares and any other preferred shares (one vote per share) and will vote
together with holders of common shares and any preferred shares as a single
class.
Holders of outstanding preferred shares, including Preferred Shares,
voting as a separate class, are entitled to elect two of the Trust's
trustees. The remaining trustees are elected by holders of common shares
and preferred shares, including Preferred Shares, voting together as a
single class. In addition, if at any time dividends (whether or not earned
or declared) on outstanding preferred shares, including Preferred Shares,
are due and unpaid in an amount equal to two full years of dividends, and
sufficient cash or specified securities have not been deposited with the
auction agent for the payment of such dividends, then, the sole remedy of
holders of outstanding preferred shares, including Preferred Shares, is
that the number of trustees constituting the Board will be automatically
increased by the smallest number that, when added to the two trustees
elected exclusively by the holders of preferred shares including Preferred
Shares as described above, would constitute a majority of the Board. The
holders of preferred shares, including Preferred Shares, will be entitled
to elect that smallest number of additional trustees at a special meeting
of shareholders held as soon as possible and at all subsequent meetings at
which trustees are to be elected. The terms of office of the persons who
are trustees at the time of that election will continue. If the Trust
thereafter shall pay, or declare and set apart for payment, in full, all
dividends payable on all outstanding preferred shares, including Preferred
Shares, the special voting rights stated above will cease, and the terms of
office of the additional trustees elected by the holders of preferred
shares, including Preferred Shares, will automatically terminate.
As long as any Preferred Shares are outstanding, the Trust will not,
without the affirmative vote or consent of the holders of at least a
majority of the Preferred Shares outstanding at the time (voting together
as a separate class):
(a) authorize, create or issue, or increase the authorized or
issued amount of, any class or series of stock ranking prior to or on
a parity with the Preferred Shares with respect to payment of
dividends or the distribution of assets on liquidation, or increase
the authorized amount of the Preferred Shares or any other preferred
shares, unless, in the case of shares of preferred stock on parity
with the Preferred Shares, the Trust obtains written confirmation from
Moody's (if Moody's is then rating preferred shares), S&P (if S&P is
then rating preferred shares) or any substitute rating agency (if any
such substitute rating agency is then rating preferred shares) that
the issuance of a class or series would not impair the rating then
assigned by such rating agency to the Preferred Shares and the Trust
continues to comply with Section 13 of the Investment Company Act, the
Investment Company Act Preferred Shares Asset Coverage requirements
and the Preferred Shares Basic Maintenance Amount requirements, in
which case the vote or consent of the holders of the Preferred Shares
is not required;
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust, as amended and restated, or the Statement, by
merger, consolidation or otherwise, so as to adversely affect any
preference, right or power of the Preferred Shares or holders of
Preferred Shares; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of Preferred Shares
will be deemed to affect such preferences, rights or powers only if
the terms of such division adversely affect the holders of Preferred
Shares and (iii) the authorization, creation and issuance of classes
or series of shares ranking junior to the Preferred Shares with
respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the
Trust, will be deemed to affect such preferences, rights or powers
only if Moody's or S&P is then rating the Preferred Shares and such
issuance would, at the time thereof, cause the Trust not to satisfy
the Investment Company Act Preferred Shares Asset Coverage or the
Preferred Shares Basic Maintenance Amount.
(c) authorize the Trust's conversion from a closed-end to an
open-end investment company; or
(d) amend the provisions of the Agreement and Declaration of
Trust, as amended and restated, or the Statement, which provide for
the classification of the board of directors of the Trust into three
classes, each with a term of office of three years with only one class
of directors standing for election in any year.
So long as any shares of the Preferred Shares are outstanding, the
Trust shall not, without the affirmative vote or consent of the Holders of
at least 662/3% of the Preferred Shares outstanding at the time, in person
or by proxy, either in writing or at a meeting, voting as a separate class,
file a voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Trust is solvent and
does not foresee becoming insolvent.
To the extent permitted under the Investment Company Act, the Trust
will not approve any of the actions set forth in (a) or (b) above which
adversely affects the rights expressly set forth in the Agreement and
Declaration of Trust, as amended and restated, or the Statement, of a
holder of shares of a series of preferred shares differently than those of
a holder of shares of any other series of preferred shares without the
affirmative vote or consent of the holders of at least a majority of the
shares of each series adversely affected. Unless a higher percentage is
provided for under the Agreement and Declaration of Trust, as amended and
restated, or the Statement, the affirmative vote of the holders of a
majority of the outstanding Preferred Shares, voting together as a single
class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the Investment
Company Act. However, to the extent permitted by the Agreement and
Declaration of Trust, as amended and restated, or the Statement, no vote of
holders of common shares, either separately or together with holders of
preferred shares as a single class, is necessary to take the actions
contemplated by (a) and (b) above. The holders of common shares will not be
entitled to vote in respect of such matters, unless, in the case of the
actions contemplated by (b) above, the action would adversely affect the
contract rights of the holders of common shares expressly set forth in the
Trust's Agreement and Declaration of Trust, as amended and restated.
The foregoing voting provisions will not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption and sufficient
funds have been deposited in trust to effect such redemption.
THE AUCTION
General
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of Preferred
Shares for each rate period after the initial rate period will be the rate
that results from an auction conducted as set forth in the Statement and
summarized below. In such an auction, persons determine to hold or offer to
sell or, based on dividend rates bid by them, offer to purchase or sell
shares of a series of Preferred Shares. See the Statement included in the
Statement of Additional Information for a more complete description of the
auction process.
Auction Agency Agreement. The Trust will enter into an auction agency
agreement with the auction agent (currently, [ ]) which provides, among
other things, that the auction agent will follow the auction procedures to
determine the applicable rate for shares of each series of Preferred
Shares, so long as the applicable rate for shares of such series of
Preferred Shares is to be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon 60
days notice to the Trust. If the auction agent should resign, the Trust
will use its best efforts to enter into an agreement with a successor
auction agent containing substantially the same terms and conditions as the
auction agency agreement. The Trust may remove the auction agent provided
that, prior to removal, the Trust has entered into a replacement agreement
with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of
one or more Broker-Dealers. The auction agent will enter into agreements
with several Broker-Dealers selected by the Trust, which provide for the
participation of those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction,
from funds provided by the Trust, a service charge at the annual rate of
1/4 of 1% in the case of any auction before a rate period of 364 days or
less, or a percentage agreed to by the Trust and the Broker-Dealers, in the
case of any auction before a rate period of 365 days or longer, of the
purchase price of Preferred Shares placed by a Broker-Dealer at the
auction.
The Trust may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that
at least one Broker-Dealer Agreement is in effect after termination of the
agreement.
Auction Procedures
Prior to the submission deadline on each auction date for shares of a
series of Preferred Shares, each customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the auction agent)
as a beneficial owner of such series of Preferred Shares may submit the
following types of orders with respect to shares of such series of
Preferred Shares to that Broker-Dealer.
1. Hold order--indicating its desire to hold shares of such
series without regard to the applicable rate for the next dividend
period.
2. Bid--indicating its desire to sell shares of such series at
$25,000 per share if the applicable rate for shares of such series for
the next dividend period is less than the rate or spread specified in
the bid.
3. Sell order--indicating its desire to sell shares of such
series at $25,000 per share without regard to the applicable rate for
shares of such series for the next dividend period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then
held by the beneficial owner. A beneficial owner for shares of such series
that submits its bid with respect to shares of such series to its
Broker-Dealer having a rate higher than the maximum applicable rate for
shares of such series on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner of shares
of such series that fails to submit an order to its Broker-Dealer with
respect to such shares will ordinarily be deemed to have submitted a hold
order with respect to such shares of such series to its Broker-Dealer.
However, if a beneficial owner of shares of such series fails to submit an
order with respect to such shares of such series to its Broker-Dealer for
an auction relating to a dividend period of more than 28 days such
beneficial owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the
Preferred Shares subject to the sell order. A beneficial owner that offers
to become the beneficial owner of additional Preferred Shares is, for
purposes of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not
a beneficial owner of a series of Preferred Shares but that wishes to
purchase shares of such series or that is a beneficial owner of shares of
such series that wishes to purchase additional shares of such series. A
potential holder may submit bids to its Broker-Dealer in which it offers to
purchase shares of such series at $25,000 per share if the applicable rate
for shares of such series for the next dividend period is not less than the
specified rate in such bid. A bid placed by a potential holder of shares of
such series specifying a rate higher than the maximum applicable rate for
shares of such series on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction
agent. They will designate themselves (unless otherwise permitted by the
Trust) as existing holders of shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will designate themselves as
potential holders of shares subject to orders submitted to them by
potential holders. However, neither the Trust nor the auction agent will be
responsible for a Broker-Dealer's failure to comply with these procedures.
Any order placed with the auction agent by a Broker-Dealer as or on behalf
of an existing holder or a potential holder will be treated the same way as
an order placed with a Broker-Dealer by a beneficial owner or potential
holder. Similarly, any failure by a Broker-Dealer to submit to the auction
agent an order for any Preferred Shares held by it or customers who are
beneficial owners will be treated as a beneficial owner's failure to submit
to its Broker-Dealer an order in respect of Preferred Shares held by it. A
Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Trust.
There are sufficient clearing bids for shares of a series in an
auction if the number of shares of such series subject to bids submitted or
deemed submitted to the auction agent by Broker-Dealers for potential
holders with rates or spreads equal to or lower than the maximum applicable
rate for such series is at least equal to or exceeds the sum of the number
of shares of such series subject to sell orders and the number of shares of
such series subject to bids specifying rates or spreads higher than the
maximum applicable rate for such series submitted or deemed submitted to
the auction agent by Broker-Dealers for existing holders of such series. If
there are sufficient clearing bids for shares of a series, the applicable
rate for shares of such series for the next succeeding dividend period
thereof will be the lowest rate specified in the submitted bids which,
taking into account such rate and all lower rates bid by Broker-Dealers as
or on behalf of existing holders and potential holders, would result in
existing holders and potential holders owning the shares of such series
available for purchase in the auction.
If there are not sufficient clearing bids for shares of such series,
the applicable rate for the next dividend period will be the maximum
applicable rate for shares of such series on the auction date. If this
happens, beneficial owners of shares of such series that have submitted or
are deemed to have submitted sell orders may not be able to sell in the
auction all shares of such series subject to such sell orders. If all of
the outstanding shares of such series are the subject of submitted hold
orders, then the dividend period following the auction will automatically
be the same length as the preceding dividend period for such series. The
applicable rate for the next dividend period will then be:
o (i) if the applicable rate period is less than 183 days, the
"AA" Composite Commercial Paper Rate, (ii) if the applicable
rate period is more than 182 days but fewer than 365 days,
the Treasury Bill Rate, and (iii) if the applicable rate
period is more than 364 days, the Treasury Note Rate (the
applicable rate being referred to as the "Benchmark Rate");
multiplied by
o 1 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable
to ordinary income, whichever is greater.
If the applicable rate period is less than 183 days and the Kenny Index is
less than amount determined above for a rate period of less than 183 days,
then the applicable rate for an all hold period will be the rate equal to
the Kenny Index.
The "Kenny Index" is the Kenny S&P 30 day High Grade Index or any
successor index.
The "Treasury Bill Rate" is either (i) the bond equivalent yield,
calculated in accordance with prevailing industry convention, of the rate
on the most recently auctioned Treasury bill with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the business day next preceding such date; or (ii)
in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury bill with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the business day immediately preceding such date obtained by
the Auction Agent.
The "Treasury Note Rate" is on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the business day next preceding
such date; or (ii) in the event that any such rate is not published in The
Wall Street Journal, then the yield as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury note with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the business day immediately preceding such date obtained by
the Auction Agent.
If all the shares of a series are subject to hold orders and the Trust
has notified the Auction Agent of its intent to allocate to a series of
Preferred Shares any net capital gains or other income taxable for Federal
income tax purposes ("Taxable Income"), the applicable rate for the series
of Preferred Shares for the applicable rate period will be (i) if the
Taxable Yield Rate is greater than the Benchmark Rate, then the Benchmark
Rate, or (ii) if the Taxable Yield Rate is less than or equal to the
Benchmark Rate, then the rate equal to the sum of (x) the amount determined
pursuant to the two bullet points above, and (y) the product of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater, multiplied by the
Taxable Yield Rate.
The "Taxable Yield Rate" is the rate determined by (i) dividing the
amount of Taxable Income available for distribution on each Preferred Share
in the affected series by the number of days in the Dividend Period in
respect of which the Taxable Income is contemplate to be distributed, (ii)
multiplying the amount determined in (i) by 365 (in the case of a Dividend
Period of 7 days) or 360 (in the case of any other Dividend Period), and
(iii) dividing the amount determined in (ii) by $25,000.
The auction procedure includes a pro rata allocation of shares for
purchase and sale, which may result in an existing holder continuing to
hold or selling, or a potential holder purchasing, a number of shares of a
series of Preferred Shares that is different than the number of shares of
such series specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business
day (which is also a dividend payment date) after the auction date through
DTC. Purchasers will make payment through their Agent Members in same-day
funds to DTC against delivery to their respective Agent Members. DTC will
make payment to the sellers' Agent Members in accordance with DTC's normal
procedures, which now provide for payment against delivery by their Agent
Members in same-day funds.
The auctions for Series [ ] will normally be held every [ ], and each
subsequent dividend period will normally begin on the following [ ].
Whenever the Trust intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on Preferred
Shares, the Trust may notify the auction agent of the amount to be so
included not later than the dividend payment date before the auction date.
Whenever, the auction agent receives such notice from the Trust, it will be
required in turn to notify each Broker-Dealer, who, on or prior to such
auction date, will be required to notify its customers who are beneficial
owners and potential holders believed by it to be interested in submitting
an order in the auction to be held on such auction date. In the event of
such notice, the Trust will not be required to pay an Additional Dividend
with respect to such dividend.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading market
in Preferred Shares outside of auctions, but are not obligated to do so,
and may discontinue such activity at any time. There can be no assurance
than any secondary trading market in Preferred Shares will provide owners
with liquidity of investment. The Preferred Shares are not registered on
any stock exchange or on the Nasdaq Stock Market.
A beneficial owner or an existing holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only:
o pursuant to a bid or sell order placed with the auction agent
in accordance with the auction procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Trust;
provided, however, that
o a sale, transfer or other disposition of Preferred Shares
from a customer of Broker-Dealer who is listed on the records
of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall
not be deemed to be a sale, transfer or other disposition if
such Broker-Dealer remains the existing holder of the shares;
and
o in the case of all transfers other than pursuant to auctions,
the Broker-Dealer (or other person, if permitted by the
Trust) to whom such transfer is made will advise the auction
agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the Preferred Shares, the Agreement and Declaration of
Trust, as amended and restated, authorizes the issuance of an unlimited
number of common shares of beneficial interest, par value $.001 per share.
Each common share has one vote and is fully paid and non-assessable, except
that the trustees shall have the power to cause shareholders to pay
expenses of the Trust by setting off charges due from common shareholders
from declared but unpaid dividends or distributions owed by the common
shareholders and/or reducing the number of common shares owned by each
respective common shareholder. So long as any Preferred Shares are
outstanding, the holders of common shares will not be entitled to receive
any distributions from the Trust unless all accrued dividends on Preferred
Shares have been paid, unless asset coverage (as defined in the Investment
Company Act) with respect to Preferred Shares would be at least 200% after
giving effect to the distributions and unless certain other requirements
imposed by any rating agencies rating the Preferred Shares have been met.
All common shares are equal as to dividends, assets and voting privileges
and have no conversion, preemptive or other subscription rights.
The Trust's common shares are traded on the New York Stock Exchange
under the symbol "BPK".
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust, as amended and restated,
includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Trust or to change the
composition of its board of trustees. This could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control over the Trust. Such attempts could have the effect of
increasing the expenses of the Trust and disrupting the normal operation of
the Trust. The board of trustees is divided into three classes, with the
terms of one class expiring at each annual meeting of shareholders. At each
annual meeting, one class of trustees is elected to a three-year term. This
provision could delay for up to two years the replacement of a majority of
the board of trustees. A trustee may be removed from office by the action
of a majority of the remaining trustees followed by a vote of the holders
of at least 75% of the shares then entitled to vote for the election of the
respective trustee.
In addition, the Trust's Agreement and Declaration of Trust, as
amended and restated, requires the favorable vote of a majority of the
Trust's board of trustees followed by the favorable vote of the holders of
at least 75% of the outstanding shares of each affected class or series of
the Trust, voting separately as a class or series, to approve, adopt or
authorize certain transactions with 5% or greater holders of a class or
series of shares and their associates, unless the transaction has been
approved by at least 80% of the trustees, in which case "a majority of the
outstanding voting securities" (as defined in the Investment Company Act)
of the Trust shall be required. For purposes of these provisions, a 5% or
greater holder of a class or series of shares (a "Principal Shareholder")
refers to any person who, whether directly or indirectly and whether alone
or together with its affiliates and associates, beneficially owns 5% or
more of the outstanding shares of any class or series of shares of
beneficial interest of the Trust.
The 5% holder transactions subject to these special approval
requirements are:
o the merger or consolidation of the Trust or any subsidiary of
the Trust with or into any Principal Shareholder;
o the issuance of any securities of the Trust to any Principal
Shareholder for cash;
o the sale, lease or exchange of all or any substantial part of
the assets of the Trust to any Principal Shareholder, except
assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period; or
o the sale, lease or exchange to the Trust or any subsidiary of
the Trust, in exchange for securities of the Trust, of any
assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000,
aggregating for purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions
within a twelve-month period.
To convert the Trust to an open-end management investment company, the
Trust's Agreement and Declaration of Trust, as amended and restated,
requires the favorable vote of a majority of the board of the trustees
followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of shares of the Trust,
voting separately as a class or series, unless such amendment has been
approved by at least 80% of the trustees, in which case "a majority of the
outstanding voting securities" (as defined in the Investment Company Act)
of the Trust shall be required. The foregoing vote would satisfy a separate
requirement in the Investment Company Act that any conversion of the Trust
to an open-end management investment company be approved by the
shareholders. If approved in the foregoing manner, conversion of the Trust
to an open-end management investment company could not occur until 90 days
after the shareholders' meeting at which such conversion was approved and
would also require at least 30 days' prior notice to all shareholders.
Conversion of the Trust to an open-end management investment company would
require the redemption of all outstanding Preferred Shares, which could
eliminate or alter the leveraged capital structure of the Trust with
respect to the common 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 management 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
objectives and policies. Therefore, you should assume that it is not likely
that the board of trustees would vote to convert the Trust to an open-end
fund.
To liquidate the Trust prior to December 31, 2018, the Trust's
Agreement and Declaration of Trust, as amended and restated, requires the
favorable vote of a majority of the board of trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Trust, voting separately as a class or
series, unless such liquidation has been approved by at least 80% of
trustees, in which case "a majority of the outstanding voting securities"
(as defined in the Investment Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, as
amended and restated, each class and series of the Trust shall vote
together as a single class, except to the extent required by the Investment
Company Act or the Trust's Agreement and Declaration of Trust, as amended
and restated, with respect to any class or series of shares. If a separate
vote is required, the applicable proportion of shares of the class or
series, voting as a separate class or series, also will be required.
The board of trustees has determined that provisions with respect to
the board of trustees and the shareholder voting requirements described
above, which voting requirements are greater than the minimum requirements
under Delaware law or the Investment Company Act, are in the best interest
of shareholders generally. Reference should be made to the Agreement and
Declaration of Trust, as amended and restated, on file with the Securities
and Exchange Commission for the full text of these provisions.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount
to their net asset values, and the Trust's common shares may also trade at
a discount to their net asset value. The market price of the Trust's common
shares will be determined by such factors as relative demand for and supply
of such common shares in the market, the Trust's net asset value, general
market and economic conditions and other factors beyond the control of the
Trust. Although the Trust's common shareholders will not have the right to
redeem their common shares, the Trust may take action to repurchase common
shares in the open market or make tender offers for its common shares at
their net asset value. This may have the effect of reducing any market
discount from net asset value. Any such repurchase may cause the Trust to
repurchase Preferred Shares to maintain asset coverage requirements imposed
by the Investment Company Act or any rating agency rating the Preferred
Shares at that time.
TAX MATTERS
Federal Income Tax Matters
The following is a description of certain U.S. federal income tax
consequences to a stockholder of acquiring, holding and disposing of
Preferred Shares of the Trust. The discussion reflects applicable tax laws
of the United States as of the date of this prospectus, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively. No attempt is
made to present a detailed explanation of all U.S. federal, state, local
and foreign tax concerns affecting the Trust and its stockholders, and the
discussion set forth herein does not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the tax consequences
to them of investing in the Trust.
The Trust intends to elect to be treated and to qualify to be taxed as
a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") and intends to distribute
substantially all of its net income and gains to its shareholders.
Therefore, it is not expected that the Trust will be subject to any U.S.
federal income tax. The Trust expects that substantially all of the
dividends it distributes to its common shareholders and Preferred
Shareholders will qualify as "exempt-interest dividends." A shareholder
treats an exempt-interest dividend as interest on state and local bonds
which is exempt from regular U.S. federal income tax. Some or all of an
exempt-interest dividend, however, may be subject to U.S. federal
alternative minimum tax imposed on the shareholder. Different U.S. federal
alternative minimum tax rules apply to individuals and to corporations. In
addition to exempt-interest dividends, the Trust also may distribute to its
shareholders amounts that are treated as long-term capital gain or ordinary
income. The Trust will allocate tax-exempt interest income, long-term
capital gain and other taxable income, if any, proportionately among the
common shares and the Preferred Shares in proportion to total dividends
paid to each class for the year. The Trust intends to notify Preferred
Shareholders in advance if it will allocate income to them that is not
exempt from regular U.S. federal income tax. In certain circumstances, the
Trust will make payments to Preferred Shareholders to offset the tax
effects of the taxable distribution. See "Description of Preferred
Shares--Dividends and Dividend Periods--Additional Dividends." The sale or
other disposition of common shares or Preferred Shares of the Trust will
normally result in capital gain or loss to shareholders. Both long-term and
short-term capital gains of corporations are taxed at the rates applicable
to ordinary income. For non-corporate taxpayers, short-term capital gains
and ordinary income are taxed currently at a maximum rate of 39.1%, while
long-term capital gains are generally taxed at a maximum rate of 20% (or
18% for capital assets that have been held for more than five years and the
holding period of which began after December 31, 2000).1 Because of certain
limitations on itemized deductions and the deduction for personal
exemptions applicable to higher income taxpayers, the effective rate of tax
may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Trust held for six months or less are
disallowed to the extent of any exempt-interest dividends received with
respect to such shares, and, if not disallowed, such losses are treated as
long-term capital losses to the extent of any capital gain dividends
received (or amounts credited as an undistributed capital gain) with
respect to such shares. A shareholder's holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a
result of holding one or more other positions in substantially similar or
related property, or through certain options or short sales. Any loss
realized on a sale or exchange of shares of the Trust will be disallowed to
the extent those shares of the Trust are replaced by other shares within a
period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the original shares. In that event, the basis of the
replacement shares of the Trust will be adjusted to reflect the disallowed
loss.
-------------------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000, creates
a new 10 percent income tax bracket and reduces the tax rates
applicable to ordinary income over a six year phase-in period.
Beginning in the taxable year 2006, ordinary income will be subject to
a 35% maximum rate, with approximately proportionate reductions in the
other ordinary rates.
This summary of tax consequences is intended for general information
only. You should consult a tax advisor concerning the tax consequences of
your investment in the Trust. The foregoing discussion is subject to and
qualified in its entirety by the discussion in "Tax Matters" in the
Statement of Additional Information below.
State and Local Tax Matters
While exempt-interest dividends are exempt from regular Federal
income tax, they may not be exempt from state or local income or other
taxes. Some states exempt from state income tax that portion of any
exempt-interest dividend that is derived from interest that a regulated
investment company receives on its holdings of securities of that state and
its political subdividions and instrumentalities. Therefore, the Trust will
report annually to its shareholders the percentage of interest income the
Trust earned during the preceding year on tax-exempt obligations and the
Trust will indicate, on a state-by-state basis, the source of this income.
You should consult with your tax adviser about state and local tax matters.
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
the date hereof, each Underwriter named below has severally agreed to
purchase, and the Trust has agreed to sell to such Underwriter the number
of Preferred Shares set forth opposite the name of such Underwriter.
Number of
U.S. Underwriter Preferred Shares
---------------- ----------------
[ ]
----------------
Total
================
The purchase agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject
to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Preferred
Shares if they purchase any of the shares. In the purchase agreement, the
Trust, the Advisor and the Sub-Advisor have agreed to indemnify the
Underwriters against certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended, or to contribute payments the
Underwriters may be required to make for any of those liabilities.
The Underwriters propose to initially offer some of the Preferred
Shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the Preferred Shares to certain
dealers at the public offering price less a concession not in excess of
$___ per share. The underwriting discount the Trust will allow is equal to
1% of the initial offering price of the Preferred Shares. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $___
per share on sales to certain other dealers. After the initial public
offering, the Underwriters may change the public offering price and the
concession. Investors must pay for any shares purchased in the initial
public offering on or before ___ 2001.
The Trust anticipates that the Underwriters may from time to time act
as broker or dealer in executing the Trust's portfolio transactions after
they have ceased to be underwriters. The Underwriters are active
underwriters of, and dealers in, securities and act as market makers in a
number of such securities, and therefore can be expected to engage in
portfolio transactions with the Trust.
The Trust anticipates that its affiliates may, from time to time, act
in auctions as Broker-Dealers and receive fees as set forth under "The
Auction." Each of the Underwriters and its affiliates may engage in
transactions with, and perform services for, the Trust in the ordinary
course of business.
The principal business address of [ ] is [
].
The settlement date for the purchase of the AMPS will be [_______],
2001, as agreed upon by the Underwriters, the Trust and BlackRock pursuant
to Rule 15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT
The Custodian of the assets of the Trust is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting
services. EquiServe Trust Company, N.A., 150 Royall Street, Canton,
Massachusetts 02021, will serve as the Trust's Transfer Agent with respect
to the common shares.
[ ], [ ], a banking corporation organized under the laws of New York,
is the auction agent with respect to the Preferred Shares and acts as transfer
agent, registrar, dividend disbursing agent, and redemption agent with respect
to such shares.
LEGAL OPINIONS
Certain legal matters in connection with the 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 [ ].
AVAILABLE INFORMATION
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934 and the Investment Company Act and is
required to file reports, proxy statements and other information with the
Securities and Exchange Commission. These documents can be inspected and
copied for a fee at the SEC's public reference room, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Chicago Regional Office,
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Reports, proxy statements, and other information about
the Trust can be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the Trust's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contact or other
document are not necessarily complete and in each instance reference is
made to the copy of the contact or other document filed as an exhibit to
the registration statement, each such statement being qualified in all
respects by this reference.
Additional information about the Trust and Preferred Shares can be
found in the Trust's registration statement (including amendments,
exhibits, and schedules) on Form N-2 filed with the SEC. The SEC maintains
a web site (http://www.sec.gov) that contains the Trust's registration
statement, other documents incorporated by reference, and other information
the Trust has filed electronically with the Commission, including proxy
statements and reports filed under the Securities Exchange Act of 1934.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
------
Use of Proceeds............................................................ B-
Investment Objectives and Policies......................................... B-
Investment Policies and Techniques......................................... B-
Other Investment Policies and Techniques................................... B-
Management of the Trust.................................................... B-
Portfolio Transactions and Brokerage....................................... B-
Additional Information Concerning the Auctions for Preferred Shares........ B-
Description of Common Shares............................................... B-
Repurchase of Common Shares................................................ B-
Tax Matters................................................................ B-
Experts.................................................................... B-
Additional Information..................................................... B-
Financial Statements....................................................... F-1
Independent Auditors' Report............................................... F-2
APPENDIX A Statement of Preferences of Municipal Auction
Rate Cumulative Preferred Shares............................... A-1
APPENDIX B Ratings of Investments......................................... B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies........ C-1
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to
earn on a taxable investment in order to equal a stated tax-free yield on a
municipal investment. To assist you to more easily compare municipal
investments like the Trust with taxable alternative investments, the table
below presents the taxable equivalent yields for a range of hypothetical
tax-free yields assuming the stated marginal federal and tax rates for 2001
listed below:
Tax-Free Yields
Tax Rate 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
-------- ----- ----- ----- ----- ----- -----
15.0% 1.76% 2.35% 2.94% 3.53% 4.12% 4.71%
27.5% 2.07% 2.76% 3.45% 4.14% 4.83% 5.52%
30.5% 2.16% 2.88% 3.60% 4.32% 5.04% 5.76%
35.5% 2.33% 3.10% 3.88% 4.65% 5.43% 6.20%
39.1% 2.46% 3.28% 4.11% 4.93% 5.75% 6.57%
=============================================================================
$[ ]
BlackRock
Municipal 2018 Term Trust
Auction Rate Municipal Preferred Shares ("AMPS")
[ ] Shares, Series [ ]
PROSPECTUS
[ ]
[ ], 2001
==============================================================================
BlackRock Municipal 2018 Term Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Municipal 2018 Term Trust (the "Trust") is a recently
organized, diversified, closed-end management investment company. This
Statement of Additional Information relating to common shares does not
constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated [ ], 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 or the Statement attached as Appendix A.
TABLE OF CONTENTS
Page
-----
Use of Proceeds.......................................................... B-
Investment Objectives and Policies....................................... B-
Investment Policies and Techniques....................................... B-
Other Investment Policies and Techniques................................. B-
Management of the Trust.................................................. B-
Portfolio Transactions and Brokerage..................................... B-
Additional Information Comcerning the Auctions for Preferred Shares...... B-
Description of Common Shares............................................. B-
Repurchase of Common Shares.............................................. B-
Tax Matters.............................................................. B-
Experts.................................................................. B-
Additional Information................................................... B-
Financial Statements..................................................... F-1
Independent Auditors' Report............................................. F-2
APPENDIX A Statement of Preferences of Municipal
Auction Rate Cumulative Preferred Shares..................... A-1
APPENDIX B Ratings of Investments....................................... B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies...... C-1
This Statement of Additional Information is dated [ ], 2001.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objectives and policies, the net proceeds of the offering will be invested
in high quality, short-term tax-exempt money market securities or in high
quality municipal bonds with relatively low volatility (such as
pre-refunded and intermediate-term bonds), to the extent such securities
are available. If necessary to invest fully the net proceeds of the
offering immediately, the Trust may also purchase, as temporary
investments, short-term taxable investments of the type described under
"Investment Policies and Techniques--Short-Term Taxable Fixed Income
Securities," the income on which is subject to regular Federal income tax,
and securities of other open- or closed-end management investment companies
that invest primarily in municipal bonds of the type in which the Trust may
invest directly.
INVESTMENT OBJECTIVES AND POLICIES
The Trust has not established any limit on the percentage of its
portfolio that may be invested in municipal bonds subject to the
alternative minimum tax provisions of Federal tax law, and the Trust
expects that a portion of the net investment income it produces will be
includable in alternative minimum taxable income. Common shares therefore
would not ordinarily be a suitable investment for investors who are subject
to the Federal alternative minimum tax or who would become subject to such
tax by purchasing common shares. The suitability of an investment in common
shares will depend upon a comparison of the after-tax yield likely to be
provided from the Trust with that from comparable tax-exempt investments
not subject to the alternative minimum tax, and from comparable fully
taxable investments, in light of each such investor's tax position. Special
considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may
not, without the approval of the holders of a majority of the outstanding
common shares and Preferred Shares voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as
a separate class:
(1) invest 25% or more of the value of its total assets in any
one industry, provided that this limitation does not apply to
municipal bonds other than those municipal bonds backed only by assets
and revenues of nongovernmental issuer;
(2) with respect to 75% of its total assets, invest more than
5% of the value of its total assets in the securities of any single
issuer or purchase more than 10% of the outstanding voting securities
of any one issuer;
(3) 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;
(4) 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 objectives and
policies or the entry into repurchase agreements;
(5) 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;
(6) 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
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable law
without the Trust becoming subject to registration with the Commodity
Futures Trading Commission (the "CFTC") as a commodity pool.
When used with respect to particular shares of the Trust, "majority of
the outstanding" means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1)
above, securities of the U.S. government, its agencies, or
instrumentalities, and securities backed by the credit of a governmental
entity are not considered to represent industries. However, obligations
backed only by the assets and revenues of non-governmental issuers may for
this purpose be deemed to be issued by such non-governmental issuers. Thus,
the 25% limitation would apply to such obligations. It is nonetheless
possible that the Trust may invest more than 25% of its total assets in a
broader economic sector of the market for municipal obligations, such as
revenue obligations of hospitals and other health care facilities or
electrical utility revenue obligations. The Trust reserves the right to
invest more than 25% of its assets in industrial development bonds and
private activity securities.
For the purposes of applying the limitation set forth in subparagraph
(2) 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
guranteed 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 munipcal bonds insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10% of
its total assets in the aggregate in shares of other investment companies
and up to 5% of its total assets in any one investment company, provided
the investment does not represent more than 3% of the voting stock of the
acquired investment company at the time such shares are purchased. As a
shareholder in any investment company, the Trust will bear its ratable
share of that investment company's expenses, and will remain subject to
payment of the Trust's advisory fees and other expenses with respect to
assets so invested. Holders of common shares will therefore be subject to
duplicative expenses to the extent the Trust invests in other investment
companies. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
described herein and in the prospectus. As described in the prospectus in
the section entitled "Risks," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will
tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the
Trust is also subject to the following non-fundamental restrictions and
policies, which may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless after giving effect
to such sale, the market value of all securities sold short does not
exceed 25% of the value of the Trust's total assets and the Trust's
aggregate short sales of a particular class of securities does not
exceed 25% of the then outstanding securities of that class. The Trust
may also make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the
Trust owns or has the immediate and unconditional right to acquire at
no additional cost the identical security;
(2) purchase securities of open-end or closed-end management
investment companies except in compliance with the Investment Company
Act or any exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of the acquisition of securities.
In addition, to comply with Federal tax requirements for qualification
as a "regulated investment company," the Trust's investments will be
limited in a manner such that at the close of each quarter of each fiscal
year, (a) no more than 25% of the value of the Trust's total assets are
invested in the securities (other than United States government securities
or securities of other regulated investment companies) of a single issuer
or two or more issuers controlled by the Trust and engaged in the same,
similar or related trades or businesses and (b) with regard to at least 50%
of the Trust's total assets, no more than 5% of its total assets are
invested in the securities (other than United States government securities
or securities of other regulated investment companies) of a single issuer.
These tax-related limitations may be changed by the Trustees to the extent
appropriate in light of changes to applicable tax requirements.
The Trust intends to apply for ratings for the Preferred Shares from
Moody's and/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 and/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 objectives. 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 objectives, policies and techniques that are described in the
prospectus.
Portfolio Investments
The Trust will invest primarily in a portfolio of investment grade
municipal bonds that are exempt from regular Federal income tax.
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 issuers of municipal bonds
rated BBB are regarded as having adequate capacity to pay principal and
interest. Municipal bonds rated AAA in which the Trust may invest may have
been so rated on the basis of the existence of insurance guaranteeing the
timely payment, when due, of all principal and interest. Municipal bonds
rated below investment grade quality are obligations of issuers that are
considered predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased market price
volatility. Municipal bonds rated below investment grade tend to be less
marketable than higher-quality bonds because the market for them is less
broad. The market for unrated municipal bonds is even narrower. During
periods of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly and the Trust may have greater
difficulty selling its portfolio securities. The Trust will be more
dependent on BlackRock's research and analysis when investing in these
securities.
A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix A hereto. The ratings of Moody's,
S&P and Fitch represent their opinions as to the quality of the municipal
bonds they rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal bonds
with the same maturity, coupon and rating may have different yields while
obligations of the same maturity and coupon with different ratings may have
the same yield.
The Trust will actively manage the maturity of its bonds and will
initially invest in municipal bonds with long-term maturities in order to
maintain a weighted average maturity of approximately 17 years, but the
average weighted maturity shortens as the Trust approaches maturity.
Moreover, during temporary defensive periods (e.g., times when, in
BlackRock's opinion, temporary imbalances of supply and demand or other
temporary dislocations in the tax-exempt bond market adversely affect the
price at which long-term or intermediate-term municipal bonds are
available), and in order to keep cash on hand fully invested, including the
period during which the net proceeds of the offering are being invested,
the Trust may invest any percentage of its assets in short-term investments
including high quality, short-term securities which may be either
tax-exempt or taxable and securities of other open- or closed-end
management investment companies that invest primarily in municipal bonds of
the type in which the Trust may invest directly. The Trust intends to
invest in taxable short-term investments only in the event that suitable
tax-exempt temporary investments are not available at reasonable prices and
yields. Tax-exempt temporary investments include various obligations issued
by state and local governmental issuers, such as tax-exempt notes (bond
anticipation notes, tax anticipation notes and revenue anticipation notes
or other such municipal bonds maturing in three years or less from the date
of issuance) and municipal commercial paper. The Trust will invest only in
taxable temporary investments which are U.S. government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and
which mature within one year from the date of purchase or carry a variable
or floating rate of interest. Taxable temporary investments of the Trust
may include certificates of deposit issued by U.S. banks with assets of at
least $1 billion, commercial paper or corporate notes, bonds or debentures
with a remaining maturity of one year or less, or repurchase agreements.
See "Other Investment Policies and Techniques--Repurchase Agreements." To
the extent the Trust invests in taxable investments, the Trust will not at
such times be in a position to achieve its investment objective of
tax-exempt income.
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security and the Trust will not
be required to dispose of securities in the event Moody's, S&P or Fitch
downgrades its assessment of the credit characteristics of a particular
issuer.
Also included within the general category of municipal bonds described
in the prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal
Lease Obligations") of municipal authorities or entities. Although a
Municipal Lease Obligation does not constitute a general obligation of the
municipality for which the municipality's taxing power is pledged, a
Municipal Lease Obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the
Municipal Lease Obligation. However, certain Municipal Lease Obligations
contain "non-appropriation" clauses which provide that the municipality has
no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Trust's ability to recover
under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse
to the general credit of the lessee, and the disposition or re-leasing of
the property might prove difficult. In order to reduce this risk, the Trust
will only purchase Municipal Lease Obligations where BlackRock believes the
issuer has a strong incentive to continue making appropriations until
maturity.
Obligations of issuers of municipal bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to the laws
enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations or 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 taxes, regardless of the
technical structure of the issuer of the instrument. The Trust treats all
such tax-exempt securities as municipal bonds.
Short-Term Taxable Fixed-Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Trust may invest up to 100% of its total assets in cash
equivalents and short-term taxable fixed-income securities, although the
Trust intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Short-term taxable fixed income investments
are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government securities include
securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small
Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the
certificate on the date specified thereon. Certificates of deposit
purchased by the Trust may not be fully insured by the Federal Deposit
Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a
predetermined yield for the Trust during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Trust to invest temporarily available cash. The Trust may enter into
repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of
deposit; or bankers' acceptances in which the Trust may invest.
Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Trust is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement
provides that the Trust is entitled to sell the underlying collateral.
If the value of the collateral declines after the agreement is entered
into, and if the seller defaults under a repurchase agreement when the
value of the underlying collateral is less than the repurchase price,
the Trust could incur a loss of both principal and interest. BlackRock
monitors the value of the collateral at the time the action is entered
into and at all times during the term of the repurchase agreement.
BlackRock does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price
to be paid to the Trust. If the seller were to be subject to a Federal
bankruptcy proceeding, the ability of the Trust to liquidate the
collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued
by corporations to finance their current operations. Master demand
notes are direct lending arrangements between the Trust and a
corporation. There is no secondary market for such notes. However,
they are redeemable by the Trust at any time. BlackRock will consider
the financial condition of the corporation (e.g., earning power, cash
flow and other liquidity ratios) and will continuously monitor the
corporation's ability to meet all of its financial obligations,
because the Trust's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in
commercial paper will be limited to commercial paper rated in the
highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate
of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that are
exempt from regular Federal income tax and mature within three years or
less from the date of issuance. Short-term tax-exempt fixed income
securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim
financing for projects that will eventually be funded through the sale of
long-term debt obligations or bonds. The ability of an issuer to meet its
obligations on its BANs is primarily dependent on the issuer's access to
the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments.
Repayment is generally to be derived from specific future tax revenues.
TANs are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies could adversely affect the issuer's
ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds
obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These
notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. Maturities on municipal paper generally
will be shorter than the maturities of TANs, BANs or RANs. There is a
limited secondary market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indices, such as a bank prime rate or
tax-exempt money market indices.
While the various types of notes described above as a group represent
the major portion of the tax-exempt note market, other types of notes are
available in the marketplace and the Trust may invest in such other types
of notes to the extent permitted under its investment objectives, policies
and limitations. Such notes may be issued for different purposes and may be
secured differently from those mentioned above.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management techniques
and instruments. The Trust may purchase and sell futures contracts, enter
into various interest rate transactions and may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial indices and futures contracts (collectively, "Additional
Investment Management Techniques"). These Additional Investment Management
Techniques may be used for duration management and other risk management
techniques in an attempt to protect against possible changes in the market
value of the Trust's portfolio resulting from trends in the debt securities
markets and changes in interest rates, to protect the Trust's unrealized
gains in the value of its portfolio securities, to facilitate the sale of
such securities for investment purposes, to establish a position in the
securities markets as a temporary substitute for purchasing particular
securities and to enhance income or gain. There is no particular strategy
that requires use of one technique rather than another as the decision to
use any particular strategy or instrument is a function of market
conditions and the composition of the portfolio. The Additional Investment
Management Techniques are described below. The ability of the Trust to use
them successfully will depend on BlackRock's ability to predict pertinent
market movements as well as sufficient correlation among the instruments,
which cannot be assured. Inasmuch as any obligations of the Trust that
arise from the use of Additional Investment Management Techniques will be
covered by segregated liquid assets or offsetting transactions, the Trust
and BlackRock believe such obligations do not constitute senior securities
and, accordingly, will not treat them as being subject to its borrowing
restrictions. Commodity options and futures contracts regulated by the CFTC
have specific margin requirements described below and are not treated as
senior securities. The use of certain Additional Investment Management
Techniques may give rise to taxable income and have certain other
consequences. See "Tax Matters."
Interest Rate Transactions. The Trust may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Trust
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio as a duration
management technique or to protect against any increase in the price of
securities the Trust anticipates purchasing at a later date. The Trust will
ordinarily use these transactions as a hedge or for duration or risk
management although it is permitted to enter into them to enhance income or
gain. The Trust will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Trust with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Trust receiving or paying, as the case may be, only
the net amount of the two payments on the payment dates. The Trust will
accrue the net amount of the excess, if any, of the Trust's obligations
over its entitlements with respect to each interest rate swap on a daily
basis and will segregate with a custodian an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least
equal to the accrued excess. The Trust will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest
rating category of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Trust may also
enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities
or options on the above. The Trust will ordinarily engage in such
transactions only for bona fide hedging, risk management (including
duration management) and other portfolio management purposes. However, the
Trust is also permitted to enter into such transactions for non-hedging
purposes to enhance income or gain, in accordance with the rules and
regulations of the CFTC, which currently provide that no such transaction
may be entered into if at such time more than 5% of the Trust's net assets
would be posted as initial margin and premiums with respect to such
non-hedging transactions.
Calls on Securities, Indices and Futures Contracts. The Trust may sell
or purchase call options ("calls") on municipal bonds and indices based
upon the prices of futures contracts and debt securities that are traded on
U.S. and foreign securities exchanges and in the over-the-counter markets.
A call gives the purchaser of the option the right to buy, and obligates
the seller to sell, the underlying security, futures contract or index at
the exercise price at any time or at a specified time during the option
period. All such calls sold by the Trust must be "covered" as long as the
call is outstanding (i.e., the Trust must own the securities or futures
contract subject to the call or other securities acceptable for applicable
escrow requirements). A call sold by the Trust exposes the Trust during the
term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security, index or futures contract
and may require the Trust to hold a security or futures contract which it
might otherwise have sold. The purchase of a call gives the Trust the right
to buy a security, futures contract or index at a fixed price. Calls on
futures on municipal bonds must also be covered by deliverable securities
or the futures contract or by liquid high grade debt securities segregated
to satisfy the Trust's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may
purchase put options ("puts") that relate to municipal bonds (whether or
not it holds such securities in its portfolio), indices or futures
contracts. The Trust may also sell puts on municipal bonds, indices or
futures contracts on such securities if the Trust's contingent obligations
on such puts are secured by segregated assets consisting of cash or liquid
high grade debt securities having a value not less than the exercise price.
The Trust will not sell puts if, as a result, more than 50% of the Trust's
assets would be required to cover its potential obligations under its
hedging and other investment transactions. In selling puts, there is a risk
that the Trust may be required to buy the underlying security at a price
higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell
Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock
permits the Trust to lock in a specified municipal interest rate for a
portion of its portfolio to preserve a return on a particular investment or
a portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities to be purchased at a later
date. The Trust will ordinarily use these transactions as a hedge or for
duration or risk management although it is permitted to enter into them to
enhance income or gain. An MMD Rate Lock is a contract between the Trust
and an MMD Rate Lock provider pursuant to which the parties agree to make
payments to each other on a notional amount, contingent upon whether the
Municipal Market Data AAA General Obligation Scale is above or below a
specified level on the expiration date of the contract. For example, if the
Trust buys an MMD Rate Lock and the Municipal Market Data AAA General
Obligation Scale is below the specified level on the expiration date, the
counterparty to the contract will make a payment to the Trust equal to the
specified level minus the actual level, multiplied by the notional amount
of the contract. If the Municipal Market Data AAA General Obligation Scale
is above the specified level on the expiration date, the Trust will make a
payment to the counterparty equal to the actual level minus the specified
level, multiplied by the notional amount of the contract. In entering into
MMD Rate Locks, there is a risk that municipal yields will move in the
direction opposite of the direction anticipated by the Trust. The Trust
will not enter into MMD Rate Locks if, as a result, more than 50% of its
assets would be required to cover its potential obligations under its
hedging and other investment transactions.
Appendix C contains further information about the characteristics,
risks and possible benefits of Additional Investment Management Techniques
and the Trust's other policies and limitations (which are not fundamental
policies) relating to investment in futures contracts and options. The
principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of
the securities in the Trust's portfolio; (b) possible lack of a liquid
secondary market for closing out a position in such instruments; (c) losses
resulting from interest rate or other market movements not anticipated by
BlackRock; and (d) the obligation to meet additional variation margin or
other payment requirements, all of which could result in the Trust being in
a worse position than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the ability of
the Trust to engage in Additional Investment Management Techniques. See
"Tax Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a
transaction in which the Trust sells a security it does not own in
anticipation that the market price of that security will decline. The Trust
may make short sales to hedge positions, for duration and risk management,
in order to maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Trust may have to pay a fee to borrow
particular securities and is often obligated to pay over any payments
received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other high grade liquid securities. The Trust will
also be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold
short. Depending on arrangements made with the broker-dealer from which it
borrowed the security regarding payment over of any payments received by
the Trust on such security, the Trust may not receive any payments
(including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of
the short sale and the time the Trust replaces the borrowed security, the
Trust will incur a loss; conversely, if the price declines, the Trust will
realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Trust's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.
The Trust will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the
value of its total assets or the Trust's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of
that class. The Trust may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at the time of the
sale, the Trust owns or has the immediate and unconditional right to
acquire at no additional cost the identical security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid
securities are subject to legal or contractual restrictions on disposition
or lack an established secondary trading market. The sale of restricted and
illiquid securities often requires more time and results in higher
brokerage charges or dealer discounts and other selling expenses than does
the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may
sell at a price lower than similar securities that are not subject to
restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis and
may purchase or sell municipal bonds on a "forward commitment" basis. When
such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued and
forward commitment securities may be sold prior to the settlement date, but
the Trust will enter into when-issued and forward commitment securities
only with the intention of actually receiving or delivering the securities,
as the case may be. If the Trust disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it can incur a gain or
loss. At the time the Trust enters into a transaction on a when-issued or
forward commitment basis, it will segregate with its custodian cash or
other liquid debt securities with a value not less than the value of the
when-issued or forward commitment securities. The value of these assets
will be monitored daily to ensure that their marked to market value will at
all times equal or exceed the corresponding obligations of the Trust. There
is always a risk that the securities may not be delivered and that the
Trust may incur a loss. Settlements in the ordinary course are not treated
by the Trust as when-issued or forward commitment transactions and
accordingly are not subject to the foregoing restrictions.
Borrowing
Although it has no present intention of doing so, the Trust reserves
the right to borrow funds to the extent permitted as described under the
caption "Investment Objectives and Policies--Investment Restrictions." The
proceeds of borrowings may be used for any valid purpose including, without
limitation, liquidity, investments and repurchases of shares of the Trust.
Borrowing is a form of leverage and, in that respect, entails risks
comparable to those associated with the issuance of Preferred Shares.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to
its portfolio investments subject to the investment restrictions set forth
herein. Reverse repurchase agreements involve the sale of securities held
by the Trust with an agreement by the Trust to repurchase the securities at
an agreed upon price, date and interest payment. At the time the Trust
enters into a reverse repurchase agreement, it may establish and maintain a
segregated account with the custodian containing liquid instruments having
a value not less than the repurchase price (including accrued interest). If
the Trust establishes and maintains such a segregated account, a reverse
repurchase agreement will not be considered a borrowing by the Trust;
however, under certain circumstances in which the Trust does not establish
and maintain such a segregated account, such reverse repurchase agreement
will be considered a borrowing for the purpose of the Trust's limitation on
borrowings. The use by the Trust of reverse repurchase agreements involves
many of the same risks of leverage since the proceeds derived from such
reverse repurchase agreements may be invested in additional securities.
Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may
decline below the price of the securities the Trust has sold but is
obligated to repurchase. Also, reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale by
the Trust in connection with the reverse repurchase agreement may decline
in price.
If the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the
Trust's obligation to repurchase the securities, and the Trust's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Also, the Trust would bear the risk of loss to the
extent that the proceeds of the reverse repurchase agreement are less than
the value of the securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase
agreements. A repurchase agreement is a contractual agreement whereby the
seller of securities (U.S. government securities or municipal bonds) agrees
to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed-upon repurchase price determines the
yield during the Trust's holding period. Repurchase agreements are
considered to be loans collateralized by the underlying security that is
the subject of the repurchase contract. Income generated from transactions
in repurchase agreements will be taxable. See "Tax Matters" for information
relating to the allocation of taxable income between common shares and
Preferred Shares, if any. The Trust will only enter into repurchase
agreements with registered securities dealers or domestic banks that, in
the opinion of BlackRock, present minimal credit risk. The risk to the
Trust is limited to the ability of the issuer to pay the agreed-upon
repurchase price on the delivery date; however, although the value of the
underlying collateral at the time the transaction is entered into always
equals or exceeds the agreed-upon repurchase price, if the value of the
collateral declines there is a risk of loss of both principal and interest.
In the event of default, the collateral may be sold but the Trust might
incur a loss if the value of the collateral declines, and might incur
disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, realization upon the collateral by
the Trust may be delayed or limited. BlackRock will monitor the value of
the collateral at the time the transaction is entered into and at all times
subsequent during the term of the repurchase agreement in an effort to
determine that such value always equals or exceeds the agreed-upon
repurchase price. In the event the value of the collateral declines below
the repurchase price, BlackRock will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the
repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a
bond that does not pay interest for its entire life. The market prices of
zero coupon bonds are affected to a greater extent by changes in prevailing
levels of interest rates and thereby tend to be more volatile in price than
securities that pay interest periodically. In addition, because the Trust
accrues income with respect to these securities prior to the receipt of
such interest, it may have to dispose of portfolio securities under
disadvantageous circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to brokers, dealers and
other financial institutions which meet the creditworthiness standards
established by the board of trustees of the Trust ("Qualified
Institutions"). By lending its portfolio securities, the Trust attempts to
increase its income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Trust. The Trust may
lend its portfolio securities so long as the terms and the structure of
such loans are not inconsistent with the requirements of the Investment
Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit
issued by a U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is
"marked to the market" on a daily basis), (c) the loan be made subject to
termination by the Trust at any time and (d) the Trust receive reasonable
interest on the loan (which may include the Trust's investing any cash
collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. The Trust
will not lend portfolio securities if, as a result, the aggregate value of
such loans exceeds 331/3% of the value of the Trust's total assets
(including such loans). Loan arrangements made by the Trust will comply
with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange. All relevant facts and circumstances,
including the creditworthiness of the Qualified Institution, will be
monitored by BlackRock and will be considered in making decisions with
respect to lending of securities, subject to review by the Trust's board of
trustees.
The Trust may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Trust's board of trustees. In addition, voting rights may
pass with the loaned securities, but if a material event were to occur
affecting such a loan, the loan must be called and the securities voted.
High Yield Securities
The Trust may invest up to 20% of its assets in securities rated below
investment grade such as those rated Ba or lower by Moody's and BB or lower
by S&P or securities comparably rated by other rating agencies or in
unrated securities determined by BlackRock to be of comparable quality.
Securities rated Ba by Moody's are judged to have speculative elements;
their future cannot be considered as well assured and often the protection
of interest and principle payments may be very moderate. Securities rated
BB by S&P are regarded as having predominantly speculative characteristics
and, while such obligations have less near-term vulnerability to default
than other speculative grade debt, they face 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 lowest rated security that the Trust will invest in is one rated B by
either Moody's or S&P.
Lower grade securities, though high yielding, are characterized by
high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding,
higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Trust to sell certain
securities or could result in lower prices than those used in calculating
the Trust's net asset value.
The prices of debt securities generally are inversely related to
interest rate changes; however, the price volatility caused by fluctuating
interest rates of securities also is inversely related to the coupons of
such securities. Accordingly, below investment grade securities may be
relatively less sensitive to interest rate changes than higher quality
securities of comparable maturity because of their higher coupon. This
higher coupon is what the investor receives in return for bearing greater
credit risk. The higher credit risk associated with below investment grade
securities potentially can have a greater effect on the value of such
securities than may be the case with higher quality issues of comparable
maturity.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt
the market for such securities and may have an adverse impact on the value
of such securities. In addition, it is likely that any such economic
downturn could adversely affect the ability of the issuers of such
securities to repay principle and pay interest thereon and increase the
incidence of default for such securities.
The ratings of Moody's, S&P and other rating agencies represent their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principle payments, they do not
evaluate the market value risk of such obligations. Although these ratings
may be an initial criterion for selection of portfolio investments,
BlackRock also will independently evaluate these securities and the ability
for the issuers of such securities to pay interest and principal. To the
extent that the Trust invests in lower grade securities that have not been
rated by a rating agency, the Trust's ability to achieve its investment
objectives will be more dependent on BlackRock's credit analysis than would
be the case when the Trust invests in rated securities.
Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest
municipal bonds. Residual interest municipal bonds pay interest at rates
that bear an inverse relationship to the interest rate on another security
or the value of an index ("inverse floaters"). An investment in inverse
floaters may involve greater risk than an investment in a fixed-rate bond.
Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a
fixed-rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest paid to
the Trust when short-term interest rates rise, and increase the interest
paid to the Trust when short-term interest rates fall. Inverse floaters
have varying degrees of liquidity, and the market for these securities is
relatively volatile. These securities tend to underperform the market for
fixed-rate bonds in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline.
Shifts in long-term interest rates may, however, alter this tendency.
Although volatile, inverse floaters typically offer the potential for
yields exceeding the yields available on fixed-rate bonds with comparable
credit quality, coupon, call provisions and maturity. These securities
usually permit the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising rates if exercised at an opportune
time. Investment in inverse floaters may amplify the effects of the Trust's
use of leverage. Should short-term interest rates rise, the combination of
the Trust's investment in inverse floaters and the use of leverage likely
will adversely affect the Trust's income and distributions to common
shareholders. Although the Trust does not intend initially to invest in
inverse floaters, the Trust may do so at some point in the future. The
Trust will provide shareholders 30 days' written notice prior to any change
in its policy of not investing in inverse floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort to
the business of the Trust as is reasonably necessary to perform its duties
to the Trust, the services of BlackRock Advisors are not exclusive and
BlackRock Advisors provides similar services to other investment companies
and other clients and may engage in other activities.
The investment management agreement also provides that in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard
of its obligations thereunder, BlackRock Advisors is not liable to the
Trust or any of the Trust's shareholders for any act or omission by
BlackRock Advisors in the supervision or management of its respective
investment activities or for any loss sustained by the Trust or the Trust's
shareholders and provides for indemnification by the Trust of BlackRock
Advisors, its directors, officers, employees, agents and control persons
for liabilities incurred by them in connection with their services to the
Trust, subject to certain limitations and conditions.
The investment management agreement was approved by the Trust's board
of trustees at an in-person meeting of the board of trustees held on
October 15, 2001, including a majority of the trustees who are not parties
to the agreement or interested persons of any such party (as such term is
defined in the Investment Company Act). This agreement provides for the
Trust to pay a management fee at an annual rate equal to 0.40% of the
average weekly value of the Trust's Managed Assets.
The investment management agreement was approved by the sole common
shareholder of the Trust as of October 19, 2001. The investment management
agreement will continue in effect for a period of two years from its
effective date, and if not sooner terminated, will continue in effect for
successive periods of 12 months thereafter, provided that each continuance
is specifically approved at least annually by both (1) the vote of a
majority of the Trust's board of trustees or the vote of a majority of the
outstanding voting securities of the Trust (as such term is defined in the
Investment Company Act) and (2) by the vote of a majority of the trustees
who are not parties to the investment management agreement or interested
persons (as such term is defined in the Investment Company Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The investment management agreement may be terminated as a whole
at any time by the Trust, without the payment of any penalty, upon the vote
of a majority of the Trust's board of trustees or a majority of the
outstanding voting securities of the Trust or by BlackRock Advisors, on 60
days' written notice by either party to the other. The investment
management agreement will terminate automatically in the event of its
assignment (as such term is defined in the Investment Company Act and the
rules thereunder).
Sub-Investment Advisory Agreement
BlackRock Financial Management, the Sub-Advisor, is a wholly owned
subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory
agreement, BlackRock Advisors has appointed BlackRock Financial Management,
one of its affiliates, to perform certain of the day-to-day investment
management of the Trust. BlackRock Financial Management will receive a
portion of the management fee paid by the Trust to BlackRock Advisors. From
the management fees, BlackRock Advisors will pay BlackRock Financial
Management, for serving as Sub-Advisor, a fee equal to: (i) prior to
October 31, 2002, 38% of the monthly management fees received by BlackRock
Advisors, (ii) from November 1, 2002 to October 31, 2003, 19% of the
monthly management fees received by BlackRock Advisors; and (iii) after
October 31, 2003, 0% of the management fees received by BlackRock Advisors;
provided thereafter that the Sub-Advisor may be compensated at cost for any
services rendered to the Trust at the request of BlackRock Advisors and
approved of by the board of trustees.
The sub-investment advisory agreement also provides that, in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Trust will indemnify BlackRock
Financial Management, its directors, officers, employees, agents,
associates and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain
limitations.
Although BlackRock Financial Management intends to devote such time
and effort to the business of the Trust as is reasonably necessary to
perform its duties to the Trust, the services of BlackRock Financial
Management are not exclusive and BlackRock Financial Management provides
similar services to other investment companies and other clients and may
engage in other activities.
The sub-investment advisory agreement was approved by the Trust's
board of trustees at an in-person meeting of the board of trustees held on
October 15, 2001, including a majority of the trustees who are not parties
to the agreement or interested persons of any such party (as such term is
defined in the Investment Company Act). The sub-investment advisory
agreement was approved by the sole common shareholder of the Trust as of
October 19, 2001. The sub-investment advisory agreement will continue in
effect for a period of two years from its effective date, and if not sooner
terminated, will continue in effect for successive periods of 12 months
thereafter, provided that each continuance is specifically approved at
least annually by both (1) the vote of a majority of the Trust's board of
trustees or the vote of a majority of the outstanding voting securities of
the Trust (as defined in the Investment Company Act) and (2) by the vote of
a majority of the trustees who are not parties to such agreement or
interested persons (as such term is defined in the Investment Company Act)
of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The sub-investment advisory agreement may be
terminated as a whole at any time by the Trust, without the payment of any
penalty, upon the vote of a majority of the Trust's board of trustees or a
majority of the outstanding voting securities of the Trust, or by BlackRock
Advisors or BlackRock Financial Management, on 60 days' written notice by
any party to the others. The sub-investment advisory agreement will also
terminate automatically in the event of its assignment (as such term is
defined in the Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day-to-day operations. The
officers are directly responsible to the Trust's board of trustees, which
sets broad policies for the Trust and chooses its officers. The following
is a list of the trustees and officers of the Trust and a brief statement
of their present positions and principal occupations during the past five
years. Trustees who are interested persons of the Trust (as defined in the
Investment Company Act) are denoted by an asterisk (*). Trustees who are
independent trustees (as defined in the Investment Company Act)(the
"Independent Trustees") are not denoted with an asterisk. The business
address of the Trust, BlackRock Advisors and their board members and
officers is 100 Bellevue Parkway, Wilmington, Delaware 19809, unless
specified otherwise below. The trustees listed below are either trustees or
directors of other closed-end funds for which BlackRock Advisors acts as
investment advisor.
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Andrew F. Brimmer Trustee President of Brimmer &
4400 MacArthur Blvd., N.W. Company, Inc., a Washington,
Suite 302 D.C.- based economic and
Washington, DC 20007 financial consulting firm.
Age: 74 Director of CarrAmerica Realty
BankAmerica Corporation and Borg-Warner
Automotive. Formerly member of
the Board of Governors of the
Federal Reserve System.
Formerly Director of AirBorne
Express, Corporation (Bank of
America), Bell South
Corporation, College
Retirement Equities Fund
(Trustee), Commodity Exchange,
Inc. (Public Governor),
Connecticut Mutual Life
Insurance Company, E.I. Dupont
de Nemours & Company,
Equitable Life Assurance
Society of the United States,
Gannett Company, Mercedes-Benz
of North America, MNC
Financial Corporation
(American Security Bank), NMC
Capital Management, Navistar
International Corporation, PHH
Corp. and UAL Corporation
(United Airlines).
Richard E. Cavanagh Trustee President and Chief Executive
845 Third Avenue Officer of The Conference
New York, NY 10022 Board, Inc., a leading global
Age: 54 business membership from
organization, 1995-present.
Former Executive Dean of the
John F. Kennedy School of
Government at Harvard
University from 1988-1995.
Acting Director, Harvard
Center for Business and
Government (1991-1993).
Formerly Partner (principal)
of McKinsey & Company, Inc.
(1980 1988).Former Executive
Director of Federal Cash
Management, White House Office
of Management and Budget
(1977-1979). Co-author, The
Winning Performance (best
selling management book
published in 13 national
editions). Trustee Emeritus,
Wesleyan University. Trustee,
Drucker Foundation, Airplanes
Group, Aircraft Finance Trust
(AFT) and Educational Testing
Service (ETS). Director, Arch
Chemicals, Fremont Group and
The Guardian Life Insurance
Company of America.
Kent Dixon Trustee Consultant/Investor. Former
430 Sandy Hook Road President and Chief Executive
St. Petersburg, FL 33706 Officer of Empire Federal
Age: 63 Savings Bank of America and
Banc PLUS Savings Association,
former Chairman of the Board,
President and Chief Executive
Officer of Northeast Savings.
Former Director of ISFA (the
owner of INVEST, a national
securities brokerage service
designed for banks and thrift
institutions).
Frank J. Fabozzi Trustee Consultant. Editor of The
858 Tower View Circle Journal of Portfolio
New Hope, PA 18938 Management and Adjunct
Age: 52 Professor of Finance at the
School of Management at Yale
University. Director, Guardian
Mutual Funds Group. Author and
editor of several books on
fixed income portfolio
management. Visiting Professor
of Finance and Accounting at
the Sloan School of
Management, Massachusetts
Institute of Technology from
1986 to August 1992.
Laurence D. Fink* Trustee Director, Chairman and Chief
Age: 48 Executive Officer of
BlackRock, Inc. since its
formation in 1998 and of
BlackRock, Inc.'s predecessor
entities since 1988. Chairman
of the Management Committee of
BlackRock, Inc. Formerly,
Managing Director of the First
Boston Corporation, Member of
its Management Committee,
Co-head of its Taxable Fixed
Income Division and Head of
its Mortgage and Real Estate
Products Group. Currently,
Chairman of the Board of each
of the closed-end Trusts in
which BlackRock Advisors, Inc.
acts as investment advisor,
President, Treasurer and a
Trustee of the BlackRock
Funds, Chairman of the Board
and Director of Anthracite
Capital, Inc., a Director of
BlackRock's offshore funds and
alternative products and
Chairman of the Board of
Nomura BlackRock Asset
Management Co., Ltd.
Currently, Vice Chairman of
the Board of Trustees of Mount
Sinai-New York University
Medical Center and Health
System and a Member of the
Board of Phoenix House.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John E.
P.O. Box 1595 Anderson Graduate School of
Pauma Valley, CA 92061 Management, University of
Age: 72 California since July 1, 1993.
Director, Jacobs Engineering
Group, Inc., Payden & Rygel
Investment Trust, Provident
Investment Counsel Funds,
Timken Company, Motor Cargo
Industries and Trust for
Investment Managers. Acting
Dean of The School of
Business, Hong Kong University
of Science and Technology
1990-1993. From 1978 to
September 1993, Dean of The
John E. Anderson Graduate
School of Management,
University of California.
Walter F. Mondale Trustee Partner, Dorsey & Whitney, a
220 South Sixth Street law firm (December
Minneapolis, MN 55402 1996-present, September
Age: 73 1987-August 1993). Formerly,
U.S. Ambassador to Japan
(1993-1996). Formerly Vice
President of the United
States, U.S. Senator and
Attorney General of the State
of Minnesota. 1984 Democratic
Nominee for President of the
United States. Director,
Northwest Airlines
Corporation, NWA Inc.,
Northwest Airlines, Inc. and
UnitedHealth Group
Corporation.
Ralph L. Schlosstein* Trustee Director since 1999 and
Age: 50 and President of BlackRock, Inc.
President since its formation in 1998
and of BlackRock, Inc.'s
predecessor entities since
1988. Member of the Management
Committee and Investment
Strategy Group of BlackRock,
Inc. Formerly, Managing
Director of Lehman Brothers,
Inc. and Co-head of its
Mortgage and Savings
Institutions Group. Currently,
President of each of the
closed-end Trusts in which
BlackRock Advisors, Inc. acts
as investment advisor and a
Director and Officer of
BlackRock's alternative
products. Currently, a Member
of the Visiting Board of
Overseers of the John F.
Kennedy School of Government
at Harvard University, the
Financial Institutions Center
Board of the Wharton School of
the University of
Pennsylvania, and a Trustee of
New Visions for Public
Education in New York City.
Formerly, a Director of Pulte
Corporation and a Member of
Fannie Mae's Advisory Council.
Anne F. Ackerley Secretary Managing Director of
Age: 39 BlackRock, Inc. since 2000.
Formerly First Vice President
and Chief Operating Officer,
Mergers and Acquisitions Group
at Merrill Lynch & Co. from
1997 to 2000; First Vice
President and Chief Operating
Officer, Public Finance Group
at Merrill Lynch & Co. from
1995 to 1997; First Vice
President, Emerging Markets
Fixed Income Research at
Merrill Lynch & Co. prior
thereto.
Henry Gabbay Treasurer Managing Director of
Age: 53 BlackRock, Inc. and its
predecessor entities.
Robert S. Kapito Vice Vice Chairman of BlackRock,
Inc. and its predecessor
Age: 44 President entities.
Kevin Klingert Vice Managing Director of
Age 38 President BlackRock, Inc. and its
predecessor entities.
James Kong Assistant Managing Director of
Age: 38 Treasurer BlackRock, Inc. and its
predecessor entities.
Richard Shea, Esq. Vice Managing Director of
Age: 41 President/ BlackRock, Inc. since 2000;
Tax Chief Operating Officer and
Chief Financial Officer of
Anthracite Capital, Inc. since
1998. Formerly, Director of
BlackRock, Inc. and its
predecessor entities.
Prior to this offering, all of the outstanding shares of the Trust
were owned by BlackRock Advisors.
The fees and expenses of the Independent Trustees of the Trust are
paid by the Trust. The trustees who are members of the BlackRock
organization receive no compensation from the Trust. During the year ended
December 31, 2000, the Independent Trustees/Directors earned the
compensation set forth below in their capacities as trustees/directors of
the funds in the BlackRock Family of Funds. It is estimated that the
Independent Trustees will receive from the Trust the amounts set forth
below for the Trust's calendar year ending December 31, 2001, assuming the
Trust had been in existence for the full calendar year.
Total Compensation from
Estimated the Trust and Fund
Compensation Complex Paid to
Name of Board Member From Trust Board Member(1)
-------------------- ---------- ---------------
Andrew F. Brimmer $6,000(2)(3) $160,000(4)
Richard E. Cavanagh $6,000(2) $160,000(4)
Kent Dixon $6,000 $160,000
Frank J. Fabozzi $6,000 $160,000
James Clayburn La Force, Jr. $6,000(2) $160,000(4)
Walter F. Mondale $6,000(2) $160,000(4)
(1) Represents the total compensation earned by such persons during the
calendar year ended December 31, 2000 from the twenty-two closed-end
funds advised by the Advisor (the "Fund Complex"). Two of these funds,
BlackRock Target Term Trust and the BlackRock 2001 Term Trust, were
terminated on December 29, 2000 and June 30, 2001, respectively. On
July 31, 2001, five additional closed-end funds advised by the Advisor
were added to the Fund Complex and on October 30, 2001, three additional
closed-end funds advised by the Advisor were added to the Fund Complex.
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La
Force and Mondale will defer $1,500, $1,500, $3,750 and $1,500,
respectively, pursuant to the Fund Complex's deferred compensation
plan.
(3) At a meeting of the boards of directors/trustees of the Fund Complex
held on August 24, 2000, Andrew F. Brimmer was appointed "lead
director" for each board of trustees/directors in the Fund Complex.
For his services as lead trustee/director, Andrew F. Brimmer will be
compensated in the amount of $40,000 per annum by the Fund Complex to
be allocated among the funds in the Fund Complex based on each fund's
relative net assets.
(4) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale
deferred $12,000, $12,000, $77,500 and $31,000, respectively, pursuant
to the Fund Complex's deferred compensation plan.
Each Independent Trustee/Director receives an annual fee calculated as
follows: (i) $6,000 from each fund/trust in the Fund Complex and (ii)
$1,500 for each meeting of each board in the Fund Complex attended by such
Independent Trustee/Director. The total annual aggregate compensation for
each Independent Trustee/Director is capped at $160,000 per annum, except
that Dr. Brimmer receives an additional $40,000 from the Fund Complex for
acting as the lead trustee/director for each board of trustees/directors in
the Fund Complex. In the event that the $160,000 cap is met with respect to
an Independent Trustee/Director, the amount of the Independent
Trustee/Director's fee borne by each fund in the Fund Complex is reduced by
reference to the net assets of the Trust relative to the other funds in the
Fund Complex. In addition, the attendance fees of each Independent
Trustee/Director of the funds/trusts are reduced proportionately, based on
each respective fund's/trust's net assets, so that the aggregate per
meeting fee for all meetings of the boards of trustees/directors of the
funds/trusts held on a single day does not exceed $20,000 for any
Independent Trustee/Director.
Codes of Ethics
The Trust, the Advisor, the Sub-Advisor and the Trust's principal
underwriters have adopted codes of ethics under Rule 17j-1 of the
Investment Company Act. These codes permit personnel subject to the codes
to invest in securities, including securities that may be purchased or held
by the Trust.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor.
BlackRock Financial Management acts as the Trust's sub-advisor. BlackRock
Advisors and BlackRock Financial Management are both wholly owned
subsidiaries of BlackRock, Inc., which is one of the largest publicly
traded investment management firms in the United States with $225 billion
of assets under management as of September 30, 2001. BlackRock Advisors is
one of the nation's leading fixed income managers with over $205 billion of
fixed income and liquidity assets under management. BlackRock, Inc. and its
affiliates manage assets on behalf of more than 3,300 institutions and
200,000 individuals worldwide, through a variety of equity, fixed income,
liquidity and alternative investment separate accounts and mutual funds,
including the company's flagship fund families, BlackRock Funds and
BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's
26th largest asset management firm according to Pensions & Investments, May
14 , 2001.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 28 funds.
BlackRock has 18 leveraged municipal closed-end funds under management and
approximately $17.6 billion in municipal assets firm-wide. As of July 31,
2001, BlackRock managed over $6.7 billion in closed-end products. In
addition, BlackRock provides risk management and investment system 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, Delaware, San Francisco,
California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock,
Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of
the largest diversified financial services organizations in the United
States, and is majority-owned by PNC and by BlackRock employees. The
BlackRock organization invented the term trust in 1988 and has successfully
managed four consecutive term trusts to returning principal on maturity.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to buy
and sell securities for the Trust, the selection of brokers and dealers to
effect the transactions and the negotiation of prices and any brokerage
commissions. The securities in which the Trust invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the
price of such securities usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the
price, a fixed amount of compensation for the manager(s), underwriter(s)
and dealer(s). The Trust may also purchase certain money market instruments
directly from an issuer, in which case no commissions or discounts are
paid. Purchases and sales of debt securities on a stock exchange are
effected through brokers who charge a commission for their services.
The Advisor and the Sub-Advisor are responsible for effecting
securities transactions of the Trust and will do so in a manner deemed fair
and reasonable to shareholders of the Trust and not according to any
formula. The Advisor's and the Sub-Advisor's primary considerations in
selecting the manner of executing securities transactions for the Trust
will be prompt execution of orders, the size and breadth of the market for
the security, the reliability, integrity and financial condition and
execution capability of the firm, the difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of
the Advisor or the Sub-Advisor, more than one firm can offer comparable
execution services. In selecting among such firms, consideration is given
to those firms which supply research and other services in addition to
execution services. Consideration may also be given to the sale of shares
of the Trust. However, it is not the policy of BlackRock, absent special
circumstances, to pay higher commissions to a firm because it has supplied
such research or other services.
The Advisor and the Sub-Advisor are able to fulfill their obligation
to furnish a continuous investment program to the Trust without receiving
research or other information from brokers; however, each considers access
to such information to be an important element of financial management.
Although such information is considered useful, its value is not
determinable, as it must be reviewed and assimilated by the Advisor and/or
the Sub-Advisor, and does not reduce the Advisor's and/or the Sub-Advisor's
normal research activities in rendering investment advice under the
investment management agreement or the sub-investment advisory agreement.
It is possible that the Advisor's and/or the Sub-Advisor's expenses could
be materially increased if it attempted to purchase this type of
information or generate it through its own staff.
One or more of the other investment companies or accounts which the
Advisor and/or the Sub-Advisor manages may own from time to time some of
the same investments as the Trust. Investment decisions for the Trust are
made independently from those of such other investment companies or
accounts; however, from time to time, the same investment decision may be
made for more than one company or account. When two or more companies or
accounts seek to purchase or sell the same securities, the securities
actually purchased or sold will be allocated among the companies and
accounts on a good faith equitable basis by the Advisor and/or the
Sub-Advisor in their discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Trust. In other cases,
however, the ability of the Trust to participate in volume transactions may
produce better execution for the Trust. It is the opinion of the Trust's
board of trustees that this advantage, when combined with the other
benefits available due to the Advisor's or the Sub-Advisor's organization,
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
It is not the Trust's policy to engage in transactions with the
objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Trust will be approximately 100%
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rates, actual turnover
may be higher or lower. Higher portfolio turnover results in increased
Trust costs, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the reinvestment in
other securities.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR PREFERRED SHARES
General
Securities Depository. The Depository Trust Company ("DTC") will act
as the Securities Depository with respect to each series of Preferred
Shares. One certificate for all of the shares of each series will be
registered in the name of The Bank of New York, as nominee of the
Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting
transfers of shares of Preferred Shares contained in the Statement. The
Trust will also issue stop-transfer instructions to the transfer agent for
Preferred Shares. Prior to the commencement of the right of holders of
Preferred Shares to elect a majority of the Trust's trustees, as described
under "Description of Preferred Shares--Voting Rights" in the prospectus,
The Bank of New York will be the holder of record of each series of
Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives)
own DTC. DTC maintains lists of its participants and will maintain the
positions (ownership interests) held by each such participant in shares of
Preferred Shares, whether for its own account or as a nominee for another
person. Additional information concerning DTC and the DTC depository system
is included as an Exhibit to the Registration Statement of which this
statement of additional information forms a part.
Concerning the Auction Agent
The auction agent will act as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the
auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties
under the auction agency agreement between the Trust and the auction agent
and will not be liable for any error of judgment made in good faith unless
the auction agent was negligent in ascertaining the pertinent facts.
The auction agent may rely upon, as evidence of the identities of the
holders of Preferred Shares, the auction agent's registry of holders, the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Trust) with respect to transfers described under "The
Auction--Secondary Market Trading and Transfers of Preferred Shares" in the
prospectus and notices from the Trust. The auction agent is not required to
accept any such notice for an auction unless it is received by the auction
agent by 3:00 p.m., New York City time, on the business day preceding such
auction.
The auction agent may terminate its auction agency agreement with the
Trust upon notice to the Trust on a date no earlier than 45 days after such
notice. If the auction agent should resign, the Trust will use its best
efforts to enter into an agreement with a successor auction agent
containing substantially the same terms and conditions as the auction
agency agreement. The Trust may remove the auction agent provided that
prior to such removal the Trust shall have entered into such an agreement
with a successor auction agent.
Broker-Dealers
The auction agent after each auction for shares of each series of
Preferred Shares will pay to each Broker-Dealer, from funds provided by the
Trust, a service charge at the annual rate of 1/4 of 1% in the case of any
auction immediately preceding a dividend period of less than one year, or a
percentage agreed to by the Trust and the Broker-Dealers in the case of any
auction immediately preceding a dividend period of one year or longer, of
the purchase price of the series of Preferred Shares placed by such
Broker-Dealer at such auction. For the purposes of the preceding sentence,
Preferred Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of hold orders deemed to have been submitted to the auction
agent by the Broker-Dealer and were acquired by such Broker-Dealer for its
own account or were acquired by such Broker-Dealer for its customers who
are beneficial owners or (b) the subject of an order submitted by such
Broker-Dealer that is (i) a submitted bid of an existing holder that
resulted in the existing holder continuing to hold such shares as a result
of the auction or (ii) a submitted bid of a potential holder that resulted
in the potential holder purchasing such shares as a result of the auction
or (iii) a valid hold order.
The Trust may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one
Broker-Dealer agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than
an affiliate of the Trust) may submit orders in auctions for its own
account, unless the Trust notifies all Broker-Dealers that they may no
longer do so, in which case Broker-Dealers may continue to submit hold
orders and sell orders for their own accounts. Any Broker-Dealer that is an
affiliate of the Trust may submit orders in auctions, but only if such
orders are not for its own account. If a Broker-Dealer submits an order for
its own account in any auction, it might have an advantage over other
bidders because it would have knowledge of all orders submitted by it in
that auction; such Broker-Dealer, however, would not have knowledge of
orders submitted by other Broker-Dealers in that auction.
DESCRIPTION OF COMMON SHARES
A description of the common shares is contained in the prospectus. The
Trust intends to hold annual meetings of shareholders so long as the common
shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such
its shareholders will not have the right to cause the Trust to redeem their
shares. Instead, the Trust's common shares will trade in the open market at
a price that will be a function of several factors, including dividend
levels (which are in turn affected by expenses), net asset value, call
protection, dividend stability, relative demand for and supply of such
shares in the market, general market and economic conditions and other
factors. Because shares of a closed-end management investment company may
frequently trade at prices lower than net asset value, the Trust's board of
trustees may consider action that might be taken to reduce or eliminate any
material discount from net asset value in respect of common shares, which
may include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares, or the
conversion of the Trust to an open-end management investment company. The
board of trustees may decide not to take any of these actions. In addition,
there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred
Shares are outstanding, the Trust may not purchase, redeem or otherwise
acquire any of its common shares unless (1) all accrued Preferred Shares
dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the net asset value of the Trust's portfolio (determined
after deducting the acquisition price of the common shares) is at least
200% of the liquidation value of the outstanding Preferred Shares (expected
to equal the original purchase price per share plus any accrued and unpaid
dividends thereon). Any service fees incurred in connection with any tender
offer made by the Trust will be borne by the Trust and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to
finance the repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of
cash by the Trust in anticipation of share repurchases or tenders will
reduce the Trust's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trust's board of trustees would
have to comply with the Securities Exchange Act of 1934, as amended, the
Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from
net asset value will be made by the board of trustees at the time it
considers such issue, it is the board's present policy, which may be
changed by the board of trustees, not to authorize repurchases of common
shares or a tender offer for such shares if: (1) such transactions, if
consummated, would (a) result in the delisting of the common shares from
the New York Stock Exchange, or (b) impair the Trust's status as a
regulated investment company under the Code, (which would make the Trust a
taxable entity, causing the Trust's income to be taxed at the corporate
level in addition to the taxation of shareholders who receive dividends
from the Trust) or as a registered closed-end management 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 objectives and policies in order to repurchase shares;
or (3) there is, in the board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Trust, (b) general suspension
of or limitation on prices for trading securities on the New York Stock
Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or New York
banks, (d) material limitation affecting the Trust or the issuers of its
portfolio securities by Federal or state authorities on the extension of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or (f) other
event or condition which would have a material adverse effect (including
any adverse tax effect) on the Trust or its shareholders if shares were
repurchased. The board of trustees may in the future modify these
conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset
value will result in an increase in the net asset value of those shares
that remain outstanding. However, there can be no assurance that share
repurchases or tender offers at or below net asset value will result in the
Trust's shares trading at a price equal to their net asset value.
Nevertheless, the fact that the Trust's shares may be the subject of
repurchase or tender offers from time to time, or that the Trust may be
converted to an open-end management investment company, may reduce any
spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Trust of its common shares will
decrease the Trust's total assets which would likely have the effect of
increasing the Trust's expense ratio. Any purchase by the Trust of its
common shares at a time when Preferred Shares are outstanding will increase
the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade
below net asset value, the Trust's board of trustees would likely consider
all relevant factors, including the extent and duration of the discount,
the liquidity of the Trust's portfolio, the impact of any action that might
be taken on the Trust or its shareholders and market considerations. Based
on these considerations, even if the Trust's shares should trade at a
discount, the board of trustees may determine that, in the interest of the
Trust and its shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain Federal income tax
consequences to a shareholder of acquiring, holding and disposing of common
stock of the Trust. The discussion reflects applicable tax laws of the
United States as of the date of this prospectus, which tax laws may be
changed or subject to new interpretations by the courts or the Internal
Revenue Service retroactively or prospectively.
The Trust intends to qualify under Subchapter M of the Code for tax
treatment as a regulated investment company. In order to qualify as a
regulated investment company, the Trust must satisfy certain requirements
relating to the source of its income, diversification of its assets, and
distributions of its income to its shareholders. First, the Trust must
derive at least 90% of its annual gross income (including tax-exempt
interest) from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including but not limited to gains
from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90%
gross income test"). Second, the Trust must diversify its holdings so that,
at the close of each quarter of its taxable year, (i) at least 50% of the
value of its total assets is comprised of cash, cash items, United States
government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Trust's total assets and to
not more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of the total assets is invested in the
securities of any one issuer (other than United States government
securities and securities of other regulated investment companies) or two
or more issuers controlled by the Trust and engaged in the same, similar or
related trades or businesses.
As a regulated investment company, the Trust will not be subject to
Federal income tax on its income that it distributes each taxable year to
its shareholders, provided that in such taxable year 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 net long-term capital loss, and any other taxable
income other than "net capital gain" (as defined below) and is reduced by
deductible expenses) determined without regard to the deduction for
dividends paid and (ii) its net tax-exempt interest (the excess of its
gross tax-exempt interest income over certain disallowed deductions). The
Trust may retain for investment its net capital gain (which consists of the
excess of its net long-term capital gain over its net short-term capital
loss). However, if the Trust retains any net capital gain or any investment
company taxable income, it will be subject to tax at regular corporate
rates on the amount retained. If the Trust retains any net capital gain, it
may designate the retained amount as undistributed capital gains in a
notice to its shareholders 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 shareholder of the Trust will be increased by
the amount of undistributed capital gains included in the gross income of
the shareholder less the tax deemed paid by the shareholder under clause
(ii) of the preceding sentence.
Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain, to
elect 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 that do not constitute capital gain
dividends or exempt-interest dividends (as defined below) will be taxable
as ordinary income to the extent of the current or accumulated earnings and
profits of the Trust and any excess over such earnings and profits will be
treated first as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his or her shares and then 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.
Although there is a dividend reinvestment plan available, the tax
status of your dividend is not affected by whether you reinvest your
dividends or receive them in cash. In addition, 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.
The Trust intends to invest in sufficient tax-exempt municipal bonds
to permit payment of "exempt-interest dividends" (as defined in the Code).
Generally, exempt-interest dividends paid to holders of common shares
retain their tax-exempt character and are not includable in the holder's
gross income for Federal income tax purposes. However, 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 and, as noted below, may
generate a tax preference for alternative minimum tax purposes. In
addition, the Trust may distribute "capital gains dividends" as defined in
the Code. The Trust will not be taxed on such distributed gains and the
shareholder will be taxed on the distribution at long term capital gains
rates regardless of the shareholder's holding period.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Trust is required to designate distributions paid with
respect to its common shares and its Preferred Shares as consisting of a
portion of each type of income distributed by the Trust. The portion of
each type of income deemed received by the holders of each class of shares
will be equal to the portion of total Trust dividends received by such
class. Thus, the Trust will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends between the holders of
the common shares and the holders of Preferred Shares in proportion to the
total dividends paid to each such class during or with respect to the
taxable year, or otherwise as required by applicable law. Capital gain
dividends and ordinary income dividends will similarly be allocated between
the two classes.
Federal income tax law imposes an alternative minimum tax with respect
to both corporations and individuals based on certain items of tax
preference. To the extent the Trust receives income treated as tax
preference items for purposes of the alternative minimum tax, a portion of
the dividends paid by it, although otherwise exempt from Federal income
tax, will be taxable to holders of common shares to the extent that their
tax liability is determined under the alternative minimum tax. The Trust
will annually supply holders of common shares with reports indicating the
amount and nature of all income distributed to them as well as the
percentage of Trust income attributable to tax preference items subject to
the alternative minimum tax.
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. 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. 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.
Although exempt-interest dividends generally may be treated by holders
of common shares as items of interest excluded from their gross income,
each holder is advised to consult his tax advisor with respect to whether
exempt-interest dividends retain their exclusion if the shareholder would
be treated as a "substantial user," or a "related person" of a substantial
user, of the facilities financed with respect to any of the tax-exempt
obligations held by the Trust.
The redemption, sale or exchange of common shares generally will
result in capital gain or loss to the holders of common shares who hold
their shares as capital assets. Generally, a shareholder's gain or loss
will be long-term capital gain or loss if the shares have been held for
more than one year even though the increase in value in such common shares
is attributable to tax-exempt interest income. Present law taxes both
long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however,
long-term capital gains will be taxed at a maximum rate of 20%, while
short-term capital gains and other ordinary income will currently be taxed
at a maximum rate of 39.1%.*
-------------------
* The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000, creates
a new 10 percent income tax bracket and reduces the tax rate
applicable to ordinary income over a six year phase-in period.
Beginning in taxable year 2006, ordinary income will be subject to a
35% maximum rate.
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, sale 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, sale or exchange of common shares if the shareholder purchases
other common 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 common shares of the Trust within a period of 61 days beginning 30 days
before and ending 30 days after such redemption, sale 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 redemption, sale or
exchange of common shares held for six months or less (i) will be
disallowed to the extent of any exempt-interest dividends received with
respect to such common shares and, (ii) such losses will be treated as
long-term capital losses to the extent of any capital gain dividends
received (or credited as undistributed capital gain) with respect to such
common shares.
If you borrow money to invest in common shares of the Trust, you may
not be able to deduct the interest with respect to that loan. Moreover,
Trust shares may be treated as being financed by a loan even if the loan
cannot be traced directly to the investment in such shares.
In order to avoid a 4% Federal excise tax, the Trust must distribute
or be deemed to have distributed by December 31 of each calendar year at
least 98% of its taxable ordinary income for such year, at least 98% of its
capital gain net income (the excess of its realized capital gains over its
realized capital losses, generally computed on the basis of the one-year
period ending on October 31 of such year) and 100% of any taxable ordinary
income and capital gain net income for the prior year that was not
distributed during such year and on which the Trust paid no Federal income
tax. The Trust intends to make timely distributions in compliance with
these requirements and consequently it is anticipated that it generally
will not be required to pay the excise tax.
If in any year the Trust should fail to qualify under Subchapter M for
tax treatment as a regulated investment company, the Trust would incur a
regular corporate Federal income tax upon its income for that year, and
distributions to its shareholders would be taxable to shareholders as
ordinary dividend income for Federal income tax purposes to the extent of
the Trust's earnings and profits.
The Trust is required to withhold on certain dividends and other
payments paid to non-corporate shareholders who have not furnished to the
Trust their correct taxpayer identification number (in the case of
individuals, their Social Security number) and certain certifications, or
who are otherwise subject to backup withholding. Backup withholding is not
an additional tax and any amount withheld maybe credited against the
shareholder's Federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions
of the Code and the Treasury Regulations presently in effect as they
directly govern the taxation of the Trust and its shareholders. For
complete provisions, reference should be made to the pertinent Code
sections and Treasury Regulations. The Code and the Treasury Regulations
are subject to change by legislative or administrative action, and any such
change may be retroactive with respect to Trust transactions. Holders of
common shares are advised to consult their own tax advisors for more
detailed information concerning the Federal taxation of the Trust and the
income tax consequences to its holders of common shares.
EXPERTS
The Statement of Net Assets of the Trust as of [ ] 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.
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF ASSETS AND LIABILITIES
[TO BE PROVIDED]
Independent Auditors' Report
The Board of Trustees and Shareholder of
BlackRock Municipal 2018 Term Trust
We have audited the accompanying statement of assets and liabilities
of BlackRock Municipal 2018 Term Trust (the "Trust") as of ______, 2001 and
the related statement of operations and changes in net assets for the
period _______, 2001 (date of inception) to _______, 2001. These financial
statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements presents fairly, in all
material respects, the financial position of the Trust at ______, 2001 and
the results of its operations and changes in its net assets for the period
then ended, in conformity with accounting principles generally accepted in
the United States of America.
APPENDIX A
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF PREFERENCES OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("PREFERRED SHARES")
[To be provided.]
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings
(as published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-- capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned
by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay
interest and repay principal although it is
somewhat more susceptible to the adverse effects
of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or
changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay
principal for debt in this category than in higher
rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics these are outweighed by major
uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability
to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic
conditions which could lead to inadequate capacity
to meet timely interest and principal payments.
The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an
actual or implied "BBB" rating.
B Debt rated "B" has a greater vulnerability to
default but currently has the capacity to meet
interest payments and principal repayments.
Adverse business, financial, or economic
conditions will likely impair capacity or
willingness to pay interest and repay principal.
The "B" rating category is also used for debt
subordinated to senior debt that is assigned an
actual or implied "BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable
vulnerability to default, and is dependent upon
favorable business, financial, and economic
conditions to meet timely payment of interest and
repayment of principal. In the event of adverse
business, financial, or economic conditions, it is
not likely to have the capacity to pay interest
and repay principal.
The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an
actual or implied "B" or "B" rating.
CC The rating "CC" typically is applied to debt
subordinated to senior debt that is assigned an
actual or implied "CCC" debt rating.
C The rating "C" typically is applied to debt
subordinated to senior debt which is assigned an
actual or implied "CCC" debt rating. The "C"
rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating "CI" is reserved for income bonds
on which no interest is being paid.
D Debt rated "D" is in payment default. The "D"
rating category is used when interest payments or
principal payments are not made on the date due
even if the applicable grace period has not
expired, unless S&P believes that such payments
will be made during such grace period. The "D"
rating also will be used upon the filing of a
bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L The letter "L" indicates that the rating pertains
to the principal amount of those bonds to the
extent that the underlying deposit collateral is
Federally insured by the Federal Savings & Loan
Insurance Corporation or the Federal Deposit
Insurance Corporation* and interest is adequately
collateralized. In the case of certificates of
deposit the letter "L" indicates that the deposit,
combined with other deposits being held in the
same right and capacity will be honored for
principal and accrued pre-default interest up to
the Federal insurance limits within 30 days after
closing of the insured institution or, in the
event that the deposit is assumed by a successor
insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow
agreement or closing documentation confirming
investments and cash flow.
NR Indicates no rating has been requested, that there
is insufficient information on which to base a
rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a
note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal
and interest. Those issues determined to possess
overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of
safety regarding timely payment is strong. Those
issues determined to possess extremely strong
safety characteristics are denoted with a plus
sign (+) designation.
A-2 Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have adequate
capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only
speculative capacity for timely payment.
C This rating is as signed to short-term debt
obligations with a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D"
rating category is used when interest payments or
principal payments are not made on the date due,
even if the applicable grace period has not
expired, unless S&P believes that such payments
will be made during such grace period.
A commercial rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result
of changes in or unavailability of such information or based on other
circumstances.
Moody's Investors Service, Inc.-- A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and
principal is secure. While the various protective
elements are likely to change, such changes as can
be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa
group they comprise what are generally known as
high grade bonds. They are rated lower than the
best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or
there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as
upper medium grade obligations. Factors giving
security to principal and interest are considered
adequate, but elements may be present which
suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments
and principal security appear adequate for the
present but certain protective elements may be
lacking or may be characteristically unreliable
over any great length of time. Such bonds lack
outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have
speculative elements; their future cannot be
considered as well assured. Often the protection
of interest and principal payments may be very
moderate and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack
characteristics of the desirable investment.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing.
Such issues may be in default or there may be
present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such
issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class
of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining
any real investment standing.
Con(...) Bonds for which the security depends upon the
completion of some act or the fulfillment of some
condition are rated conditionally. These are bonds
secured by (a ) earnings of projects under
construction, (b) earnings of projects unseasoned
in operation experience, (c) rentals which begin
when facilities are completed, or (d) payments to
which some other limiting condition attaches.
Parenthetical rating denotes probable credit
stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating category from Aa to B in the
public finance sectors. The modifier 1 indicates
that the issuer is in the higher end of its letter
rating category; the modifier 2 indicates a
mid-range ranking; the modifier 3 indicates that
the issuer is in the lower end of the letter
ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality.
There is present strong protection by established
cash flows, superior liquidity support or
demonstrated broadbased access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality.
Margins of protection are ample although not so
large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable
quality. All security elements are accounted for
but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access for
refinancing is likely to be less well-established.
MIG 4/VMIG 4 This designation denotes adequate
quality. Protection commonly regarded as required
of an investment security is present and although
not distinctly or predominantly speculative, there
is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.-- A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch)
follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA" ratings denote
the lowest expectation of credit risk. They
are assigned only in case of exceptionally
strong capacity for timely payment of
financial commitments. This capacity is
highly unlikely to be adversely affected by
foreseeable events.
AA Very high credit quality. "AA " ratings
denote a very low expectation of credit
risk. They indicate very strong capacity for
timely payment of financial commitments.
This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A " ratings denote a
low expectation of credit risk. The capacity
for timely payment of financial commitments
is considered strong. This capacity may,
nevertheless, be more vulnerable to changes
in circumstances or in economic conditions
than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate
that there is currently a low expectation of
credit risk. The capacity for timely payment
of financial commitments is considered
adequate, but adverse changes in
circumstances and in economic conditions are
more likely to impair this capacity. This is
the lowest investment-grade category.
Speculative Grade
BB Speculative. "BB" ratings indicate that
there is a possibility of credit risk
developing, particularly as the result of
adverse economic change over time; however,
business or financial alternatives may be
available to allow financial commitments to
be met. Securities rated in this category
are not investment grade.
B Highly speculative. "B" ratings indicate
that significant credit risk is present, but
a limited margin of safety remains.
Financial commitments are currently being
met; however, capacity for continued payment
is contingent upon a sustained, favorable
business and economic environment.
CCC, CC, C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon
sustained, favorable business or economic
developments. A "CC" rating indicates that
default of some kind appears probable. "C"
ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this
category are based on their prospects for
achieving partial or full recovery in a
reorganization or liquidation of the
obligor. While expected recovery values are
highly speculative and cannot be estimated
with any precision, the following serve as
general guidelines. "DDD" obligations have
the highest potential for recovery, around
90%-100% of outstanding amounts and accrued
interest. "DD" indicates potential
recoveries in the range of 50%-90%, and "D"
the lowest recovery potential, i.e., below
50%.
Entities rated in this category have
defaulted on some or all of their
obligations. Entities rated "DDD" have the
highest prospect for resumption of
performance or continued operation with or
without a formal reorganization process.
Entities rated "DD" and "D" are generally
undergoing a formal reorganization or
liquidation process; those rated "DD" are
likely to satisfy a higher portion of their
outstanding obligations, while entities
rated "D" have a poor prospect for repaying
all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest
capacity for timely payment of financial
commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for
timely payment of financial commitments, but the
margin of safety is not as great as in the case of
the higher ratings.
F3 Fair credit quality. The capacity for timely
payment of financial commitments is adequate;
however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment
of financial commitments, plus vulnerability to
near-term adverse changes in financial and
economic conditions.
C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is
solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the "AAA"
long-term rating category, to categories below "CCC," or to short-term
ratings other than "F1."
`NR' indicates that Fitch does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced. Rating alert: Ratings are
placed on Rating alert to notify investors that there is a reasonable
probability of a rating change and the likely direction of such change.
These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be
raised, lowered or maintained. Rating alert is typically resolved over a
relatively short period.
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING STRATEGIES
In order to manage the risk of its securities portfolio, or to enhance
income or gain as described in the prospectus, the Trust will engage in
Additional Investment Management Techniques. The Trust will engage in such
activities in the Advisor's or Sub-Advisor's discretion, and may not
necessarily be engaging in such activities when movements in interest rates
that could affect the value of the assets of the Trust occur. The Trust's
ability to pursue certain of these strategies may be limited by applicable
regulations of the CFTC. Certain Additional Investment Management
Techniques may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell
and the writer the obligation to buy the underlying security at the
exercise price during the option period. The Trust may also purchase and
sell options on bond indices ("index options"). Index options are similar
to options on securities except that, rather than taking or making delivery
of securities underlying the option at a specified price upon exercise, an
index option gives the holder the right to receive cash upon exercise of
the option if the level of the bond index upon which the option is based is
greater, in the case of a call, or less, in the case of a put, than the
exercise price of the option. The purchase of a put option on a debt
security could protect the Trust's holdings in a security or a number of
securities against a substantial decline in the market value. A call option
gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the exercise price
during the option period or for a specified period prior to a fixed date.
The purchase of a call option on a security could protect the Trust against
an increase in the price of a security that it intended to purchase in the
future. In the case of either put or call options that it has purchased, if
the option expires without being sold or exercised, the Trust will
experience a loss in the amount of the option premium plus any related
commissions. When the Trust sells put and call options, it receives a
premium as the seller of the option. The premium that the Trust receives
for selling the option will serve as a partial hedge, in the amount of the
option premium, against changes in the value of the securities in its
portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of
the underlying security increases, but has retained the risk of loss should
the price of the underlying security decline. Conversely, a secured put
seller retains the risk of loss should the market value of the underlying
security decline be low the exercise price of the option, less the premium
received on the sale of the option. The Trust is authorized to purchase and
sell exchange-listed options and over-the-counter options ("OTC Options")
which are privately negotiated with the counterparty. Listed options are
issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller
of an exchange-listed put or call option is dependent upon the existence of
a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or
other restrictions imposed with respect to particular classes or series of
options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange
or OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange
(or in that class or series of options) would cease to exist, although
outstanding options on that exchange that had been listed by the OCC as a
result of trades on that exchange would generally continue to be
exercisable in accordance with their terms. OTC Options are purchased from
or sold to dealers, financial institutions or other counterparties which
have entered into direct agreements with the Trust. With OTC Options, such
variables as expiration date, exercise price and premium will be agreed
upon between the Trust and the counterparty, without the intermediation of
a third party such as the OCC. If the counterparty fails to make or take
delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that
option as written, the Trust would lose the premium paid for the option as
well as any anticipated benefit of the transaction. As the Trust must rely
on the credit quality of the counterparty rather than the guarantee of the
OCC, it will only enter into OTC Options with counterparties with the
highest long-term credit ratings, and with primary United States government
securities dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or
purchase put and call options on such futures as a hedge against
anticipated interest rate changes or other market movements. The sale of a
futures contract creates an obligation by the Trust, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specified future time for a specified price. Options on futures contracts
are similar to options on securities except that an option on a futures
contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or
sold, the Trust must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Trust
will pay may range from approximately 1% to approximately 5% of the value
of the securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Trust may
be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in case of "variation margin" may
be required, a process known as "marking to the market." Transactions in
listed options and futures are usually settled by entering into an
offsetting transaction, and are subject to the risk that the position may
not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use
of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and
regulations of the CFTC. Under such regulations the Trust currently may
enter into such transactions without limit for bona fide hedging purposes,
including risk management and duration management and other portfolio
strategies. The Trust may also engage in transactions in futures contracts
or related options for non-hedging purposes to enhance income or gain
provided that the Trust will not enter into a futures contract or related
option (except for closing transactions) for purposes other than bona fide
hedging, or risk management including duration management if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on
open contracts and options would exceed 5% of the Trust's liquidation
value, i.e., net assets (taken at current value); provided, however, that
in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, when required, a segregated account of cash equivalents will be
maintained and marked to market on a daily basis in an amount equal to the
market value of the contract. The Trust reserves the right to comply with
such different standard as may be established from time to time by CFTC
rules and regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate
swaps, caps, floors and collars, short sales, reverse repurchase agreements
and dollar rolls, and listed or OTC options on securities, indices and
futures contracts sold by the Trust are generally subject to segregation
and coverage requirements of either the CFTC or the SEC, with the result
that, if the Trust does not hold the security or futures contract
underlying the instrument, the T rust will be required to segregate on an
ongoing basis with its custodian, cash, U.S. government securities, or
other liquid high grade debt obligations in an amount at least equal to the
Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it
would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks.
With respect to hedging and risk management, the variable degree of
correlation between price movements of hedging instruments and price
movements in the position being hedged create the possibility that losses
on the hedge may be greater than gains in the value of the Trust's
position. The same is true for such instruments entered into for income or
gain. In addition, certain instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Trust may not be able
to close out a transaction without incurring losses substantially greater
than the initial deposit. Although the contemplated use of these
instruments predominantly for hedging should tend to minimize the risk of
loss due to a decline in the value of the position, at the same time they
tend to limit any potential gain which might result from an increase in the
value of such position. The ability of the Trust to successfully utilize
Additional Investment Management Techniques will depend on the Advisor's
and the Sub-Advisor's ability to predict pertinent market movements and
sufficient correlations, which cannot be assured. Finally, the daily
deposit requirements in futures contracts that the Trust has sold create an
on going greater potential financial risk than do options transactions,
where the exposure is limited to the cost of the initial premium. Losses
due to the use of Additional Investment Management Techniques will reduce
net asset value.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A--None.
Part B--To be filed by Amendment.
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.3
(b) By-Laws.1
(c) Inapplicable.
(d) Statement of Preferences of Municipal Auction
Rate Cumulative Preferred Shares.5
(e) Dividend Reinvestment Plan.3
(f) Inapplicable.
(g)(1) Investment Management Agreement.3
(g)(2) Sub-Investment Advisory Agreement.3
(h) Form of Purchase Agreement.5
(i) Form of Deferred Compensation Plan for Independent Trustees.3
(j) Custodian Agreement.4
(k)(1) Transfer Agency Agreement.3
(k)(2) Form of Auction Agency Agreeement.5
(k)(3) Form of Broker-Dealer Agreement.5
(k)(4) Form of DTC Agreement.5
(l) Opinion and Consent of Counsel to the Trust.5
(m) Inapplicable.
(n) Consent of Independent Public Accountants.5
(o) Inapplicable.
(p) Initial Subscription Agreement.3
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.3
(r)(2) Code of Ethics of Advisor and Sub-Advisor.3
(s) Powers of Attorney2
-------
1 Previously filed in the initial filing on September 18, 2001.
2 Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement of the Common Shares on September 27, 2001.
3 Previously filed with Pre-Effective Amendment No. 2 to the
Registration Statement of the Common Shares on October 25, 2001.
4 Filed herewith.
5 To be filed by Amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the
Registrant's Preferred Shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this registration statement:
Registration fees................................. *
New York Stock Exchange listing fee............... 0
Printing (other than certificates)................ *
Engraving and printing certificates............... 0
Accounting fees and expenses...................... *
Legal fees and expenses........................... *
NASD fee.......................................... *
Miscellaneous..................................... *
Total........................................... *
---------
* To be firnished by amendment.
Item 27. Persons Controlled by or under Common Control with the Registrant
None.
Item 28. Number of Holders of Common Shares
Number of
Title of Class Record Holders
-------------- --------------
Common Shares of Beneficial Interest............. [ ]
Preferred Shares................................. 0
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust, as
amended and restated, provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a
private corporation for profit incorporated under the Delaware General
Corporation Law. No Trustee or officer of the Trust shall be subject in
such capacity to any personal liability whatsoever to any Person, save only
liability to the Trust or its Shareholders arising from bad faith, willful
misfeasance, gross negligence or reckless disregard for his duty to such
Person; and, subject to the foregoing exception, all such Persons shall
look solely to the Trust Property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any Shareholder,
Trustee or officer, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal
liability. Any repeal or modification of this Section 5.1 shall not
adversely affect any right or protection of a Trustee or officer of the
Trust existing at the time of such repeal or modification with respect to
acts or omissions occurring prior to such repeal or modification.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to
indemnify each person who at any time serves as a Trustee or officer of the
Trust (each such person being an "indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, while acting in any capacity set
forth in this Article V by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall not have acted in
good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to
which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence, or (iv) reckless disregard of the duties involved
in the conduct of his position (the conduct referred to in such clauses (i)
through (iv) being sometimes referred to herein as "disabling conduct").
Notwithstanding the foregoing, with respect to any action, suit or other
proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action,
suit or other proceeding by such indemnitee (1) was authorized by a
majority of the Trustees or (2) was instituted by the indemnitee to enforce
his or her rights to indemnification hereunder in a case in which the
indemnitee is found to be entitled to such indemnification. The rights to
indemnification set forth in this Declaration shall continue as to a person
who has ceased to be a Trustee or officer of the Trust and shall inure to
the benefit of his or her heirs, executors and personal and legal
representatives. No amendment or restatement of this Declaration or repeal
of any of its provisions shall limit or eliminate any of the benefits
provided to any person who at any time is or was a Trustee or officer of
the Trust or otherwise entitled to indemnification hereunder in respect of
any act or omission that occurred prior to such amendment, restatement or
repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on
the merits by a court or other body of competent jurisdiction before whom
the issue of entitlement to indemnification hereunder was brought that such
indemnitee is entitled to indemnification hereunder or, (ii) in the absence
of such a decision, by (1) a majority vote of a quorum of those Trustees
who are neither "interested persons" of the Trust (as defined in Section
2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested
Non-Party Trustees"), that the indemnitee is entitled to indemnification
hereunder, or (2) if such quorum is not obtainable or even if obtainable,
if such majority so directs, independent legal counsel in a written opinion
concludes that the indemnitee should be entitled to indemnification
hereunder. All determinations to make advance payments in connection with
the expense of defending any proceeding shall be authorized and made in
accordance with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by
the indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that the indemnitee is entitled to such indemnification and if a majority
of the Trustees determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at
least one of the following conditions must be met: (i) the indemnitee shall
provide adequate security for his undertaking, (ii) the Trust shall be
insured against losses arising by reason of any lawful advances, or (iii) a
majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a
written opinion, shall conclude, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that there is substantial
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall
not exclude any other right which any person may have or hereafter acquire
under this Declaration, the By-Laws of the Trust, any statute, agreement,
vote of stockholders or Trustees who are "disinterested persons" (as
defined in Section 2(a)(19) of the 1940 Act) or any other right to which he
or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this
Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification
has been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or other security for the performance of any of
his duties hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees
or with any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be
made by the Trustees or by said officer, employee or agent or be liable for
the application of money or property paid, loaned, or delivered to or on
the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, undertaking, instrument, certificate, Share, other
security of the Trust, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively taken to have been executed
or done by the executors thereof only in their capacity as Trustees under
this Declaration or in their capacity as officers, employees or agents of
the Trust. The Trustees may maintain insurance for the protection of the
Trust Property, its Shareholders, Trustees, officers, employees and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment
shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of
the Trust shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to
the Trust by any of the Trust's officers or employees or by any advisor,
administrator, manager, distributor, selected dealer, accountant, appraiser
or other expert or consultant selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of whether such
counsel or expert may also be a Trustee.
Insofar as indemnification for liabilities arising under the Act, may
be terminated to Trustees, officers and controlling persons of the Trust,
pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue. Reference is made to Section 6 of the
purchase agreement attached as Exhibit (h), which is incorporated herein by
reference.
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently
located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100
Bellevue Parkway, Wilmington, Delaware 19809 and at the offices of State
Street Bank and Trust Company, the Registrant's Custodian, and EquiServe
Trust Company, N.A., the Registrant's Transfer Agent and Dividend
Disbursing Agent.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its
units until it amends its prospectus if (a) subsequent to the effective
date of its registration statement, the net asset value declines more than
10 percent from its net asset value as of the effective date of the
Registration Statement or (b) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from 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 9th day of November, 2001.
/s/ RALPH L. SCHLOSSTEIN
-----------------------------
Ralph L. Schlosstein
Trustee, President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following
persons in the capacities set forth below on the 9th day of November, 2001.
Name Title
---- -----
/s/ Ralph L. Schlosstein Trustee, President,
---------------------------------------
Ralph L. Schlosstein Chief Executive Officer and
Chief Financial Officer
* Trustee
---------------------------------------
Andrew Brimmer
* Trustee
---------------------------------------
Richard E. Cavanagh
* Trustee
---------------------------------------
Kent Dixon
* Trustee
---------------------------------------
Frank J. Fabozzi
* Trustee
---------------------------------------
Laurence D. Fink
* Trustee
---------------------------------------
James Clayburn La Force, Jr.
* Trustee
---------------------------------------
Walter Mondale
* By /s/ Ralph L. Schlosstein
-----------------------------------
Ralph L. Schlosstein
Attorney-in-fact
Index to Exhibits
(j) Custodian Contract