As filed with the Securities and Exchange Commission on September 30, 2003
Securities Act Registration No.
Investment Company Registration No. 811-21181
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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. 5 [X ]
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BlackRock Municipal 2020 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)
Robert S. Kapito, President
BlackRock Municipal 2020 Term Trust
40 East 52nd Street
New York, New York 10022
(Name and Address of Agent for Service)
-------------------
Copy to:
Michael K. Hoffman, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
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Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------- --------------- -------------- --------------- ---------------
Proposed
Maximum Proposed
Offering Maximum Amount of
Amount Being Price Per Aggregate Registration
Title of Securities Being Registered Registered Unit Offering Price Fee
------------------------------------------------------- --------------- -------------- --------------- ---------------
Preferred Shares, $0.001 par value.................. 40 shares $25,000 $1,000,000(1) $81(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 2020 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. Cover Pages; Other Offering Information...... Cover page
Item 3. Fee Table and Synopsis....................... Prospectus Summary
Item 4. Financial Highlights......................... Financial Highlights (Unaudited)
Item 5. Plan of Distribution......................... Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders......................... Not Applicable
Item 7. Use of Proceeds.............................. Use of proceeds; The Trust's investments
Item 8. General Description of the Registrant........ The Trust; The Trust's investments; Risks;
Description of Preferred Shares; Certain
Provisions in the Agreement and Declaration of
Trust
Item 9. Management................................... Management of the Trust; Custodian, Transfer
Agent and Auction Agent
Item 10. Capital Stock, Long-Term Debt, and Other
Securities................................... Description of Preferred Shares; Description of
Common Shares; Certain Provisions in the
Agreement and Declaration of Trust; Tax matters
Item 11. Defaults and Arrears on Senior Securities.... Not Applicable
Item 12. Legal Proceedings............................ Not Applicable
Item 13. Table of Contents of the Statement of
Additional Information....................... Table of contents for the Statement of
Additional Information
Part B Statement of Additional Information
Item 14. Cover Page................................... Cover Page
Item 15. Table of Contents............................ Cover Page
Item 16. General Information and History.............. Not Applicable
Item 17. Investment Objective and Policies............ Investment 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......................... Financial Highlights (Unaudited); Report of
Independent Auditors
Part C Other Information
Items 24-33 have been answered in Part C of this Registration Statement
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS Subject to Completion
--------------------------------------------------------------------------------
$
BlackRock Municipal 2020 Term Trust
Shares, Series
Shares, Series
Municipal Auction Rate Cumulative Preferred Shares ("Preferred Shares")
Liquidation Preference $25,000 Per Share
--------------------------------------------------------------------------------
Investment Objectives. BlackRock Municipal 2020 Term Trust (the "Trust") is a
diversified, closed-end management investment company with a limited operating
history. The Trust's investment objectives are:
> to provide current income that is exempt from regular Federal income
tax; and
> to return $15.00 per common share (the initial public offering price
per common share) to holders of common shares on or about December 31,
2020.
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 or
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 Managed Assets (as defined herein) in
municipal bonds that at the time of investment are investment grade quality.
Investment grade quality bonds are bonds rated within the four highest grades
("Baa" or "BBB" or better by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P") or Fitch Ratings ("Fitch")) or, if
unrated, determined to be of comparable quality by the Trust's investment
advisor or sub-advisor. The Trust may invest up to 20% of its Managed Assets in
municipal bonds that at the time of investment are rated "Ba"/"BB" or below 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 or 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." After the initial
investment period, the Trust intends to actively manage the maturity of its
bonds which are expected to have a dollar weighted average effective maturity
approximately equal to the Trust's maturity date. As a result, over time the
maturity of the Trust's portfolio is expected to shorten in relation to the
remaining term of the Trust. The Trust cannot ensure that it will achieve its
investment objectives.
Term Trust. The Trust seeks to return $15.00 per common share to common
shareholders on or about December 31, 2020 (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 continue 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.
Before buying any Preferred Shares, you should read the discussion of the
material risks of investing in the Trust in the "Risks" section beginning on
page of this Prospectus. Certain of these risks are summarized in "Prospectus
Summary--Special Risk Considerations" beginning on page . The minimum purchase
amount of the Preferred Shares is $25,000.
Neither the Securities and Exchange Commission ("SEC") nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Price to Public Sales Load Proceeds to the Trust(1)
Per Share(2) $
Total
(1) The Trust, its investment advisor, BlackRock Advisors, Inc., and its
investment sub-advisor, BlackRock Financial Management, Inc., have
agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended.
(2) Rounded to the nearest penny.
The Preferred Shares are being offered by the underwriters subject to the
condition that the Preferred Shares be rated "Aaa" by Moody's and "AAA" by S&P
as of the time of delivery of the Preferred Shares to the underwriters, and
subject to certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify the offering in whole or in part. It is expected
that the Preferred Shares will be delivered to the nominee of The Depository
Trust Company ("DTC") on or about , 2003.
Investors in Preferred Shares will be entitled to receive cash dividends at an
annual rate that may vary for the successive dividend periods for such shares.
The dividend rate on the Series Preferred Shares for the initial period from
and including the date of issue to, but excluding, , 2003 will be % per year.
For each subsequent period, the auction agent will determine the dividend rate
for a particular period by an auction conducted in accordance with the
procedures described in this Prospectus and, in further detail in Appendix A to
the Statement of Additional Information (the "Auction").
The Preferred Shares, which have no history of public trading, will not be
listed on an exchange or automated quotation system. Broker-dealers may
maintain a secondary trading market in the Preferred Shares outside of
Auctions; however, they have no obligation to do so, and there can be no
assurance that a secondary market for the Preferred Shares will develop or, if
it does develop, that it will provide holders with a liquid trading market
(i.e., trading will depend on the presence of willing buyers and sellers and
the trading price will be subject to variables to be determined at the time of
the trade by such broker-dealers). A general increase in the level of interest
rates may have an adverse effect on the secondary market price of the Preferred
Shares, and a selling shareholder that sells Preferred Shares between Auctions
may receive a price per share of less than $25,000. The Trust may redeem
Preferred Shares as described under "Description of Preferred Shares -
Redemption." The Trust intends to redeem all of the Preferred Shares no later
than the last dividend payment date prior to December 31, 2020 (when the Trust
will terminate).
When issued and outstanding, the Preferred Shares will add leverage to an
investment in the Trust's common shares of beneficial interest (the "Common
Shares") The Preferred Shares will be senior in liquidation and distribution
rights to the Trust's outstanding Common Shares. The Trust's Common Shares are
traded on the New York Stock Exchange under the symbol "BKK."
You should read this 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 , 2003,
containing additional information about the Trust, has been filed with the SEC
and is incorporated by reference in its entirety into this Prospectus, which
means it is part of the Prospectus for legal purposes. 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
SEC's web site (http://www.sec.gov).
The Trust's 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.
You should rely only on the information contained or incorporated by reference
in this Prospectus. The Trust has not, and the underwriters have not,
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
Trust is not, and the underwriters are not, making an offer in any state where
the offer or sale is not permitted. You should not assume that the information
in this Prospectus is accurate as of any date other than the date on the front
of this Prospectus. The Trust's business, financial condition and prospects may
have changed since that date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................2
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..........................................................................................19
DESCRIPTION OF PREFERRED SHARES..................................................................................22
THE AUCTION......................................................................................................31
DESCRIPTION OF COMMON SHARES.....................................................................................35
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST.....................................................36
REPURCHASE OF COMMON SHARES......................................................................................37
TAX MATTERS......................................................................................................39
UNDERWRITING.....................................................................................................41
CUSTODIAN, TRANSFER AGENT AND AUCTION AGENT......................................................................42
LEGAL OPINIONS...................................................................................................42
AVAILABLE INFORMATION............................................................................................42
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION....................................................43
APPENDIX A STATEMENT OF PREFERENCES OF MUNICIPAL AUCTION
RATE CUMULATIVE PREFERRED SHARES..........................................................A-1
APPENDIX B TAXABLE EQUIVALENT YIELD TABLE............................................................B-1
APPENDIX C RATINGS OF INVESTMENTS....................................................................C-1
APPENDIX D GENERAL CHARACTERISTICS AND RISKS OF
STRATEGIC TRANSACTIONS....................................................................D-1
APPENDIX E PROXY VOTING PROCEDURES...................................................................E-1
PRIVACY PRINCIPLES
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
Municipal Auction Rate Cumulative Preferred Shares (the "Statement") attached
as Appendix A to the Statement of Additional Information. Capitalized terms
used but not defined in this Prospectus shall have the meanings given to such
terms in the Statement.
The Trust......................... BlackRock Municipal 2020 Term Trust (the "Trust") is a diversified,
closed-end management investment company with a limited operating history.
The Trust will distribute substantially all of its net assets on or about
December 31, 2020, when the Trust will terminate. Throughout the Prospectus,
we refer to BlackRock Municipal 2020 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 "BKK". See "Description of
Common Shares." As of , 2003, the Trust had common
shares outstanding and net assets of $ .
The Offering...................... The Trust is offering an aggregate of shares of Series Preferred
Shares and shares of Series Preferred Shares, each at a
purchase price of $25,000 per share. Preferred Shares are being offered by a
group of underwriters led by (collectively, the
"Underwriters"). See "Underwriting." The Trust intends to redeem all of the
Preferred Shares no later than the last dividend payment date prior to
December 31, 2020 (when the Trust will terminate).
Investment Objectives............. The Trust's investment objectives are to provide current income exempt from
regular Federal income tax and to return $15.00 per common share (the initial
offering price per common share) to holders of common shares on or about
December 31, 2020. 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 Managed
Assets in municipal bonds that at the time of investment are investment grade
quality. Investment grade quality bonds are bonds rated within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or bonds that
are unrated but judged to be of comparable quality by the Advisor or the
Sub-Advisor. The Trust may invest up to 20% of its Managed Assets in
municipal bonds that at the time of investment are rated Ba/BB or below by
Moody's, S&P or Fitch or bonds that are unrated but judged to be of
comparable quality by the Advisor or the Sub-Advisor. "Managed Assets" means
the total assets of the Trust (including any assets attributable to any
Preferred Shares that may be outstanding) minus the sum of accrued
liabilities (other than debt representing financial leverage). 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."
After the initial investment period, the Trust intends to actively manage the
maturity of its bonds which are expected to have a dollar-weighted average
effective maturity approximately equal to the Trust's maturity date. As a
result, over time the maturity of the Trust's portfolio is expected to
shorten in relation to the remaining term of the Trust. See "The Trust's
Investments."
The Trust seeks to return $15.00 per common share to holders of common shares
on or about December 31, 2020 (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 continue to maintain its status as
a regulated investment company for Federal income tax purposes. There is no
assurance that the Trust will be able to achieve its investment objective of
returning $15.00 per common share to holders of common shares on or about
December 31, 2020. For a discussion of risk factors that may affect the Trust
in achieving its objectives, see "Risks."
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." BlackRock Advisors will receive an
annual fee, payable monthly in arrears, in a maximum amount equal to 0.50% of
the average weekly value of the Trust's Managed Assets. The liquidation
preference of the Preferred Shares is not a liability. See "Management of the
Trust."
Special Risk Considerations....... The following describes various principal risks of investing in the Preferred
Shares and the Trust. A more detailed description of these and other risks
of investing in the Preferred Shares and the Trust are described under
"Risks" in this Prospectus and in the Statement of Additional Information.
The principal risks of investing in the Preferred Shares include:
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 suspend, withdraw or 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 the Preferred Shares may be junior to any borrowings of the Trust;
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 Managed Assets in securities that
are below investment grade quality which are regarded as having
predominately speculative characteristics with respect to the issuer's
capacity to pay interest and principal.
For additional risks of investing in the Preferred Shares and in the Trust,
see "Risks" below.
Trading Market.................... Preferred Shares are not listed on an exchange. Instead, you may buy or sell
the Preferred Shares at an auction that normally is held weekly, by
submitting orders to a broker-dealer that has entered into an agreement with
the auction agent and the Trust (a "Broker-Dealer"), or to a broker-dealer
that has entered into a separate agreement with a Broker-Dealer. In addition
to the auctions, Broker-Dealers and other broker-dealers may maintain a
secondary trading market in Preferred Shares outside of auctions, but may
discontinue this activity at any time. There is no assurance that a secondary
market will provide shareholders with liquidity. You may transfer shares
outside of auctions only to or through a Broker-Dealer or a broker-dealer
that has entered into a separate agreement with a Broker-Dealer.
The table below shows the first auction date for each series of Preferred
Shares and the day on which each subsequent auction will normally be held for
each series of Preferred Shares. The first auction date for each series of
Preferred Shares will be the business day before the dividend payment date
for the initial rate period for each series of Preferred Shares. The start
date for subsequent rate periods will normally be the business day following
the auction dates 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.
Initial auction day* Subsequent auction day*
Series
Series
* All dates are 2003.
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."
In addition, the table below also shows the date from which dividends on the
Preferred Shares will accumulate at the initial rate, the dividend payment
date for the initial rate period and the day on which dividends will normally
be paid. If the day on which dividends otherwise would be paid is not a
business day, then your dividends will be paid on the first business day that
falls after that day.
Finally, the table below shows the number of days of the initial rate period
for the Preferred Shares. Subsequent rate periods generally will be seven
days. The dividend payment date for special rate periods of more than seven
days will be set out in the notice designating a special rate period. See
"Description of Preferred Shares--Dividends and Dividend Periods--Designation
of Special Rate Periods."
Initial Date of Dividend Subsequent Number of
Dividend Accumulation Payment Dividend Days of
Rate at Initial Date for Payment Initial
Rate* Initial Day* Rate Period
Rate Period*
Series %
Series %
* All dates are 2003.
Special Tax
Considerations................ Because under normal circumstances the Trust will invest substantially all of
its assets in municipal bonds that pay interest that is exempt from regular
Federal income tax, the income you receive will ordinarily be exempt from
Federal income tax. Your income may be subject to state and local taxes. A
portion of the income from these bonds may 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 for each taxable year 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 Share 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, whether or not 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. See "Tax
Matters" and "Description of Preferred Shares--Dividends and Dividend Periods."
Redemption........................ The Trust may be required to redeem Preferred 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 an amount equal to accumulated but unpaid
dividends. See "Description of Preferred Shares--Liquidation."
Ratings........................... The shares of each series of 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
these ratings, the Trust must own portfolio securities of a sufficient value
and with adequate credit quality and diversification to meet the rating
agencies' guidelines. See "Description of Preferred Shares--Rating Agency
Guidelines and Asset Coverage."
Voting Rights..................... The Investment Company Act of 1940, as amended (the "Investment Company Act")
requires that the holders of preferred shares, including Preferred Shares,
voting as a separate class, have the right to elect at least two trustees at
all times and to elect a majority of the trustees at any time when 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, 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 September 30, 2003 through , 2003. Since the Trust commenced
investment operations on September 30, 2003, 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 objective and policies. Accordingly, the
information presented may not provide a meaningful picture of the Trust's
future operating performance.
For the period
September 30, 2003(1)
through 2003
---------------------
Per Common Share Operating Performance:
Net asset value, beginning of period(2)................................................ $
Investment operations:
Net investment income...............................................................
Net realized and unrealized gain on investments.....................................
Net increase from investment operations.............................................
Dividends and distributions:
Dividends from net investment income to:
Common shareholders.................................................................
Preferred shareholders..............................................................
Distributions in excess of net investment income to:
Common shareholders.................................................................
Preferred shareholders..............................................................
Total dividends and distributions......................................................
Capital charges with respect to issuance of:
Common shares.......................................................................
Preferred shares....................................................................
Net asset value, end of period(2)...................................................... $
Market value, end of period(2)......................................................... $
Total Investment Return(3)............................................................. %
Ratios to Average Net Assets of Common Shareholders:(4)(5)
Operating expenses..................................................................... %
Net investment income.................................................................. %
Preferred share dividends..............................................................
Net investment income available to common shareholders................................. %
Supplemental Data:
Average net assets of common shareholders (000)........................................ $
Portfolio turnover..................................................................... %
Net assets of common shareholders, end of period (000)................................. $
Preferred shares outstanding (000)..................................................... $
Asset coverage per preferred share end of period....................................... $
------------
(1) Commencement of investment operations. This information includes the
initial investment by BlackRock Funding, Inc., an affiliate of the
Advisor. The Trust's net asset value per share immediately after the
closing of the initial public offering was $ .
(2) Net asset value and market value are published in Barron's on Saturday
and The Wall Street Journal on Monday.
(3) Total investment return is calculated assuming a purchase of common
shares at the current market price on the first day and a sale at the
current market price on the last day of the period reported. Dividends
and distributions, if any, are assumed for purposes of this
calculation to be reinvested at prices obtained under the Trust's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions. The total investment return, which is for less
than a full year, is not annualized. Past performance is not a
guarantee of future results.
(4) Annualized.
(5) These ratios are not indicative of future expense ratios due to the
short operating history of the Trust. Please refer to the Trust's
common shares prospectus for the estimated expense ratio.
The information above represents the unaudited operating performance
for a common share outstanding, total investment return, ratios to average net
assets and other supplemental data for the period indicated. This information
has been determined based upon financial information provided in the financial
statements and market value data for the Trust's common shares.
THE TRUST
The Trust is a diversified, closed-end management investment company
registered under the Investment Company Act with a limited operating history.
The Trust was organized as a Delaware statutory trust on August 20, 2002
pursuant to an Agreement and Declaration of Trust, as subsequently 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, 2020,
when the Trust is expected to terminate. On September 30, 2003, the Trust
issued an aggregate of common shares of beneficial interest, par value $.001
per share, pursuant to an initial public offering and commenced its investment
operations. On , 2003, the Trust issued an additional common shares pursuant to
an over-allotment provision for net proceeds, after expenses, to the Trust of
approximately $ . The Trust's common shares are traded on the New York Stock
Exchange under the symbol "BKK". 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 , 2003:
Amount held by the
Trust or for its Amount
Title of Class Amount Authorized Account Outstanding
-------------- ----------------- ------- -----------
Common Shares Unlimited 0
Preferred Shares Unlimited 0 0
Series 0 0
Series 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of the sales load and estimated offering costs. The Trust will invest
the net proceeds of the offering in accordance with the Trust's investment
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 objectives and policies within six to eight
weeks after the completion of the offering. Pending such investment, it is
anticipated that the proceeds will be invested in high quality short-term fixed
income securities. If necessary, the Trust may also purchase, as temporary
investments, securities of other open- or closed-end investment companies that
invest primarily in securities of the type in which the Trust may invest
directly.
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Trust as of ,
2003, and as adjusted to give effect to the issuance of the Preferred Shares
(including estimated offering expenses and sales loads of $ ) offered hereby.
Actual As Adjusted
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 Shareholder's Equity:
Common shares, $.001 par value per share; unlimited shares authorized,
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 attributable to Common Shares...................................
Net assets attributable to Common Shares plus liquidation preference of the
Preferred Shares...........................................................
-------------
* None of these outstanding shares are held by or for the account of the
Trust.
PORTFOLIO COMPOSITION
As of , 2003, 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 , 2003, based on the
highest rating assigned.
Credit Rating Value (000) Percent
------------- ----------- -------
AA/Aa %
A/A %
BBB/Baa %
BB/Ba %
B/B %
TOTAL %
THE TRUST'S INVESTMENTS
The following section describes the Trust's investment objectives,
significant investment policies and investment techniques. More complete
information describing the Trust's significant investment policies and
techniques, including the Trust's fundamental investment restrictions, can be
found in the Statement of Additional Information, which is herein incorporated
by reference.
Investment Objectives And Policies
The Trust's investment objectives are to provide current income exempt
from regular Federal income tax and to return $15.00 per common share to
holders of common shares on or about December 31, 2020. 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, but no less than 80% invested, in such
tax-exempt municipal bonds. Under normal market conditions, the Trust will
invest at least 80% of its Managed 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, if unrated, are determined 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 Managed Assets in municipal bonds that
are rated, at the time of investment, "Ba"/"BB" or below by Moody's, S&P or
Fitch or, if unrated, are determined 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 C
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
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 Securities" and "Initial Portfolio
Composition." 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 and the insurer,
the price at which the security could be sold and the rating, if any, assigned
to the security and the insurer by other rating agencies.
The Trust seeks to return $15.00 per common share to holders of common
shares on or about December 31, 2020 (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 continue 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 $15.00 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
$15.00 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,
2020, to have available for distribution to holders of its common shares $15.00
for each common share then outstanding. There is no assurance that the Trust
will be able to achieve its investment objective of returning $15.00 per common
share to holders of common shares on or about December 31, 2020. For a
discussion of risk factors that may affect the Trust in achieving its
objectives, see "Risks" below.
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, but not limited to, 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, but not limited to, 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 and of the offering of the Trust's Common
Shares are being invested, and in order to keep the Trust's cash fully
invested, the Trust may invest up to 100% of its total 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
objectives under these circumstances. The Trust intends to invest in taxable
short-term investments only if suitable tax-exempt short-term investments are
not available at reasonable prices and yields. If the Trust invests in taxable
short-term investments, a portion of your dividends would be subject to regular
Federal 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 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. A "majority of the outstanding"
means (1) 67% or more of the shares present at a meeting, if the holders of
more than 50% of the shares are present or represented by proxy, or (2) more
than 50% of the shares, whichever is less. See "Description of Preferred
Shares-Voting Rights" for additional information with respect to the voting
rights of holders of Preferred Shares.
Municipal Bonds
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 U.S. 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.
After the initial investment period, the Trust intends to actively manage the
maturity of its bonds which are expected to have a dollar weighted average
effective maturity approximately equal to the Trust's maturity date. As a
result, over time the maturity of the Trust's portfolio is expected to shorten
in relation to the remaining term of the Trust.
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. The Trust will
designate on its books and records cash or other liquid debt securities having
a market value at all times at least equal to the amount of the commitment.
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities of
other open- or closed-end investment companies that invest primarily in
municipal bonds of the types in which the Trust may invest directly. The Trust
generally expects to invest in other investment companies either during periods
when it has large amounts of uninvested cash, such as the period shortly after
the Trust receives the proceeds of the offering of its Preferred Shares, or
during periods when there is a shortage of attractive, high-yielding municipal
bonds available in the market. As a shareholder in an investment company, the
Trust will bear its ratable share of that investment company's expenses, and
will remain subject to payment of the Trust's advisory and other fees and
expenses with respect to assets so invested. Holders of Preferred 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. The net asset
value and market value of leveraged shares will be more volatile and the yield
to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. Investment companies may have investment policies that
differ from those of the Trust. In addition, to the extent the Trust invests in
other investment companies, the Trust will be dependent upon the investment and
research abilities of persons other than BlackRock. The Trust treats its
investments in such open- or closed-end investment companies as investments in
municipal bonds.
Tax-Exempt Preferred Securities
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. Investing in such tax-exempt preferred shares involves
many of the same issues as investing in other open- or closed-end investment
companies as discussed above. These investments also have additional risks,
including liquidity risk, the absence of regulation governing investment
practices, capital structure and leverage, affiliated transactions and other
matters, and concentration of investments in particular issuers or industries.
High Yield Securities
The Trust may invest up to 20% of its Managed Assets in securities
rated below investment grade such as those rated "Ba" or below by Moody's and
"BB" or below by S&P or Fitch 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 their 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.
Limited Operating History
The Trust is a diversified, closed-end management investment company
and has a limited operating history.
Interest Rate Risk
Interest rate risk is the risk that bonds, and the Trust's assets will
decline in value because of changes in market interest rates. Generally,
municipal bonds will decrease in value when interest rates rise and increase in
value when interests 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 will initially invest primarily 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
initially 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 Shares dividends, however, Preferred Shares dividend rates would
need to greatly exceed the yield on the Trust's portfolio before the Trust's
ability to pay Preferred Shares 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.
During periods of declining interest rates, the issuer of a security
may exercise its option to prepay principal earlier than scheduled, forcing the
Trust to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred and debt securities frequently have call features
that allow the issuer to repurchase the security prior to its stated maturity.
An issuer may redeem an obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. During periods of rising interest rates, the average
life of certain types of securities may be extended because of slower than
expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk. Market interest rates for investment grade municipal
bonds in which the Trust will primarily invest have recently declined
significantly below the recent historical average rates for such bonds. This
decline may have increased the risk that these rates will rise in the future
(which would cause the value of the Trust's net assets to decline) and the
degree to which asset values may decline in such events; however, historical
interest rate levels are not necessarily predictive of future interest rate
levels. The Trust may enter into interest rate swap or cap transactions with
the intent to reduce or eliminate the risk posed by an increase in market
interest rates. There is no guarantee that the Trust will engage in these
transactions or that these transactions will be successful in reducing or
eliminating interest rate risk. A decline in net asset value could require the
Trust to redeem some or all of 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. 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 traded on 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
It is expected that while 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 withdraw or downgrade Preferred Shares,
which may make your shares less liquid at an auction or in the secondary
market. If Moody's or S&P withdraws its rating or downgrades Preferred Shares,
the Trust may alter its portfolio or redeem Preferred Shares in an effort to
reinstate or improve, as the case may be, 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 also 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 a debt security in the Trust's portfolio
will decline in price or fail to make dividend payments when due because the
issuer of the security experiences a decline in its financial status. The Trust
may invest up to 20% (measured at the time of purchase) of its Managed Assets
in debt securities that are rated "Ba" or below by Moody's and "BB" or below by
S&P or Fitch, or if unrated, are determined to be of comparable quality by
BlackRock. Securities 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 bonds with these ratings are commonly
referred to as "junk bonds." These securities are subject to a greater risk of
default. The prices of lower grade securities 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 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.
Revenue bonds issued by state or local agencies to finance the
development of low-income, multi-family housing involve special risks in
addition to those generally associated with municipal bonds, including that the
underlying properties may not generate sufficient income to pay expenses and
interest costs. Such bonds are generally non-recourse against the property
owner, may be junior to the rights of others with an interest in the
properties, may pay interest that changes based in part on the financial
performance of the property, may be prepayable without penalty and may be used
to finance the construction of housing developments which, until completed and
rented, do not generate income to pay interest. Increases in interest rates
payable on senior obligations may make it more difficult for issuers to meet
payment obligations on subordinated bonds. The Trust will treat investments in
tax-exempt preferred shares as investments in municipal bonds.
Reinvestment Risk
Reinvestment risk is the risk that income from the Trust's bond
portfolio will decline if and when the Trust invests the proceeds from matured,
traded, prepaid or called bonds at market interest rates that are below the
portfolio's current earnings rate. A decline in income could affect the Trust's
ability to pay dividends on the Preferred Shares. The Trust's income and
distributions 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 increases, the real value of the Preferred Shares and
distributions on those shares can decline. In an inflationary period, however,
it is expected that, through the auction process, dividend rates on the
Preferred Shares would increase, tending to offset this risk.
Economic Sector and Geographic Risk
The Trust may invest 25% or more of its Managed Assets in municipal
bonds of issuers located in the same state (or U.S. Territory) or in municipal
bonds in the same economic sector, including without limitation the following:
lease rental bonds of state and local authorities; bonds dependent on annual
appropriations by a state's legislature for payment; bonds of state and local
housing finance authorities, municipal utilities systems or public housing
authorities; bonds 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 net
asset 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 their 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.
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. A majority of the trustees are not "interested
persons" (as defined in the Investment Company Act). The names and business
addresses 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 acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors,
located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and BlackRock
Financial Management, located at 40 East 52nd Street, New York, New York 10022,
are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest
publicly traded investment management firms in the United States with
approximately $286 billion of assets under management as of June 30, 2003.
BlackRock manages assets on behalf of institutional and individual investors
worldwide through a variety of equity, fixed income, liquidity and alternative
investment products, including the BlackRock Funds and BlackRock Provident
Institutional Funds. In addition, BlackRock provides risk management and
investment system services to institutional investors under the BlackRock
Solutions(TM) name.
The BlackRock organization has over 15 years of experience managing
closed-end products and, as of July 31, 2003, advised a closed-end family of 45
active funds with over $12 billion in assets. BlackRock has 35 leveraged
municipal closed-end funds and six open-end municipal funds under management as
of July 31, 2003. As of June 30, 2003, BlackRock had approximately $24 billion
in municipal assets firm-wide. Clients are served from the company's
headquarters in New York City, as well as offices in Wilmington, San Francisco,
Boston, Edinburgh, Tokyo and Hong Kong. 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 manages or managed 17 other "term trusts" as of
July 31, 2003. To date, five 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 in 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 four portfolio managers with
an average experience of 17 years and six credit research analysts with an
average experience of 13 years. Kevin M. Klingert, senior portfolio manager and
head of municipal bonds at BlackRock, leads the team, a position he has held
since joining BlackRock in 1991. A Managing Director since 1996, Mr. Klingert
was a Vice President from 1991 through 1993 and a Director in 1994 and 1995.
Mr. Klingert has over 18 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 James McGinley, F. Howard Downs and
James Pruskowski. 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. Mr. Pruskowski has been a portfolio manager and a member of
the Investment Strategy Group at BlackRock since 2000. From 1996 to 2000 Mr.
Pruskowski was an analyst in BlackRock's Risk Management and Analytics Group,
focusing on portfolio risk reporting and pricing of individual fixed income
assets.
As of June 30, 2003, BlackRock's municipal bond portfolio managers
were responsible for municipal bond portfolios valued at approximately $18
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 municipal
liquidity accounts valued at approximately $6 billion as of June 30, 2003. As
of July 31, 2003, the team managed 35 closed-end municipal funds, with over $8
billion in assets under management. Of the $8 billion in closed-end municipal
funds, 9 of these funds are municipal term trusts valued at over $3.5 billion
and 26 are perpetual trusts valued at over $4.5 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 approximately $18 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 and was
recognized in subsequent years.
BlackRock's approach to credit risk incorporates a combination of
sector-based, top-down macro-analysis of industry sectors to determine relative
weightings with a name-specific (issuer-specific), bottom-up detailed credit
analysis of issuers and structures. The sector-based approach focuses on
rotating into sectors that are undervalued and exiting sectors when
fundamentals or technicals become unattractive. The name-specific approach
focuses on identifying special opportunities where the market undervalues a
credit, and devoting concentrated resources to research the credit and monitor
the position. BlackRock's analytical process focuses on anticipating change in
credit trends before market recognition. Credit research is a critical,
independent element of BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust (the "Investment Management Agreement"), 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
0.50% of the average weekly value of the Trust's Managed Assets (the
"Management Fee"). The Trust will also reimburse BlackRock Advisors for certain
expenses BlackRock Advisors incurs in connection with performing certain
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 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, leverage expenses,
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. Net asset value
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, including the meanings
of the defined terms used herein but not otherwise defined, please refer to the
detailed description of the Preferred Shares in the Statement attached as
Appendix A to the Statement of Additional Information.
General
The Trust's Agreement and Declaration of Trust, as amended and
restated, authorizes the issuance of an unlimited number of preferred shares,
par value $.001 per share, in one or more classes or series with rights as
determined by the board of trustees without the approval of common
shareholders. The Statement currently authorizes the issuance of Preferred
Shares, Series , and Preferred Shares, Series . All Preferred Shares will have
a liquidation preference of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared). The Trust
intends to redeem all of the Preferred Shares no later than the last Dividend
Payment Date prior to December 31, 2020 (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 each series is as set forth below:
Initial Rate Period
-------------------
Series days
Series days
Any subsequent Rate Periods of shares of a series of Preferred Shares
will generally be seven days. The Trust, subject to certain conditions, may
change the length of Subsequent Rate Periods by designating them as Special
Rate Periods. See "Declaration of Special Rate Periods" below.
Dividend Payment Dates. Dividends on each series of Preferred Shares
will be payable when, as and if declared by the board of trustees, out of
legally available funds in accordance with the Agreement and Declaration of
Trust, the Statement and applicable law. Dividends are scheduled to be paid for
each series of Preferred Shares as follows:
Initial Dividend Payment Date* Subsequent Dividend Payment Days on
Each*
Series
Series
-------------
*........All dates are 2003.
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 Depository Trust Company (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 dividend
period consists of seven days, and will be 360 for all other dividend 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 once each of the requirements of the Statement are
satisfied, 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 generally 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 based on the
prevailing rating of the Preferred Shares in effect at the close of business on
the business day next preceding the auction date. 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. 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 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 Payment Table
Credit Ratings of Preferred Shares Applicable 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 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
below:
"AA" Composite Commercial Paper Rate Table
Minimum Rate Period Special Rate Period "AA" Composite Commercial Paper Rate*
------------------- ------------------- -------------------------------------
7 days 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, other than by reason of force majeure, 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
If the Trust allocates any net capital gain or other income taxable
for Federal income tax purposes to a dividend paid on Preferred Shares without
having provided advance notice (a "Taxable Allocation"), whether or not such
allocation is made retroactively as a result of the redemption of all or a
portion of the Preferred Shares or a liquidation of the Trust, the Trust shall
pay an additional dividend. The additional dividend will be in an amount
approximately equal to the amount of taxes paid by a holder of Preferred Shares
on the Taxable Allocation and the additional dividend, provided that the
additional dividend will be calculated: without consideration being given to
the time value of money; assuming that no holder of Preferred Shares is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and assuming that each Taxable Allocation and such additional
dividend (except to the extent such additional dividend is designated as an
exempt-interest dividend under Section 852(b)(5) of the Internal Revenue Code
of 1986, as amended (the "Code") or successor provisions) would be taxable in
the hands of each holder of Preferred Shares at the maximum marginal regular
Federal income tax rate applicable to ordinary income or net capital gain for
individuals, as applicable, or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or net capital gain, as
applicable whichever is greater, in effect during the fiscal year in question.
The Trust will not pay additional dividends with respect to net
capital gains or other taxable income determined by the Internal Revenue
Service ("IRS") to be allocable in a manner different from that allocated by
the Trust.
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 "Tax Matters." The Trust will not pay a
further additional dividend with respect to any taxable portion of an
additional dividend not provided for in the additional dividend calculation
above.
The Trust will, within 90 days (and generally within 60 days) after
the end of its fiscal year for which a 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 Taxable Allocations made
during the fiscal year in question.
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 Investment
Company Act Preferred Shares Asset Coverage (see "--Rating
Agency Guidelines and Asset Coverage" below);
o any additional dividends required to be paid on or before the
date of such transaction have been paid;
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; 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. Upon declaring a special
rate period, the Trust will give notice to the auction agent. 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; provided, however, that a
special rate period may be a number of days not evenly divisible by seven if
all shares of the series of Preferred Shares are to be redeemed at the end of
such special rate period. 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 purposes of (a) above 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 any series of
Preferred Shares, in whole or in part, out of funds legally available therefor.
Any optional redemption will occur on 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 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 Preferred 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, 2020 (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 Company 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 ,
2003, 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 accordance with the requirements of the rating agency or agencies
then rating the Preferred Shares or the Investment Company Act, as the case may
be, 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, suspend 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 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 referred to 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 of trustees 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 of trustees. 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 shares ranking prior
to or on a parity with the Preferred Shares with respect to
payment of dividends or the distribution of assets on
liquidation, authorize, create or issue additional shares of
or increase the authorized amount of the Preferred Shares or
any other preferred shares, unless, in the case of shares of
preferred shares on parity with the Preferred Shares, the
Trust obtains written confirmation from Moody's (if Moody's
is then rating the Preferred Shares), S&P (if S&P is then
rating the Preferred Shares) or any substitute rating agency
(if any such substitute rating agency is then rating the
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
materially and 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 materially and
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) approve any reorganization (as such term is used in the
Investment Company Act) materially and adversely affecting
the Preferred Shares.
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 66 2/3% 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
materially and adversely affects the rights expressly set forth in the
Agreement and Declaration of Trust 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.
However, to the extent permitted by the Agreement and Declaration of Trust 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 charter.
The foregoing voting provisions will not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption and sufficient
funds have been deposited in trust to effect such redemption.
THE AUCTION
General
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of Preferred
Shares for each dividend period after the initial dividend period will be the
rate that results from an auction conducted as set forth in the Statement and
summarized below. In such an auction, persons determine to hold or offer to
sell or, based on dividend rates bid by them, offer to purchase or sell shares
of a series of Preferred Shares. See the Statement included in the Statement of
Additional Information for a more complete description of the auction process.
Auction Agency Agreement. The Trust will enter into an auction agency
agreement with the auction agent (currently, The Bank of New York) 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 45
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 dividend period of 364 days or less, or
a percentage agreed to by the Trust and the Broker-Dealers, in the case of any
auction before a dividend period of 365 days or longer, of the purchase price
of Preferred Shares placed by a Broker-Dealer at the auction.
The Trust may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after termination of the
agreements.
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 order--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
Preferred Shares of such series or that is a beneficial owner of Preferred
Shares of such series that wishes to purchase additional Preferred 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, 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 individual Federal
income tax rate applicable to ordinary income or the maximum
marginal regular corporate Federal 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 the 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, if the length of the
Rate Period exceeds the remaining maturity of any recently auctioned Treasury
Bill, the weighted average rate of the most recently auctioned Treasury Bill
and Treasury Note with maturities closest to the length of the Rate Period; 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" 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 contemplated 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 . The auctions
for Series will normally be held every , and each subsequent dividend period
will normally begin on the following .
If an Auction Date is not a business day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services, or the auction agent is
not able to conduct an Auction in accordance with the Auction Procedures for
any such reason, then the Applicable Rate for the next dividend period will be
the Applicable Rate determined on the previous Auction Date.
If a Dividend Payment Date is not a business day because the New York
Stock Exchange is closed for business due to an act of God, natural disaster,
act of war, civil or military disturbance, act of terrorism, sabotage, riots or
a loss or malfunction of utilities or communications services, or the dividend
payable on such date can not be paid for any such reason, then:
(i) The Dividend Payment Date for the affected Dividend Period
will be the next business day on which the Trust and its
paying agent, if any, can pay the dividend;
(ii) The affected Dividend Period will end on the day it otherwise
would have ended; and
(iii) The next Dividend Period will begin and end on the dates on
which it otherwise would have begun and ended.
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, but shall not be required to, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. 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 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 that any
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares will not be listed on any stock exchange or
traded on the NASDAQ Stock Market. Investors who purchase shares in an auction
for a special dividend period in which the Bid Requirements, if any, do not
require a bid to specify a spread should note that because the dividend rate on
such shares will be fixed for the length of such dividend period, the value of
the shares may fluctuate in response to changes in interest rates and may be
more or less than their original cost if sold on the open market in advance of
the next auction. Investors who purchase shares in an auction for a special
dividend period in which the Bid Requirements require a bid to specify a spread
should be aware that the value of their shares may also fluctuate and may be
more or less than their original cost if sold in the open market in advance of
the next auction, particularly if market spreads narrow or widen in a manner
unfavorable to such purchaser's position.
A beneficial owner or an existing holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only:
o pursuant to a bid or sell order placed with the auction agent
in accordance with the auction procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Trust;
provided, however, that:
o a sale, transfer or other disposition of Preferred Shares
from a customer of a 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 dated as of August 20, 2002, as subsequently 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 by reducing the number of common shares owned by
each respective common shareholder. So long as any Preferred Shares are
outstanding, the holders of common shares will not be entitled to receive any
distributions from the Trust unless all accrued dividends on Preferred Shares
have been paid, unless asset coverage (as defined in the Investment Company
Act) with respect to Preferred Shares would be at least 200% after giving
effect to the distributions and unless certain other requirements imposed by
any rating agencies rating the Preferred Shares have been met. All common
shares are equal as to dividends, assets and voting privileges and have no
conversion, preemptive or other subscription rights.
The Trust's common shares are traded on the New York Stock Exchange
under the symbol "BKK."
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 all outstanding
classes or series of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval
requirements are: the merger or consolidation of the Trust or any subsidiary of
the Trust with or into any Principal Shareholder; the issuance of any
securities of the Trust to any Principal Shareholder for cash, except pursuant
to any automatic dividend reinvestment plan; the sale, lease or exchange of all
or any substantial part of the assets of the Trust to any Principal
Shareholder, except assets having an aggregate fair market value of less than
2% of the total assets of the Trust, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period; or the sale, lease or exchange to
the Trust or any subsidiary of the Trust, in exchange for securities of the
Trust, of any assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than 2% of the total assets of the Trust,
aggregating for purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period.
To convert the Trust to an open-end investment company, the Trust's
Agreement and Declaration of Trust, as amended and restated, requires the
favorable vote of a majority of the board of the trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of each
affected class or series of shares of the Trust, voting separately as a class
or series, unless such amendment has been approved by at least 80% of the
trustees, in which case "a majority of the outstanding voting securities" (as
defined in the Investment Company Act) of the Trust shall be required. The
foregoing vote would satisfy a separate requirement in the Investment Company
Act that any conversion of the Trust to an open-end investment company be
approved by the shareholders. If approved in the foregoing manner, conversion
of the Trust to an open-end investment company could not occur until 90 days
after the shareholders' meeting at which such conversion was approved and would
also require at least 30 days' prior notice to all shareholders. Conversion of
the Trust to an open-end investment company would require the redemption of any
outstanding preferred shares, including the 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 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 reserves 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, 2020, 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 the trustees, in which
case "a majority of the outstanding voting securities" (as defined in the
Investment Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, as amended
and restated, each class 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 class vote is required,
the applicable proportion of shares of the class or series, voting as a
separate class or series, also will be required.
The board of trustees has determined that provisions with respect to
the board of trustees and the shareholder voting requirements described above,
which voting requirements are greater than the minimum requirements under
Delaware law or the Investment Company Act, are in the best interest of
shareholders generally. Reference should be made to the Trust's Agreement and
Declaration of Trust, as amended and restated, on file with the SEC 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, although it is possible that they may trade
at a premium above net asset value. The market price of the Trust's common
shares will be determined by such factors as relative demand for and supply of
such common shares in the market, the Trust's net asset value, general market
and economic conditions and other factors beyond the control of the Trust.
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 Tax Matters
The discussion below and in the Statement of Additional Information
provides general tax information related to an investment in the Preferred
Shares. The discussion reflects applicable tax laws of the United States as of
the date of this Prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service retroactively or
prospectively. No attempt is made to present a detailed explanation of all
Federal, state, local and foreign tax concerns affecting the Trust and its
shareholders, and the discussions set forth here and in the Statement of
Additional Information do not constitute tax advice. Because tax laws are
complex and often change, you should consult your tax advisor about the tax
consequences of an investment in the Trust.
The Trust invests primarily in municipal bonds the income of which is
exempt from regular Federal income tax. Consequently, the regular monthly
dividends you receive will generally be exempt from regular Federal income tax.
A portion of these dividends, however, may be attributable to tax preference
items subject to the Federal alternative minimum tax.
Although the Trust does not seek to realize taxable income or capital
gain, the Trust may realize and distribute taxable income or capital gain from
time to time as a result of the Trust's normal investment activities. The Trust
will allocate tax-exempt interest income, long-term capital gain and other
taxable income, if any, among the common shares and the Preferred Shares for
each taxable year in proportion to total dividends paid to each class for the
taxable year. The Trust intends to notify holders of Preferred Shares in
advance if it will allocate income to them that is not exempt from regular
Federal income tax. In certain circumstances, the Trust will make payments to
holders of Preferred Shares to offset the tax effects of the taxable
distribution. See "Description of Preferred Shares--Dividends and Dividend
Periods--Additional Dividends.
The Trust will distribute at least annually any taxable income or
realized capital gain. Distributions of net short-term gain are taxable as
ordinary income. Distributions of net long-term capital gain are taxable to you
as long-term capital gain regardless of how long you have owned your shares.
Dividends will not qualify for a dividends received deduction generally
available to corporate shareholders or for the reduced rate on qualified
dividend income.
The sale or other disposition of shares of the Trust will normally
result in capital gain or loss to shareholders. In general, any gain or loss
realized upon a taxable disposition of shares will be treated as long-term
capital gain or loss if the shares have been held for more than one year.
Otherwise, the gain or loss on the taxable disposition of the shares will be
treated as short-term capital gain or loss.
Each year, you will receive a year-end statement designating the
amounts of tax-exempt dividends, capital gain dividends and ordinary income
dividends paid to you during the preceding year, including the source of
investment income by state and the portion of income that is subject to the
Federal alternative minimum tax, if any. You will receive this statement from
the firm where you purchased your shares if you hold your investment in street
name; the Trust will send you this statement if you hold your shares in
registered form.
In order to avoid corporate taxation of its taxable income and be
permitted to pay tax-exempt dividends, the Trust must elect to be treated as a
regulated investment company under Subchapter M of the Code and meet certain
requirements that govern the Trust's sources of income, diversification of
assets and distribution of earnings to shareholders. The Trust intends to make
such an election and meet these requirements. If the Trust failed to do so, the
Trust would be required to pay corporate taxes on its taxable income and all
the distributions would be taxable as ordinary income to the extent of the
Trust's earnings and profits. In particular, in order for the Trust to pay
tax-exempt dividends, at least 50% of the value of the Trust's total assets
must consist of tax-exempt obligations on a quarterly basis. The Trust intends
to meet this requirement. If the Trust failed to do so, it would not be able to
pay tax-exempt dividends and your distributions attributable to interest
received by the Trust from any source would be taxable as ordinary income to
the extent of the Trust's earnings and profits.
The Trust may be required to withhold taxes on certain of your
dividends if you have not provided the Trust with your correct taxpayer
identification number (if you are an individual, normally your Social Security
number), or if you are otherwise subject to back-up withholding. If you receive
Social Security benefits, you should be aware that tax-free income is taken
into account in calculating the amount of these benefits that may be subject to
Federal income tax. If you borrow money to buy Trust shares, you may not be
permitted to deduct the interest on that loan. Under Federal income tax rules,
Trust shares may be treated as having been bought with borrowed money even if
the purchase of the Trust shares cannot be traced directly to borrowed money.
Holders are urged to consult their own tax advisors regarding the impact of an
investment in shares upon the deductibility of interest payable by the holder.
If you are subject to the Federal alternative minimum tax, a portion
of your regular monthly dividends may be taxable.
State and Local Tax Matters
The exemption from Federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the income or
other tax laws of any state or local taxing authority. In some states, the
portion of any exempt-interest dividend that is derived from interest received
by a regulated investment company on its holdings of that state's securities
and its political subdivisions and instrumentalities is exempt from that
state's income tax. Therefore, the Trust will report annually to you the
percentage of interest income earned by the Trust during the preceding year on
tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. You are advised to consult with their own tax advisors about state
and local tax matters.
Please refer to the Statement of Additional Information for more
detailed information. You are urged to consult your tax advisor.
UNDERWRITING
The Underwriters named below, acting through , as lead manager, and
, as their representatives (together with the lead manager, the
"Representatives"), have severally agreed, subject to the terms and conditions
of an underwriting agreement with the Trust, BlackRock Advisors and BlackRock
Financial Management (the "Underwriting Agreement"), to purchase from the Trust
the number of Preferred Shares set forth opposite their respective names.
Underwriters Number of Preferred Shares
------------ --------------------------
The underwriting agreement provides that the obligations of the
Underwriters to purchase the Preferred Shares included in this offering are
subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to purchase all the Preferred
Shares if they purchase any shares. In the underwriting agreement, the Trust,
BlackRock Advisors and BlackRock Financial Management have agreed to indemnify
the Underwriters against certain liabilities, including liabilities arising
under the Securities Act of 1933, or to contribute payments the Underwriters
may be required to make for any of those liabilities.
The Underwriters propose to initially offer some of the Preferred
Shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the Preferred Shares to certain
dealers at the public offering price less a concession not in excess of $ per
share. The sales load the Trust will pay of $ per share is equal to % of the
initial offering price. After the initial public offering, the Underwriters may
change the public offering price and the concession. Investors must pay for any
Preferred Shares purchased in the public offering on or before , 2003.
The Trust anticipates that the Representatives from time to time and
certain other Underwriters may act as brokers or dealers in connection with the
execution of the Trust's portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers
while they are 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 underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of the
Underwriters to the Trust, BlackRock Advisors or BlackRock Financial Management
by notice to the Trust, BlackRock Advisors or BlackRock Financial Management
if, prior to delivery of and payment for the Preferred Shares, (1) trading in
the Trust's common shares shall have been suspended by the SEC or the American
Stock Exchange or trading in securities generally on the New York Stock
Exchange or the American Stock Exchange shall have been suspended or limited or
minimum prices shall have been established on either of such Exchanges, (2) a
commercial banking moratorium shall have been declared by either federal or New
York state authorities, or (3) there shall have occurred any outbreak or
escalation of hostilities, declaration by the United States of a national
emergency or war, or other calamity or crisis the effect of which on financial
markets in the United States is such as to make it, in the sole judgment of the
representatives, impracticable or inadvisable to proceed with the offering or
delivery of the Preferred Shares as contemplated by this prospectus (exclusive
of any supplement thereto).
The Trust anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and
receive fees as set forth under "The Auction."
CUSTODIAN, TRANSFER AGENT AND AUCTION AGENT
The Custodian of the assets of the Trust is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services.
EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021,
acts as the Trust's Transfer Agent with respect to the common shares.
The Bank of New York, 100 Church Street, New York, New York 10286, a
banking corporation organized under the laws of New York, is the auction agent
with respect to the Preferred Shares and acts as transfer agent, registrar,
dividend disbursing agent and redemption agent with respect to such shares.
LEGAL OPINIONS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Trust by Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York, and for the Underwriters by . may rely as to
certain matters of Delaware law on the opinion of Skadden, Arps, Slate, Meagher
& Flom LLP.
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 SEC. These
documents can be inspected and copied for a fee at the SEC's public reference
room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's 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 SEC, including proxy statements and reports filed under
the Securities Exchange Act of 1934.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
USE OF PROCEEDS..............................................................B-2
INVESTMENT OBJECTIVES AND POLICIES...........................................B-2
INVESTMENT POLICIES AND TECHNIQUES...........................................B-5
OTHER INVESTMENT POLICIES AND TECHNIQUES....................................B-12
MANAGEMENT OF THE TRUST.....................................................B-16
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-28
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES.........B-29
DESCRIPTION OF COMMON SHARES................................................B-31
OTHER SHARES................................................................B-31
REPURCHASE OF COMMON SHARES.................................................B-31
TAX MATTERS.................................................................B-33
EXPERTS B-37
ADDITIONAL INFORMATION......................................................B-37
INDEPENDENT AUDITORS' REPORT................................................B-38
--------------------
APPENDIX A STATEMENT OF PREFERENCES OF MUNICIPAL AUCTION
RATE CUMULATIVE PREFERRED SHARES.................................A-1
APPENDIX B TAXABLE EQUIVALENT YIELD TABLE...................................B-1
APPENDIX C RATINGS OF INVESTMENTS...........................................C-1
APPENDIX D GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC
TRANSACTIONS.....................................................D-1
APPENDIX E PROXY VOTING PROCEDURES..........................................E-1
BlackRock Municipal 2020 Term Trust
Municipal Auction Rate Cumulative Preferred Shares
Shares, Series
Shares, Series
PROSPECTUS
, 2003
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Municipal 2020 Term Trust (the "Trust") is a diversified,
closed-end management investment company with a limited operating history. This
Statement of Additional Information relating to Preferred Shares does not
constitute a prospectus, but should be read in conjunction with the Prospectus
relating hereto dated , 2003. This Statement of Additional Information, which
is not a Prospectus, does not include all information that a prospective
investor should consider before purchasing Preferred Shares, and investors
should obtain and read the Prospectus prior to purchasing such shares. A copy
of the Prospectus may be obtained without charge by calling (888) 825-2257. You
may also obtain a copy of the Prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus or the Statement attached as Appendix A.
TABLE OF CONTENTS
USE OF PROCEEDS..............................................................B-2
INVESTMENT OBJECTIVES AND POLICIES...........................................B-2
INVESTMENT POLICIES AND TECHNIQUES...........................................B-5
OTHER INVESTMENT POLICIES AND TECHNIQUES....................................B-12
MANAGEMENT OF THE TRUST.....................................................B-16
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-28
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES.........B-29
DESCRIPTION OF COMMON SHARES................................................B-31
OTHER SHARES................................................................B-31
REPURCHASE OF COMMON SHARES.................................................B-31
TAX MATTERS.................................................................B-33
EXPERTS B-37
ADDITIONAL INFORMATION......................................................B-37
INDEPENDENT AUDITORS' REPORT................................................B-38
--------------------
APPENDIX A STATEMENT OF PREFERENCES OF MUNICIPAL AUCTION
RATE CUMULATIVE PREFERRED SHARES.................................A-1
APPENDIX B TAXABLE EQUIVALENT YIELD TABLE...................................B-1
APPENDIX C RATINGS OF INVESTMENTS...........................................C-1
APPENDIX D GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC
TRANSACTIONS.....................................................D-1
APPENDIX E PROXY VOTING PROCEDURES..........................................E-1
This Statement of Additional Information is dated , 2003.
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objectives and policies, the net proceeds of this 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 this 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 investment companies that invest primarily in municipal bonds of the
type in which the Trust may invest directly. We currently anticipate that the
Trust will be able to invest primarily in tax-exempt municipal bonds that meet
the Trust's investment objectives and policies within six to eight weeks after
the completion of this offering.
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 income it produces may be includable in alternative minimum taxable
income. Preferred 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 Managed Assets in any
one industry, provided that this limitation does not apply to
municipal bonds other than those municipal bonds backed only
by assets and revenues of non-governmental issuers;
(2) with respect to 75% of its Managed Assets, invest more than
5% of the value of its Managed Assets in the securities of
any single issuer or purchase more than 10% of the
outstanding 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 Managed 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 Managed Assets in industrial
development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph
(1) above, a non-governmental issuer shall be deemed the sole issuer of a
security when its assets and revenues are separate from other governmental
entities and its securities are backed only by its assets and revenues.
Similarly, in the case of a non-governmental issuer, such as an industrial
corporation or a privately owned or operated hospital, if the security is
backed only by the assets and revenues of the non-governmental issuer, then
such non-governmental issuer would be deemed to be the sole issuer. Where a
security is also backed by the enforceable obligation of a superior or
unrelated governmental or other entity (other than a bond insurer), it shall
also be included in the computation of securities owned that are issued by such
governmental or other entity. Where a security is guaranteed by a governmental
entity or some other facility, such as a bank guarantee or letter of credit,
such a guarantee or letter of credit would be considered a separate security
and would be treated as an issue of such government, other entity or bank. When
a municipal bond is insured by bond insurance, it shall not be considered a
security that is issued or guaranteed by the insurer; instead, the issuer of
such municipal bond will be determined in accordance with the principles set
forth above. The foregoing restrictions do not limit the percentage of the
Trust's assets that may be invested in municipal bonds insured by any given
insurer.
Under the Investment Company Act, the Trust may invest up to 10% of
its total assets in the aggregate in shares of other investment companies and
up to 5% of its total assets in any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a shareholder in
any investment company, the Trust will bear its ratable share of that
investment company's expenses, and will remain subject to payment of the
Trust's advisory fees and other expenses with respect to assets so invested.
Holders of Preferred 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.
As a fundamental policy, under normal market conditions, the Trust
will invest at least 80% of its Managed Assets in municipal bonds, the interest
of which is exempt from regular Federal income tax.
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 Managed Assets and the Trust's aggregate short
sales of a particular class of securities does not exceed
25% of the then outstanding securities of that class. The
Trust may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at
the time of the sale, the Trust owns or has the immediate
and unconditional right to acquire at no additional cost the
identical security;
(2) purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act or any exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of the acquisition of securities.
In addition, to comply with Federal tax requirements for qualification
as a "regulated investment company," the Trust's investments will be limited in
a manner such that at the close of each quarter of each taxable year, (a) no
more than 25% of the value of the Trust's total assets are invested in the
securities (other than U.S. 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
U.S. Government securities or securities of other regulated investment
companies) of a single issuer and no investment represents ownership of 10% or
more of the voting securities of such 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, S&P and/or Fitch. 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, S&P and/or Fitch.
Such guidelines will likely be more restrictive than the restrictions set forth
above. The Trust does not anticipate that such guidelines would have a material
adverse effect on the Trust's holders of common shares or its ability to
achieve its investment objective. The Trust presently anticipates that any
Preferred Shares that it intends to issue would be initially given the highest
ratings by Moody's ("Aaa") and/or by S&P or Fitch ("AAA"), but no assurance can
be given that such ratings will be obtained, or if obtained, maintained. No
minimum rating is required for the issuance of Preferred Shares by the Trust.
Moody's, S&P and Fitch 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 below are regarded as having
current capacity to make principal and interest payments but are subject to
business, financial or economic conditions which could adversely affect such
payment capacity. Municipal bonds rated "Baa" or "BBB" are considered
"investment grade" securities; municipal bonds rated "Baa" are considered
medium grade obligations which lack outstanding investment characteristics and
have speculative characteristics, while municipal bonds rated "BBB" are
regarded as having adequate capacity to pay principal and interest. Municipal
bonds rated "AAA" in which the Trust may invest may have been so rated on the
basis of the existence of insurance guaranteeing the timely payment, when due,
of all principal and interest. Municipal bonds rated below investment grade
quality are obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Municipal bonds rated below
investment grade tend to be less marketable than higher-quality bonds because
the market for them is less broad. The market for unrated municipal bonds is
even narrower. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Trust
may have greater difficulty selling its portfolio securities. The Trust will be
more dependent on BlackRock's research and analysis when investing in these
securities.
A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix C 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.
After the initial investment period, the Trust intends to actively
manage the maturity of its bonds which are expected to have a dollar weighted
average effective maturity approximately equal to the Trust's maturity date. As
a result, the Trust's portfolio at any given time may include both long-term
and intermediate-term municipal bonds. Moreover, during temporary defensive
periods (e.g., times when, in BlackRock's opinion, temporary imbalances of
supply and demand or other temporary dislocations in the tax-exempt bond market
adversely affect the price at which long-term or intermediate-term municipal
bonds are available), and in order to keep cash on hand fully invested,
including the period during which the net proceeds of the offering of common
shares and of Preferred Shares, if any, are being invested, the Trust may
invest any percentage of its assets in short-term investments including high
quality, short-term securities which may be either tax-exempt or taxable and
securities of other open- or closed-end investment companies that invest
primarily in municipal bonds of the type in which the Trust may invest
directly. The Trust intends to invest in taxable short-term investments only in
the event that suitable tax-exempt temporary investments are not available at
reasonable prices and yields. Tax-exempt temporary investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. The Trust will invest only in
taxable temporary investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or
floating rate of interest. Taxable temporary investments of the Trust may
include certificates of deposit issued by U.S. banks with assets of at least $1
billion, commercial paper or corporate notes, bonds or debentures with a
remaining maturity of one year or less, or repurchase agreements. See "Other
Investment Policies and Techniques--Repurchase Agreements." To the extent the
Trust invests in taxable investments, the Trust will not at such times be in a
position to achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security and the Trust will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Also included within the general category of municipal bonds described
in the Prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However,
certain Municipal Lease Obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. In the case of a "non-appropriation" lease, the Trust's
ability to recover under the lease in the event of non-appropriation or default
will be limited solely to the repossession of the leased property, without
recourse to the general credit of the lessee, and the disposition or re-leasing
of the property might prove difficult. In order to reduce this risk, the Trust
will only purchase Municipal Lease Obligations where BlackRock believes the
issuer has a strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or 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 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 Tennessee
Valley Authority, whose securities are supported by the
right of the agency to borrow from the U.S. Treasury; (c)
the Federal National Mortgage Association, whose securities
are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support
to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S.
Government, its agencies and instrumentalities do not
guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.
2. Certificates of deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are
for a definite period of time, earn a specified rate of
return, and are normally negotiable. The issuer of a
certificate of deposit agrees to pay the amount deposited
plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the
Trust may not be fully insured by the Federal Deposit
Insurance Corporation.
3. Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities
pursuant to a repurchase agreement, it simultaneously agrees
to resell and redeliver such securities to the seller, who
also simultaneously agrees to buy back the securities at a
fixed price and time. This assures a predetermined yield for
the Trust during its holding period, since the resale price
is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity
for the Trust to invest temporarily available cash. The
Trust may enter into repurchase agreements only with respect
to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers'
acceptances in which the Trust may invest. Repurchase
agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the
Trust is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Trust is
entitled to sell the underlying collateral. If the value of
the collateral declines after the agreement is entered into,
and if the seller defaults under a repurchase agreement when
the value of the underlying collateral is less than the
repurchase price, the Trust could incur a loss of both
principal and interest. BlackRock monitors the value of the
collateral at the time the action is entered into and at all
times during the term of the repurchase agreement. BlackRock
does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Trust. If the seller were
to be subject to a Federal bankruptcy proceeding, the
ability of the Trust to liquidate the collateral could be
delayed or impaired because of certain provisions of the
bankruptcy laws.
4. Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand
notes issued by corporations to finance their current
operations. Master demand notes are direct lending
arrangements between the Trust and a corporation. There is
no secondary market for such notes. However, they are
redeemable by the Trust at any time. BlackRock will consider
the financial condition of the corporation (e.g., earning
power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all
of its financial obligations, because the Trust's liquidity
might be impaired if the corporation were unable to pay
principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the
highest categories by a major rating agency and which mature
within one year of the date of purchase or carry a variable
or floating rate of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that are
exempt from regular Federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be
used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments. Repayment is
generally to be derived from specific future tax revenues. TANs are usually
general obligations of the issuer. A weakness in an issuer's capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in
delinquencies could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute
general obligations of the issuer. A decline in the receipt of projected
revenues, such as anticipated revenues from another level of government, could
adversely affect an issuer's ability to meet its obligations on outstanding
RANs. In addition, the possibility that the revenues would, when received, be
used to meet other obligations could affect the ability of the issuer to pay
the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on issues
of municipal paper may be made from various sources, to the extent the funds
are available therefrom. Maturities on municipal paper generally will be
shorter than the maturities of TANs, BANs or RANs. There is a limited secondary
market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or tax-exempt
money market indices.
While the various types of notes described above as a group represent
the major portion of the tax-exempt note market, other types of notes are
available in the marketplace and the Trust may invest in such other types of
notes to the extent permitted under its investment objective, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.
Duration Management and Other Management Techniques
Consistent with its investment objectives and policies set forth
herein, the Trust may also enter into certain hedging and risk management
transactions. In particular, the Trust may purchase and sell futures contracts,
exchange-listed and over-the-counter put and call options on securities,
financial indices and futures contracts, forward foreign currency contracts,
and may enter into various interest rate transactions (collectively, "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect
against possible changes in the market value of the Trust's portfolio resulting
from fluctuations 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
and to establish a position in the securities markets as a temporary substitute
for purchasing particular securities. Any or all of these Strategic
Transactions may be used at any time. There is no particular strategy that
requires use of one technique rather than another. Use of any Strategic
Transaction is a function of market conditions. The Strategic Transactions that
the Trust may use are described below. The ability of the Trust to hedge 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.
Interest Rate Transactions. Among the Strategic Transactions are which
the Trust may enter into are 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 intends to use these transactions for
hedging and risk management purposes and not as a speculative investment. 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, depending on whether it is
hedging its assets or liabilities, 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. In as much as these hedging transactions are
inured into for good faith hedging purposes. BlackRock and the Trust believe
such obligations do not constitute senior securities, and, accordingly will not
treat them as being subject to its borrowing restrictions. 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 designate on its books and records 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. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
Futures Contracts and Options on Futures Contracts. In connection with
its hedging and other risk management strategies, 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 engage in such transactions only for bona fide hedging,
risk management and other portfolio management purposes.
Calls on Securities, Indices and Futures Contracts. In order to
enhance income or reduce fluctuations on net asset value, 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 option
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 instrument subject to the call or other securities or
assets acceptable for applicable segregation and coverage 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 an instrument 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 assets
or instruments acceptable under applicable segregation and coverage
requirements.
Puts on Securities, Indices and Futures Contracts. As with calls, 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. For the same purposes, 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 total 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.
Credit derivatives. The Trust may engage in credit derivative
transactions. There are two broad categories of credit derivatives: default
price risk derivatives and market spread derivatives. Default price risk
derivatives are linked to the price of reference securities or loans after a
default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index. There are three
basic transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If BlackRock is incorrect in its
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Trust would diminish compared with what it would
have been if these techniques were not used. Moreover, even if BlackRock is
correct in its forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of credit derivative transactions that may be
entered into by the Trust. The Trust's risk of loss in a credit derivative
transaction varies with the form of the transaction. For example, if the Trust
purchases a default option on a security, and if no default occurs with respect
to the security, the Trust's loss is limited to the premium it paid for the
default option. In contrast, if there is a default by the grantor of a default
option, the Trust's loss will include both the premium that it paid for the
option and the decline in value of the underlying security that the default
option hedged.
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 total
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 Strategic Transactions 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 Strategic Transactions are:
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 Strategic Transactions. See "Tax Matters."
Short Sales
The Trust may make short sales of 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 liquid securities. The Trust will also be
required to designate on its books and records 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 Managed 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.
Dollar Roll Transaction
To take advantage of attractive opportunities in the bond market and
to enhance current income, the Trust may enter into dollar roll transactions. A
dollar roll transaction involves a sale by the Trust of a mortgage-backed or
other security concurrently with an agreement by the Trust to repurchase a
similar security at a later date at an agreed-upon price. The securities that
are repurchased will bear the same interest rate and stated maturity as those
sold, but pools of mortgages collateralizing those securities may have
different prepayment histories than those sold. During the period between the
sale and repurchase, the Trust will not be entitled to receive interest and
principal payments of the securities sold. Proceeds of the sale will be
invested in additional instruments for the Trust, and the income from these
investments will generate income for the Trust. If such income does not exceed
the income, capital appreciation and gain or loss that would have been realized
on the securities sold as part of the dollar roll, the use of this technique
will diminish the investment performance of the Trust compared with what the
performance would have been without the use of dollar rolls. At the time the
Trust enters into a dollar roll transaction, it will place in a segregated
account maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including
accrued interest) and will subsequently monitor the account to ensure that its
value is maintained. The Trust's dollar rolls, together with its reverse
repurchase agreements, the issuance of Preferred Shares and other borrowings,
will not exceed, in the aggregate, 33% of the value of its Managed Assets.
Dollar roll transactions involve the risk that the market value of the
securities the Trust is required to purchase may decline below the agreed upon
repurchase price of those securities. The Trust's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the investment manager's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls can be
successfully employed.
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 securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to acquire
the security or to hedge against anticipated changes in interest rates and
prices. When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date,
but the Trust will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. If the Trust disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it might incur a gain or loss. At the time the Trust enters
into a transaction on a when-issued or forward commitment basis, it will
designate on its books and records cash or liquid debt securities equal to at
least the value of the when-issued or forward commitment securities. The value
of these assets will be monitored daily to ensure that their marked to market
value will at all times equal or exceed the corresponding obligations of the
Trust. There is always a risk that the securities may not be delivered and that
the Trust may incur a loss. Settlements in the ordinary course, which may take
substantially more than five business days, 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 designate on its books and records
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 agrees to repurchase the same security at a specified
price on a future date agreed upon by the parties. The agreed-upon repurchase
price determines the yield during the Trust's holding period. Repurchase
agreements are considered to be loans collateralized by the underlying security
that is the subject of the repurchase contract. Income generated from
transactions in repurchase agreements will be taxable. See "Tax Matters" for
information relating to the allocation of taxable income between common shares
and Preferred Shares. The Trust will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of
BlackRock, present minimal credit risk. The risk to the Trust is limited to the
ability of the issuer to pay the agreed-upon repurchase price on the delivery
date; however, although the value of the underlying collateral at the time the
transaction is entered into always equals or exceeds the agreed-upon repurchase
price, if the value of the collateral declines there is a risk of loss of both
principal and interest. In the event of default, the collateral may be sold but
the Trust might incur a loss if the value of the collateral declines, and might
incur disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, realization upon the collateral by the Trust may
be delayed or limited. BlackRock will monitor the value of the collateral at
the time the transaction is entered into and at all times subsequent during the
term of the repurchase agreement in an effort to determine that such value
always equals or exceeds the agreed-upon repurchase price. In the event the
value of the collateral declines below the repurchase price, BlackRock will
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a
bond that does not pay interest for its entire life. The market prices of zero
coupon bonds are affected to a greater extent by changes in prevailing levels
of interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Trust accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to banks or dealers 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 (i) the borrower pledge and maintain
with the Trust collateral consisting of cash, a letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the U.S. Government
having a value at all times not less than 100% of the value of the securities
loaned, (ii) 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), (iii) the loan be made subject to termination by the Trust
at any time and (iv) the Trust receive reasonable interest on the loan (which
may include the Trust's investing any cash collateral in interest bearing short
term investments), any distributions on the loaned securities and any increase
in their market value. The Trust will not lend portfolio securities if, as a
result, the aggregate value of such loans exceeds 33-1/3% of the value of the
Trust's total assets (including such loans). Loan arrangements made by the
Trust will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal
settlement time of five business days. 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 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 Managed Assets in securities
rated below investment grade such as those rated Ba or below by Moody's or BB
or below by S&P or Fitch or securities comparably rated by other rating
agencies or in unrated securities determined by BlackRock to be of comparable
quality. Securities rated Ba and below by Moody's and Fitch 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.
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
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.
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 August 21,
2003, 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 0.50% of the average weekly value of
the Trust's Managed Assets. In approving this agreement the board of trustees
considered, among other factors, (i) the services provided to the Trust by
BlackRock Advisors, (ii) the Trust's fee and expense data as compared to
various benchmarks and a peer group of closed-end funds with similar investment
strategies as the Trust, (iii) BlackRock's profitability with respect to its
management of BlackRock family of closed-end funds, and (iv) the direct and
indirect benefits to the BlackRock from its relationship with the Trust.
During its deliberations, the board of trustees focused on the
experience, resources and strengths of BlackRock Advisors in managing
leveraged, closed-end investment companies that invest in municipal bonds. The
board of trustees, based on their experience as directors or trustees of other
investment companies managed by BlackRock Advisors, also focused on the quality
of the compliance and administrative staff at BlackRock. The board of trustees
placed significant emphasis on the Trust's advisory fee rate and anticipated
expense ratios as compared to those of comparable leveraged, closed-end funds
with comparable investment objectives and strategies as provided by Lipper Inc.
Based on the information reviewed and discussions held, the board of
trustees, including a majority of the non-interested trustees, concluded that
it was satisfied with the nature and quality of the services to be provided by
the BlackRock Advisors to the Trust and that the advisory fee rate was
reasonable in relation to such services. The non-interested trustees were
represented by independent counsel who assisted them in their deliberations.
The Investment Management Agreement was approved by the sole common
shareholder of the Trust as of September 17, 2003. 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
which can be waived by the non-terminating party. 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 September 30, 2004, 38% of the
monthly management fees received by BlackRock Advisors, (ii) from September 30,
2004 to September 30, 2005, 19% of the monthly management fees received by
BlackRock Advisors; and (iii) after September 30, 2005, 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
August 21, 2003, 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). In addition to the information the board of
trustees considered in approving the Investment Management Agreement, the board
of trustees considered in approving the sub-advisory agreement, among other
factors, (i) the services provided to the Trust by BlackRock Financial
Management, (ii) the performance of BlackRock Financial Management in
sub-advising other leveraged municipal bond funds, and (iii) the direct and
indirect benefits to BlackRock Financial Management from its relationship with
the Trust.
During its deliberations, the board of trustees focused on the
experience, resources and strengths of BlackRock Financial Management in
sub-advising leveraged, closed-end investment companies that invest in
municipal bonds.
Based on the information reviewed and the discussions, the board of
trustees, including a majority of the non-interested trustees, concluded that
it was satisfied with the nature and quality of the services to be provided by
BlackRock Financial Management to the Trust and that the sub-advisory fee rate
was reasonable in relation to such services. The non-interested trustees were
represented by independent counsel who assisted them in their deliberations.
The sub-investment advisory agreement was approved by the sole common
shareholder of the Trust as of September 17, 2003. The sub-investment advisory
agreement will continue in effect for a period of two years from its effective
date, and if not sooner terminated, will continue in effect for successive
periods of 12 months thereafter, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Trust's
board of trustees or the vote of a majority of the outstanding voting
securities of the Trust (as defined in the Investment Company Act) and (2) by
the vote of a majority of the trustees who are not parties to such agreement or
interested persons (as such term is defined in the Investment Company Act) of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The sub-investment advisory agreement may be terminated as a
whole at any time by the Trust without the payment of any penalty, upon the
vote of a majority of the Trust's board of trustees or a majority of the
outstanding voting securities of the Trust, or by BlackRock Advisors or
BlackRock Financial Management, on 60 days' written notice by either party to
the other. The sub-investment advisory agreement will also terminate
automatically in the event of its assignment (as such term is defined in the
Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day-to-day operations. The
officers are directly responsible to the Trust's board of trustees which sets
broad policies for the Trust and chooses its officers. The following is a list
of the trustees and officers of the Trust and their present positions and
principal occupations during the past five years. Trustees who are interested
persons of the Trust (as defined in the Investment Company Act) are denoted by
an asterisk (*). Trustees who are independent trustees (as defined in the
Investment Company Act) (the "Independent Trustees") are denoted without an
asterisk. The business address of the Trust, BlackRock Advisors and their board
members and officers is 100 Bellevue Parkway, Wilmington, Delaware 19809,
unless specified otherwise below.
The trustees listed below are either trustees or directors of other
closed-end funds in which BlackRock Advisors acts as investment advisor.
Number of
Portfolios in
Fund Complex
Term of Office Principal Occupation Overseen by
Name, Address, Age and During The Past Five Trustee or Other
Position(s) Held Length of Years and Other Nominee for Directorships held
Registrant Time Served Affiliations Trustee by Trustee
-----------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
Andrew F. Brimmer 3 years(1)(2) President of Brimmer & 46 Director of
------------------------------ Company, Inc., a CarrAmerica Realty
P.O. Box 4546 Washington, D.C.-based Corporation and
New York, NY 10163-4546 economic and financial Borg-Warner
Age: 77 consulting firm. Wilmer Automotive. Former
Trustee D. Barrett Professor of Director of AirBorne
Economics, University Express, BankAmerica
of Massachusetts, Corporation (Bank of
Amherst. Formerly America), Bell South
member of the Board of Corporation, College
Governors of the Retirement Equities
Federal Reserve System. Fund (Trustee),
Former Chairman, Commodity Exchange,
District of Columbia Inc. (Public
Financial Control Governor), Connecticut
Board. Lead Trustee and Mutual Life Insurance
Chairman of the Audit Company, E.I. du Pont
Committee of each of de Nemours & Company,
the closed-end trusts Equitable Life
of which BlackRock Assurance Society of
Advisors, Inc. acts as the United States,
investment advisor. Gannett Company,
Mercedes-Benz of North
America, NCM Financial
Corporation (American
Security Bank), MNC
Capital Management,
Navistar International
Corporation, PHH Corp.
and UAL Corporation
(United Airlines).
Richard E. Cavanagh 3 years(1)(2) President and Chief 46 Trustee, Airplanes
P.O. Box 4546 Executive Officer of Group, Aircraft
New York, NY 10163-4546 The Conference Board, Finance Trust (AFT)
Age: 57 Inc., a leading global and Educational
Trustee business membership Testing Service (ETS).
organization, from Director, Arch
1995-present. Former Chemicals, Fremont
Executive Dean of the Group and The Guardian
John F. Kennedy School Life Insurance Company
of Government at of America.
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).
Kent Dixon 3 years(1)(2) Consultant/Investor. 46 Former Director of
P.O. Box 4546 Former President and ISFA (the owner of
New York, NY 10163-4546 Chief Executive Officer INVEST, a national
Age: 66 of Empire Federal securities brokerage
Trustee Savings Bank of America service designed for
and Banc PLUS Savings banks and thrift
Association, former institutions).
Chairman of the Board,
President and Chief
Executive Officer of
Northeast Savings.
Frank J. Fabozzi 3 years(1)(2) Consultant. Editor of 46 Director, Guardian
P.O. Box 4546 THE JOURNAL OF Mutual Funds Group (18
New York, NY 10163-4546 PORTFOLIO MANAGEMENT portfolios).
Age: 55 and Frederick Frank
Trustee Adjunct Professor of
Finance at the School of
Management at Yale
University. 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.
James Clayburn La Force, Jr. 3 years(1)(2) Dean Emeritus of The 46 Director, Payden &
P.O. Box 4546 John E. Anderson Rygel Investment
New York, NY 10163-4546 Graduate School of Trust, Provident
Age: 74 Management, University Investment Counsel
Trustee of California since Funds, Advisor Series
July 1, 1993. Acting Trust, Arena
Dean of The School of Pharmaceuticals, Inc.
Business, Hong Kong and CancerVax
University of Science Corporation.
and Technology
1990-1993. from 1978 to
September 1993, Dean of
The John E. Anderson
Graduate School of
Management, University
of California.
INTERESTED TRUSTEES:
Robert S. Kapito* 3 years(1)(2) Vice Chairman of 46 Chairman of the Hope &
Age: 46 BlackRock, Inc. Head of Heroes Children's
Trustee and President BlackRock's Portfolio Cancer Fund. President
Management Group, a of the Board of
member of the Directors of
Management Committee, Periwinkle National
the Investment Strategy Theatre for young
Group, the Fixed Income audiences. Director
and Global Equity of ICruise.com, Corp.
Investment Strategy
Group. Responsible for
the portfolio
management of the Fixed
Income, Domestic Equity
and International
Equity, Liquidity and
Alternative Investment
Groups of BlackRock.
Currently, President
and Trustee of each of
the closed-end trusts
which BlackRock
Advisors, Inc. acts as
investment advisor.
Ralph L. Schlosstein* 3 years(1)(2) Director since 1999 and 46 Chairman and President
Age: 52 President of BlackRock, of the BlackRock
Trustee Inc. since its Provident
formation in 1998 and Institutional Funds.
of BlackRock, Inc.'s Director of several of
predecessor entities BlackRock's
since 1988. Member of alternative investment
BlackRock's Management vehicles. Currently, a
Committee and Member of the Visiting
Investment Strategy Board of Overseers of
Group. Formerly, the John F. Kennedy
Managing Director of School of Government
Lehman Brothers, Inc. at Harvard University,
and Co-head of its the Financial
Mortgage and Savings Institutions Center
Institutions Group. Board of the Wharton
Currently, Chairman and School of the
Trustee of each of the University of
closed-end trusts which Pennsylvania, a
BlackRock Advisors, Trustee of Trinity
Inc. acts as investment School in New York
advisor. City and a Trustee of
New Visions for Public
Education in New York
Council. Formerly, a
Director of Pulte
Corporation and a
Member of Fannie Mae's
Advisory Council.
Walter F. Mondale(3) 3 years(1)(2) Partner, Dorsey & 46
P.O. Box 4546 Whitney LLP, a law firm
New York, NY 10163-4546 (December 1996-present,
Age: 75 September 1987-August
Trustee 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.
-------------
* "Interested person" of the Trust as defined in the Investment Company
Act. Messrs. Kapito and Schlosstein are interested persons due to
their employment with the investment advisor.
(1) After a trustee's initial term, each trustee is expected to serve a
three-year term concurrent with the class of trustees for which he
serves: Messrs. Cavanagh and La Force, as Class I trustees, are
expected to stand for re-election at the Trust's 2004 annual meeting
of shareholders Messrs. Schlosstein, Fabozzi and Mondale, as Class II
trustees, are expected to stand for re-election at the Trust's 2005
annual meeting of shareholders Messrs. Kapito, Brimmer and Dixon, as
Class III trustees, are expected to stand for re-election at the
Trust's 2006 annual meeting of shareholders
(2) Each trustee has served in such capacity since the Trust's inception.
(3) Mr. Mondale may be deemed an interested person of one or more of the
Trust's principal underwriters because his law firm, Dorsey & Whitney
LLP, serves as legal counsel to such principal underwriters. Because
Mr. Mondale may be deemed an interested person of certain of the
Trust's principal underwriters, he also may be deemed to be an
interested person of the Trust during the pendency of any securities
offering by the Trust in which such underwriters participate.
OFFICERS: Title Principal Occupation During the Past Five Years and
Name and Age ----- Other Affiliations
----------- ------------------
Anne F. Ackerley Vice President Managing Director of BlackRock, Inc. since 2000.
Age: 41 Formerly, First Vice President and Chief Operating
Officer, Mergers and Acquisition Group at Merrill Lynch
& Co. from 1997 to 2000; First Vice President and Chief
Operating Officer, Public Finance Group at Merrill
Lynch & Co. from 1995 to 1997; First Vice President,
Emerging Markets Fixed Income Research at Merrill Lynch
& Co. prior thereto.
Henry Gabbay Treasurer Managing Director of BlackRock, Inc. and its
Age: 56 predecessor entities.
James Kong Assistant Treasurer Managing Director of BlackRock, Inc. and its
Age: 42 predecessor entities.
Richard Shea, Esq. Vice President/Tax Managing Director of BlackRock, Inc. since 2000; Chief
Age: 43 Operating Officer and Chief Financial Officer of
Anthracite Capital, Inc. since 1998. Formerly, Director
of BlackRock, Inc. and its predecessor entities.
Vincent Tritto Secretary Director and Assistant Secretary of BlackRock, Inc.
Age: 41 since 2002. Formerly, Executive Director (2000-2002)
and Vice President (1998-2000), Morgan Stanley & Co.
Incorporated and Morgan Stanley Asset Management Inc.
and officer of various Morgan Stanley-sponsored
investment vehicles; Counsel (1998) and Associate
(1988-1997), Rogers & Wells LLP, New York, NY; Foreign
Associate (1992-1994), Asahi Law Offices/Masuda &
Ejiri, Tokyo, Japan.
Brian Kindelan Assistant Secretary Director and Senior Counsel (since January 2001), and
Age: 43 Vice President and Senior Counsel (1998-2000),
BlackRock Advisors, Inc.; Senior Counsel, PNC Bank
Corp. from May 1995 to April 1998; Associate, Stradley
Ronon Stevens & Young, LLP from March 1990 to May 1995.
Aggregate Dollar Range Of Equity
Securities Overseen By Directors In The
Dollar Range Of Equity Family In All Registered Investment
Name of Director Securities In The Trust(*) Companies(*)
---------------- -------------------------- --------------------------------------
Andrew F. Brimmer $0 $1-$10,000
Richard E. Cavanagh $0 $50,001-$100,000
Kent Dixon $0 over $100,000
Frank J. Fabozzi $0 $1-$10,000
Robert S. Kapito $0 over $100,000
James Clayburn La Force, Jr. $0 $50,001-$100,000
Walter F. Mondale $0 $50,001-$100,000
Ralph L. Schlosstein $0 $50,001-$100,000
-----------
(*) As of December 31, 2002. The trustees do not own shares in the Trust
as the Trust has a limited operating history.
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,
2002, 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, 2003, assuming the Trust was in existence for the full calendar
year.
Total Compensation From The Trust
Estimated Compensation And Fund Complex Paid To Board
Name of Board Member From The Trust Members(1)
-------------------- ---------------------- ---------------------------------
Dr. Andrew F. Brimmer $2,000(2) $250,000(3)(4)(5)
Richard E. Cavanagh $2,000(2) $210,000(4)(5)
Kent Dixon $2,000(2) $210,000(4)(5)
Frank J. Fabozzi $2,000(2) $190,000(4)
James Clayburn La Force, Jr. $2,000(2) $190,000(4)
Walter F. Mondale $2,000(2) $190,000(4)
-------------
(1) Estimates the total compensation to be earned by that person during
the calendar year ending December 31, 2003 from the closed-end funds
advised by the Advisor (the "Fund Complex").
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh,
Dixon, Fabozzi, La Force and Mondale may defer $0, $0, $0, $0, $2,000
and $0, respectively, pursuant to the Fund Complex's deferred
compensation plan in the calendar year ending December 31, 2003.
(3) Dr. Brimmer serves as "lead director" for each board of
trustees/directors in the Fund Complex. For his services as lead
trustee/director, Dr. Brimmer will be compensated in the amount of
$40,000 per annum by the Fund Complex.
(4) Of this amount, Messrs. Brimmer, Cavanagh, La Force, Fabozzi, Dixon
and Mondale are expected to defer $50,000, $50,000, $190,000, $30,000,
$50,000 and $30,000, respectively, pursuant to the Fund Complex's
deferred compensation plan.
(5) Includes compensation for service on the Audit Committee.
At a meeting of the Governance Committee of the board of trustees of
the BlackRock closed-end trusts held on November 25, 2002, the Independent
Trustees approved a change to their compensation to become effective January 1,
2003. Under this revised compensation plan, each Independent Trustee will
receive 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. The total annual aggregate
compensation for each Independent Trustee is capped at $190,000 per annum,
except that Dr. Brimmer will receive an additional $40,000 per annum from the
Fund Complex for acting as the lead trustee for each board of
trustees/directors in the Fund Complex and Messrs. Brimmer, Cavanagh and Dixon
will receive an additional $20,000 per annum from the Fund Complex for their
service on the audit committee of the Fund Complex. This additional
compensation to Messrs. Brimmer, Cavanagh and Dixon will be allocated among the
fund/trusts in the Fund Complex based on their relative net assets.
In the event that the $190,000 cap is met with respect to an
Independent Trustee, the amount of the Independent Trustee's fee borne by each
fund/trust in the Fund Complex is reduced by reference to the net assets of the
Trust relative to the other funds/trusts in the Fund Complex. In addition, the
attendance fees of each Independent Trustee 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
(excluding the per annum audit committee fee) held on a single day does not
exceed $23,750 for any Independent Trustee.
Certain of the above fees paid to the Independent Trustees will be
subject to mandatory deferrals pursuant to the Fund Complex's deferred
compensation plan. The Independent Trustees have agreed that at least $30,000
of their $190,000 base fee will be mandatory deferred pursuant to the Fund
Complex's deferred compensation plan. Also, members of the audit committee of
the Fund Complex will be required to defer all of the $20,000 per annum fee
they will receive for their services on the audit committee pursuant to the
Fund Complex's deferred compensation plan. Under the deferred compensation
plan, deferred amounts earn a return for the Independent Trustees as though
equivalent dollar amounts had been invested in common shares of certain other
funds/trusts in the Fund Complex selected by the Independent Trustees. This has
the same economic effect for the Independent Trustees as if they had invested
the deferred amounts in such other funds/trusts. The deferred compensation plan
is not funded and obligations thereunder represent general unsecured claims
against the general assets of a fund/trust. A fund/trust may, however, elect to
invest in common shares of those funds/trusts selected by the Independent
Trustee in order to match its deferred compensation obligations.
The board of trustees of the Trust currently has three committees: an
Executive Committee, an Audit Committee and a Governance Committee.
The Executive Committee consists of Messrs. Schlosstein and Kapito,
and acts in accordance with the powers permitted to such a committee under the
Agreement and Declaration of Trust and the By-Laws of the Trust. The Executive
Committee, subject to the Trust's Agreement and Declaration of Trust, By-Laws
and applicable law, acts on behalf of the full board of trustees in the
intervals between meetings of the Board.
The Audit Committee consists of Messrs. Messrs. Brimmer, Cavanagh and
Dixon. The Audit Committee acts according to the Audit Committee charter. Dr.
Brimmer has been appointed as Chairman of the Audit Committee. The Audit
Committee is responsible for reviewing and evaluating issues related to the
accounting and financial reporting policies of the Trust, overseeing the
quality and objectivity of the Trust's financial statements and the audit
thereof and to act as a liaison between the board of trustees and the Trust's
independent accountants. The board of trustees of the Trust has determined that
the Trust has two audit committee financial experts serving on its Audit
Committee, Dr. Brimmer and Mr. Dixon, both of whom are independent for the
purpose of the definition of audit committee financial expert as applicable to
the Trust.
The Governance Committee consists of Messrs. Brimmer, Cavanagh, Dixon,
Fabozzi, La Force and Mondale. The Governance Committee acts in accordance with
the Governance Committee charter. Dr. Brimmer has been appointed as Chairman of
the Governance Committee. The Governance Committee consists of the Independent
Trustees and performs those functions enumerated in the Governance Committee
Charter including, but not limited to, making nominations for the appointment
or election of Independent Trustees, reviewing Independent Trustee
compensation, retirement policies and personnel training policies and
administrating the provisions of the code of ethics applicable to the
Independent Trustees.
No Trustee who is not an interested person of the Trust owns
beneficially or of record, any security of BlackRock Advisors or any person
(other than a registered investment company) directly or indirectly
controlling, controlled by or under common control with BlackRock Advisors.
As the Trust is a closed-end investment company with a limited
operating history, no meetings of the above committees have been held in the
current fiscal year, provided that the Governance Committee has acted by
written consent to form the Audit Committee which, in turn, met in connection
with the organization of the Trust.
No Trustee who is not an interested person of the Trust owns
beneficially or of record, any security of BlackRock Advisors or any person
(other than a registered investment company) directly or indirectly
controlling, controlled by or under common control with BlackRock Advisors.
The board of trustees of the Trust has delegated the voting of proxies
for Trust securities to BlackRock pursuant to BlackRock's proxy voting
guidelines. Under these guidelines, BlackRock will vote proxies related to
Trust securities in the best interests of the Trust and its shareholders. A
copy of BlackRock's proxy voting procedures are attached as Appendix E to this
Statement of Additional Information.
Codes of Ethics
The Trust, the Advisor and the Sub-Advisor 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. These codes can be reviewed and
copied at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the Securities and Exchange Commission at
1-202-942-8090. The code of ethics are available on the EDGAR Database on the
Securities and Exchange Commission's web site (http://www.sec.gov), and copies
of these codes may be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
Securities and Exchange Commission's Public Reference Section, 1100 L Street
NW, Washington, D.C. 20549-0102.
Investment Advisor and Sub-Advisor
BlackRock Advisors acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors also
performs various clerical, bookkeeping and other administrative and selected
shareholder services. BlackRock Advisors, located at 100 Bellevue Parkway,
Wilmington, Delaware 19809, and BlackRock Financial Management, located at 40
East 52nd Street, New York, New York 10022, are wholly owned subsidiaries of
BlackRock, Inc., which is one of the largest publicly traded investment
management firms in the United States with approximately $286 billion of assets
under management as of June 30, 2003. BlackRock manages assets on behalf of
institutional and individual investors worldwide through a variety of equity,
debt, liquidity and alternative investment products, including the BlackRock
Funds and BlackRock Provident Institutional Funds. In addition, BlackRock
provides risk management and investment system services to institutional
investors under the BlackRock Solutions name.
The BlackRock organization has over 15 years of experience managing
closed-end products and currently advises a closed-end family of 45 active
funds with over $12 billion in assets as of June 30, 2003. BlackRock currently
has 35 leveraged municipal closed-end funds and six open-end municipal funds
under management as of July 31, 2003. As of July 31, 2003, BlackRock managed
approximately $24 billion in municipal assets firm-wide. Clients are served
from the company's headquarters in New York City, as well as offices in
Wilmington, San Francisco, Boston, Edinburgh, Tokyo and Hong Kong. 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 five 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 bonds 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.
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 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.
OTHER SHARES
The board of trustees (subject to applicable law and the Trust's
Agreement and Declaration of Trust) may authorize an offering, without the
approval of the holders of either common shares or Preferred Shares, of other
classes of shares, or other classes or series of shares, as they determine to
be necessary, desirable or appropriate, having such terms, rights, preferences,
privileges, limitations and restrictions as the board of trustees see fit. The
Trust currently does not expect to issue any other classes of shares, or series
of shares, except for the common shares and the Preferred Shares.
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 investment company may frequently trade at prices lower
than net asset value, the Trust's board of trustees may consider action that
might be taken to reduce or eliminate any material discount from net asset
value in respect of common shares, which may include the repurchase of such
shares in the open market or in private transactions, the making of a tender
offer for such shares, or the conversion of the Trust to an open-end investment
company. The board of trustees may decide not to take any of these actions. In
addition, there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred
Shares are outstanding, the Trust may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accrued Preferred Shares dividends have
been paid and (2) at the time of such purchase, redemption or acquisition, the
net asset value of the Trust's portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). Any
service fees incurred in connection with any tender offer made by the Trust
will be borne by the Trust and will not reduce the stated consideration to be
paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to
finance the repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Trust in anticipation of share repurchases or tenders will reduce the
Trust's net income. Any share repurchase, tender offer or borrowing that might
be approved by the Trust's board of trustees would have to comply with the
Securities Exchange Act of 1934, as amended, the Investment Company Act and the
rules and regulations thereunder.
Although the decision to take action in response to a discount from
net asset value will be made by the board of trustees at the time it considers
such issue, it is the board's present policy, which may be changed by the board
of trustees, not to authorize repurchases of common shares or a tender offer
for such shares if: (1) such transactions, if consummated, would (a) result in
the delisting of the common shares from the New York Stock Exchange, or (b)
impair the Trust's status as a regulated investment company under the Code,
(which would make the Trust a taxable entity, causing the Trust's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Trust) or as a registered closed-end investment
company under the Investment Company Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment 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 common
shares trading at a price equal to their net asset value. Nevertheless, the
fact that the Trust's common shares may be the subject of repurchase or tender
offers from time to time, or that the Trust may be converted to an open-end
investment company, may reduce any spread between market price and net asset
value that might otherwise exist.
In addition, a purchase by the Trust of its common shares will
decrease the Trust's Managed 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 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. The Trust intends to elect to be
treated and to qualify to be taxed as a regulated investment company under
Subchapter M of the Code, and to satisfy conditions which will enable dividends
on common shares or Preferred Shares which are attributable to interest on
tax-exempt municipal securities to be exempt from Federal income tax in the
hands of its shareholders.
In order to qualify to be taxed 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 among other things: (a) derive at least 90%
of its annual gross income (including tax-exempt interest) from dividends,
interest, payments with respect to certain 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"), and (b)
diversify its holdings so that, at the end of each quarter of its taxable year
(i) at least 50% of the market value of its total assets is represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies, and other securities, with these other securities
limited, with respect to any one issuer, to an amount not greater in value than
5% of the Trust's total assets, and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the market
value of the total assets is invested in the securities of any one issuer
(other than U.S. Government securities or 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 generally is not subject
to Federal income tax on income and gains that it distributes each taxable year
to its shareholders, provided that in such taxable year it distributes at least
90% of the sum of its (i) "investment company taxable income" (which includes,
among other items, dividends, taxable interest, taxable original issue discount
and market discount income, income from securities lending, any 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 over certain disallowed deductions). The Trust may retain for
investment its net capital gain (which consists of the excess of its net
long-term capital gain over its net short-term capital loss). However, if the
Trust retains any net capital gain or any investment company taxable income, it
will be subject to tax at regular corporate rates on the amount retained. If
the Trust retains any net capital gain, it may designate the retained amount as
an undistributed capital gain dividend in a notice to its common shareholders
who, if subject to Federal income tax on long-term capital gain, (i) will be
required to include in income their share of such undistributed long-term
capital gain and (ii) will be entitled to credit their proportionate share of
the tax paid by the Trust against their Federal tax liability, if any, and to
claim refunds to the extent the credit exceeds such liability. For Federal
income tax purposes, the tax basis of shares owned by such a shareholder of the
Trust will be increased by the amount of undistributed capital gain included in
the gross income of such shareholder less the tax deemed paid by such
shareholder under clause (ii) of the preceding sentence. The Trust intends to
distribute at least annually to its shareholders all or substantially all of
its net tax exempt interest and any investment company taxable income and net
capital gain.
If in any year the Trust should fail to qualify under Subchapter M for
tax treatment as a regulated investment company, the Trust would incur a
regular Federal corporate income tax upon its taxable income for that year, and
distributions to its shareholders would be taxable to such holders as ordinary
income to the extent of the earnings and profits of the Trust. In addition, a
regulated investment company that fails to distribute, by the close of each
calendar year, at least an amount equal to the sum of (i) 98% of its ordinary
taxable income for such year, (ii) 98% of its capital gain net income (adjusted
for certain ordinary losses) for a one year period generally ending October 31
of such year, and (iii) 100% of all ordinary income and capital gain for
previous years that were not distributed and on which the Trust paid no Federal
income tax, is liable for a nondeductible 4% excise tax on the portion of the
undistributed amount of such income that is less than the required amount for
such distributions. To avoid the imposition of this excise tax, the Trust
intends, to the extent possible, to make the required distributions of its
ordinary taxable income, if any, and its capital gain net income, by the close
of each calendar year.
Certain of the Trust's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Trust and affect the holding period of securities
held by the Trust and the character of the gains or losses realized by the
Trust. These provisions may also require the Trust to recognize income or gain
without receiving cash with which to make distributions in the amounts
necessary to satisfy the requirements for maintaining regulated investment
company status and for avoiding income and excise taxes. The Trust will monitor
its transactions and may make certain tax elections in order to mitigate the
effect of these rules and prevent disqualification of the Trust as a regulated
investment company.
The Trust intends to invest a sufficient amount of its assets in
tax-exempt municipal bonds to permit payment of "exempt-interest" dividends, as
defined in the Code, on its common shares and Preferred Shares. Under the Code,
if at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Trust consists of municipal bonds, the Trust will be
qualified to pay exempt-interest dividends to its shareholders. Exempt-interest
dividends are dividends or any part thereof (other than a capital gain
dividend) paid by the Trust which are attributable to interest on municipal
bonds and are so designated by the Trust. Exempt-interest dividends will be
exempt from regular Federal income tax, subject to the possible application of
the Federal alternative minimum tax.
Distributions by the Trust of investment company taxable income, if
any, will be taxable to its shareholders as ordinary income whether received in
cash or additional shares(to the extent of current and accumulated earnings and
profits of the Trust). Distributions by the Trust of net capital gain, if any,
are taxable as long-term capital gain, regardless of the length of time the
shareholder has owned common shares or Preferred Shares and whether such
distributions are made in cash or additional shares. The amount of taxable
income allocable to the Trust's Preferred Shares will depend upon the amount of
such income realized by the Trust, but is not generally expected to be
significant. Except for dividends paid on Preferred Shares which include an
allocable portion of any net capital gain or other taxable income, the Trust
anticipates that all other dividends paid on its Preferred Shares will
constitute exempt-interest dividends for Federal income tax purposes.
Distributions, if any, in excess of the Trust's earnings and profits will first
reduce the adjusted tax basis of a shareholder's shares, and after the basis
has been reduced to zero, will constitute capital gain to the shareholder
(assuming the shares are held as a capital asset). Due to the Trust's expected
investments, in general, taxable distributions will not be eligible for the
dividends received deduction for corporations or the reduced rate on qualified
dividend income.
Federal tax law imposes an alternative minimum tax with respect to
both corporations and individuals. Interest on certain municipal obligations,
such as bonds issued to make loans for housing purposes or to private entities
(but not to certain tax-exempt organizations such as universities and
non-profit hospitals) ("private activity bonds") is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum
taxable income. The interest on private activity bonds (defined below) in most
instances is not tax-exempt to a person who is a "substantial user" of a
facility financed by such bonds or a "related person" of such "substantial
user." In general, a "substantial user" includes a non-exempt person who
regularly uses a part of such facility in his trade or business. "Related
persons" include certain natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders. The
foregoing is not a complete description of all of the provisions of the Code
covering the definitions of "substantial user" and "related person."
For certain corporations, alternative minimum taxable income is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on municipal obligations, and
therefore all exempt-interest dividends received from the Trust, are included
in calculating a corporation's adjusted current earnings. Certain small
corporations are not subject to the alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the
Trust, is taken into account in calculating the amount of Social Security and
railroad retirement benefits that may be subject to Federal income tax.
The IRS requires that a regulated investment company that has two or
more classes of shares designate to each such class proportionate amounts of
each type of its income for each tax year based upon the percentage of total
dividends distributed to each class for such year. Each year the Trust intends
to allocate, to the fullest extent practicable, net tax-exempt interest, net
capital gain and other taxable income, if any, between its common shares and
preferred shares, including the Preferred Shares, in proportion to the total
dividends paid to each class with respect to such year. The Trust may, at its
election, notify the auction agent of the amount of any net capital gain or
other income taxable for Federal income tax purposes to be included in any
dividend on shares of its Preferred Shares prior to the Auction establishing
the Applicable Rate for such dividend. If the Trust allocates any net capital
gain or other taxable income for Federal income tax purposes to its Preferred
Shares without having given advance notice thereof as described above, the
Trust generally will be required to make payments to owners of its Preferred
Shares to which such allocation was made in order to offset the Federal income
tax effect of the taxable income so allocated as described under "Description
of Preferred Shares--Additional Dividends" in the Prospectus.
If at any time when the Trust's Preferred Shares are outstanding, the
Trust fails to meet the Preferred Shares Basic Maintenance Amount or the
Investment Company Act Preferred Shares Asset Coverage, the Trust will be
required to suspend distributions to holders of its common shares until such
maintenance amount or asset coverage, as the case may be, is restored. See
"Description of Preferred Shares--Dividend and Dividend Periods--Restrictions
on Dividends and Other Distributions" in the Prospectus. This may prevent the
Trust from distributing an amount at least equal to the sum of 90% of its
investment company taxable income (determined without regard to the deduction
for dividends paid) and 90% of its net tax-exempt income, and may therefore
jeopardize the Trust's qualification for taxation as a regulated investment
company or cause the Trust to incur a tax liability or a non-deductible 4%
excise tax on the undistributed taxable income (including net capital gain), or
both. Upon failure to meet the Preferred Shares Basic Maintenance Amount or the
Investment Company Act Preferred Shares Asset Coverage, the Trust will be
required to redeem Preferred Shares in order to maintain or restore such
maintenance amount or asset coverage and avoid the adverse consequences to the
Trust and its shareholders of failing to qualify as a regulated investment
company. There can be no assurance, however, that any such redemption would
achieve such objectives.
The Trust may, at its option, redeem Preferred Shares in whole or in
part, and is required to redeem Preferred Shares to the extent required to
maintain the Preferred Shares Basic Maintenance Amount and the Investment
Company Act Preferred Shares Asset Coverage. Gain or loss, if any, resulting
from a redemption of Preferred Shares will be taxed as gain or loss from the
sale or exchange of Preferred Shares under Section 302 of the Code rather than
as a dividend, but only if the redemption distribution (a) is deemed not to be
essentially equivalent to a dividend, (b) is in complete redemption of a
shareholder's interest in the Trust, (c) is substantially disproportionate with
respect to the shareholder, or (d) with respect to a non-corporate shareholder,
is in partial liquidation of the shareholder's interest in the Trust. For
purposes of (a), (b) and (c) above, the common shares owned by a holder of
Preferred Shares will be taken into account.
The Code provides that interest on indebtedness incurred or continued
to purchase or carry the Trust's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to
have been made with borrowed funds even though such funds are not directly used
for the purchase or ownership of such shares.
Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S. withholding
tax at the rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on distributions of investment company taxable income (determined
without regard to the deduction for dividends paid). To the extent received or
deemed received by foreign investors, exempt-interest dividends, distributions
of net capital gain and gain from the sale or other disposition of Preferred
Shares generally are exempt from Federal income taxation. Different tax
consequences may result if the shareholder is engaged in a trade or business in
the United States or, in the case of an individual, is present in the United
States for 183 or more days during a taxable year and certain other conditions
are met.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January will be treated as having been distributed by the Trust (and received
by the shareholders) on December 31 of the year declared.
The sale or other disposition of common shares or Preferred Shares of
the Trust will result in capital gain or loss to shareholders who hold their
shares as capital assets. Generally, a shareholder's gain or loss will be
long-term gain or loss if the shares have been held for more than one year.
Present law taxes both long-term and short-term capital gain of corporations at
the rates applicable to ordinary income. For non-corporate taxpayers, however,
short-term capital gain and ordinary income will currently be taxed at a
maximum rate of 38.6% while long-term capital gain generally will be taxed at a
maximum rate of 15% Because of the limitations on itemized deductions and the
deduction for personal exemptions applicable to higher income taxpayers, the
effective rate of tax may be higher in certain circumstances.
Losses realized by a shareholder on the sale or exchange of shares of
the Trust held for six months or less are disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such shares,
and, if not disallowed, such losses are treated as long-term capital losses to
the extent of any distribution of net capital gain received (or amounts
credited as undistributed capital gain) with respect to such shares. 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 substantially identical
shares within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Trust will be adjusted to reflect the
disallowed loss.
The Trust is required in certain circumstances to backup withholding
on taxable dividends and certain other payments paid to non-corporate holders
of the Trust's shares who do not furnish the Trust with their correct taxpayer
identification number (in the case of individuals, their Social Security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against such
shareholder's Federal income tax liability, if any, provided that the required
information is furnished to the IRS. The foregoing is a general summary of the
provisions of the Code and the Treasury Regulations in effect as they directly
govern the taxation of the Trust and its shareholders. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive. Shareholders are advised to consult their own tax advisors
for more detailed information concerning the Federal, state, local, foreign and
other income tax consequences to them of purchasing, holding and disposing of
Trust shares.
EXPERTS
The Statement of Net Assets of the Trust as of , 2003 and statement of
operations for the period then ended appearing in this Statement of Additional
Information has been audited by , independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing. , located at , provides 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
SEC, 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 on the EDGAR Database of the SEC's web site or, at the
SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees
prescribed by the SEC.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder of BlackRock Municipal 2020 Term Trust
We have audited the accompanying statement of assets and liabilities
of BlackRock Municipal 2020 Term Trust (the "Trust") as of , 2003 and the
related statements of operations and changes in net assets for the period from
, 2002 (date of inception) to , 2003. 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 present fairly, in all
material respects, the financial position of the Trust at , 2003 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.
FINANCIAL STATEMENTS
[TO COME]
APPENDIX A
STATEMENT OF PREFERENCES OF MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
[TO COME]
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to
earn on a taxable investment in order to equal a stated tax-free yield on a
municipal investment. To assist you to more easily compare municipal
investments like the Trust with taxable alternative investments, the table
below presents the taxable equivalent yields for a range of hypothetical
tax-free yields assuming the stated marginal Federal tax rates for 2003 listed
below:
2003-2004 FEDERAL TAXABLE VS. TAX-FREE YIELDS
SINGLE JOINT FEDERAL
RETURN RETURN TAX RATE
$0 - 7,000 $0 - 14,000 10.00%
$7,001 - 28,400 $14,001 - 56,800 15.00%
$28,401 - 68,800 $56,801 - 114,650 25.00%
$68,801 - 143,500 $114,651 - 174,700 28.00%
$143,501 - 311,950 $174,701 - 311,950 33.00%
Over $311,950 Over $311,950 35.00%
TAXABLE EQUIVALENT ESTIMATE CURRENT RETURN
SINGLE RETURN JOINT RETURN 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
------------- ------------ ----- ----- ----- ----- ----- ----- -----
$0 - 7,000 $0 - 14,000 4.44% 5.00% 5.56% 6.11% 6.67% 7.22% 7.78%
$7,001 - 28,400 $14,001 - 56,800 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
$28,401 - 68,800 $56,801 - 114,650 5.33% 6.00% 6.67% 7.33% 8.00% 8.67% 9.33%
$68,801 - 143,500 $114,651 - 174,700 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
$143,501 - 311,950 $174,701 - 311,950 5.97% 6.72% 7.46% 8.21% 8.96% 9.70% 10.45%
Over $311,950 Over $311,950 6.15% 6.92% 7.69% 8.46% 9.23% 10.00% 10.77%
APPENDIX C
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default capacity and willingness of the obligor
as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics these are outweighed by major uncertainties or major
exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and
repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B"
rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest
is being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of
a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the underlying
deposit collateral is Federally insured by the Federal Savings &
Loan Insurance Corporation or the Federal Deposit Insurance
Corporation* and interest is adequately collateralized. In the
case of certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same
right and capacity will be honored for principal and accrued
pre-default interest up to the Federal insurance limits within 30
days after closing of the insured institution or, in the event
that the deposit is assumed by a successor insured institution,
upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
"Amortization schedule" (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
"Source of payment" (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished
to S&P by the issuer or obtained by S&P from other sources it considers
reliable. S&P does not perform an audit in connection with any rating and may,
on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is as signed to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal Payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in or unavailability
of such information or based on other circumstances.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Con(...) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating category from Aa to B in the public finance sectors. The
modifier 1 indicates that the issuer is in the higher end of its
letter rating category; the modifier 2 indicates a mid-range
ranking; the modifier 3 indicates that the issuer is in the lower
end of the letter ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broad based
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc .-- A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exception ally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable
business and economic environment.
CCC High default risk. Default is a real possibility. Capacity for
meeting financial
CC commitments is solely reliant upon sustained, favorable business
or economic
C developments. A "CC" rating indicates that default of some kind
appears probable. "C" ratings signal
imminent default.
DDD Default. The ratings of obligations in this category are based on
their prospects.
DD for achieving partial or full recovery in a reorganization or
liquidation of the obligor.
D 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 D
GENERAL CHARACTERISTICS AND RISKS
OF STRATEGIC TRANSACTIONS
In order to manage the risk of its securities portfolio, or to enhance
income or gain as described in the Prospectus, the Trust will engage in
Strategic Transactions. 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
Strategic Transactions 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 U.S. 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, an account of cash equivalents
designated on the books and records 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 earmarking 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 designate on its books and records an ongoing basis,
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 earmarking 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.
Strategic Transactions 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 Strategic
Transactions 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 Strategic Transactions will reduce net asset
value.
APPENDIX E
PROXY VOTING POLICY
For
BlackRock Advisors, Inc.
and Its Affiliated Registered Investment Advisers
Introduction
This Proxy Voting Policy ("Policy") for BlackRock Advisors, Inc. and
its affiliated registered investment advisers ("BlackRock") reflects our duty
as a fiduciary under the Investment Advisers Act of 1940 (the "Advisers Act")
to vote proxies in the best interests of our clients. In addition, the
Department of Labor views the fiduciary act of managing ERISA plan assets to
include the voting of proxies. Proxy voting decisions must be made solely in
the best interests of the pension plan's participants and beneficiaries. The
Department of Labor has interpreted this requirement as prohibiting a fiduciary
from subordinating the retirement income interests of participants and
beneficiaries to unrelated objectives. The guidelines in this Policy have been
formulated to ensure decision-making consistent with these fiduciary
responsibilities.
Any general or specific proxy voting guidelines provided by an
advisory client or its designated agent in writing will supercede the specific
guidelines in this Policy. BlackRock will disclose to our advisory clients
information about this Policy as well as disclose to our clients how they may
obtain information on how we voted their proxies. Additionally, BlackRock will
maintain proxy voting records for our advisory clients consistent with the
Advisers Act. For those of our clients that are registered investment
companies, BlackRock will disclose this Policy to the shareholders of such
funds and make filings with the Securities and Exchange Commission and make
available to fund shareholders the specific proxy votes that we cast in
shareholder meetings of issuers of portfolio securities in accordance with the
rules and regulations under the Investment Company Act of 1940.
Registered investment companies that are advised by BlackRock as well
as certain of our advisory clients may participate in securities lending
programs, which may reduce or eliminate the amount of shares eligible for
voting by BlackRock in accordance with this Policy if such shares are out on
loan and cannot be recalled in time for the vote.
Implicit in the initial decision to retain or invest in the security
of a corporation is approval of its existing corporate ownership structure, its
management, and its operations. Accordingly, proxy proposals that would change
the existing status of a corporation will be reviewed carefully and supported
only when it seems clear that the proposed changes are likely to benefit the
corporation and its shareholders. Notwithstanding this favorable
predisposition, management will be assessed on an ongoing basis both in terms
of its business capability and its dedication to the shareholders to ensure
that our continued confidence remains warranted. If it is determined that
management is acting on its own behalf instead of for the well being of the
corporation, we will vote to support shareholder proposals, unless other
mitigating circumstances are present.
Additionally, situations may arise that involve an actual or perceived
conflict of interest. For example, we may manage assets of a pension plan of a
company whose management is soliciting proxies, or a BlackRock employee
involved with managing an account may have a close relative who serves as a
director or executive of a company that is soliciting proxies regarding
securities held in such account. In all cases, the manner in which we vote
proxies must be based on our clients' best interests and not the product of a
conflict.
This Policy and its attendant recommendations attempt to generalize a
complex subject. It should be clearly understood that specific fact situations,
including differing voting practices in jurisdictions outside the United
States, might warrant departure from these guidelines. In such instances, the
relevant facts will be considered, and if a vote contrary to these guidelines
is indicated it will be cast and the reasons therefor recorded in writing.
Section I of the Policy describes proxy proposals that may be
characterized as routine and lists examples of the types of proposals we would
typically support. Section II of the Policy describes various types of
non-routine proposals and provides general voting guidelines. These non-routine
proposals are categorized as those involving:
A. Social Issues,
B. Financial/Corporate Issues, and
C. Shareholder Rights.
Finally, Section III of the Policy describes the procedures to be followed in
casting a vote pursuant to these guidelines.
SECTION I
ROUTINE MATTERS
Routine proxy proposals, amendments, or resolutions are
typically proposed by management and meet the following criteria:
1. They do not measurably change the structure, management
control, or operation of the corporation.
2. They are consistent with industry standards as well as the
corporate laws of the state of incorporation.
Voting Recommendation
BlackRock will normally support the following routine proposals:
1. To increase authorized common shares.
2. To increase authorized preferred shares as long as there are
not disproportionate voting rights per preferred share.
3. To elect or re elect directors.
4. To appoint or elect auditors.
5. To approve indemnification of directors and limitation of
directors' liability.
6. To establish compensation levels.
7. To establish employee stock purchase or ownership plans.
8. To set time and location of annual meeting.
SECTION II
NON-ROUTINE PROPOSALS
A. Social Issues
Proposals in this category involve issues of social conscience. They
are typically proposed by shareholders who believe that the corporation's
internally adopted policies are ill advised or misguided.
Voting Recommendation
If we have determined that management is generally socially
responsible, we will generally vote against the following shareholder
proposals:
1. To enforce restrictive energy policies.
2. To place arbitrary restrictions on military contracting.
3. To bar or place arbitrary restrictions on trade with other countries.
4. To restrict the marketing of controversial products.
5. To limit corporate political activities.
6. To bar or restrict charitable contributions.
7. To enforce a general policy regarding human rights based on arbitrary
parameters.
8. To enforce a general policy regarding employment practices based on
arbitrary parameters.
9. To enforce a general policy regarding animal rights based on arbitrary
parameters.
10. To place arbitrary restrictions on environmental practices.
B. Financial/Corporate Issues
Proposals in this category are usually offered by management and seek
to change a corporation's legal, business or financial structure.
Voting Recommendation
We will generally vote in favor of the following management proposals
provided the position of current shareholders is preserved or enhanced:
1. To change the state of incorporation.
2. To approve mergers, acquisitions or dissolution.
3. To institute indenture changes.
4. To change capitalization.
C. Shareholder Rights
Proposals in this category are made regularly both by management and
shareholders. They can be generalized as involving issues that transfer or
realign board or shareholder voting power.
We typically would oppose any proposal aimed solely at thwarting
potential takeover offers by requiring, for example, super majority approval.
At the same time, we believe stability and continuity promote profitability.
The guidelines in this area seek to find a middle road, and they are no more
than guidelines. Individual proposals may have to be carefully assessed in the
context of their particular circumstances.
Voting Recommendation
We will generally vote for the following management proposals:
1. To require majority approval of shareholders in acquisitions
of a controlling share in the corporation.
2. To institute staggered board of directors.
3. To require shareholder approval of not more than 66 2'3% for
a proposed amendment to the corporation's by laws.
4. To eliminate cumulative voting.
5. To adopt anti greenmail charter or by law amendments or to
otherwise restrict a company's ability to make greenmail
payments.
6. To create a dividend reinvestment program.
7. To eliminate preemptive rights.
8. To eliminate any other plan or procedure designed primarily
to discourage a takeover or other similar action (commonly
known as a "poison pill").
We will generally vote against the following management proposals:
1. To require greater than 66 2'3% shareholder approval for a
proposed amendment to the corporation's by laws ("super
majority provisions").
2. To require that an arbitrary fair price be offered to all
shareholders that is derived from a fixed formula ("fair
price amendments").
3. To authorize a new class of common stock or preferred stock
which may have more votes per share than the existing common
stock.
4. To prohibit replacement of existing members of the board of
directors.
5. To eliminate shareholder action by written consent without a
shareholder meeting.
6. To allow only the board of directors to call a shareholder
meeting or to propose amendments to the articles of
incorporation.
7. To implement any other action or procedure designed primarily
to discourage a takeover or other similar action (commonly
known as a "poison pill").
8. To limit the ability of shareholders to nominate directors.
We will generally vote for the following shareholder proposals:
1. To rescind share purchases rights or require that they be
submitted for shareholder approval, but only if the vote
required for approval is not more than 66 2'3%.
2. To opt out of state anti takeover laws deemed to be
detrimental to the shareholder.
3. To change the state of incorporation for companies operating
under the umbrella of anti shareholder state corporation laws
if another state is chosen with favorable laws in this and
other areas.
4. To eliminate any other plan or procedure designed primarily
to discourage a takeover or other similar action.
5. To permit shareholders to participate in formulating
management's proxy and the opportunity to discuss and
evaluate management's director nominees, and/or to nominate
shareholder nominees to the board.
6. To require that the board's audit, compensation, and/or
nominating committees be comprised exclusively of independent
directors.
7. To adopt anti greenmail charter or by law amendments or
otherwise restrict a company's ability to make greenmail
payments.
8. To create a dividend reinvestment program.
9. To recommend that votes to "abstain" not be considered votes
"cast" at an annual meeting or special meeting, unless
required by state law.
10. To require that "golden parachutes" be submitted for
shareholder ratification.
We will generally vote against the following shareholder proposals:
1. To restore preemptive rights.
2. To restore cumulative voting.
3. To require annual election of directors or to specify tenure.
4. To eliminate a staggered board of directors.
5. To require confidential voting.
6. To require directors to own a minimum amount of company stock
in order to qualify as a director or to remain on the board.
7. To dock director pay for failing to attend board meetings.
SECTION III
VOTING PROCESS
BlackRock has engaged a third-party service provider to assist us in
the voting of proxies. These guidelines have been provided to this service
provider, who then analyzes all proxy solicitations we receive for our clients
and makes recommendations to us as to how, based upon our guidelines, the
relevant votes should be cast. These recommendations are set out in a report
that is provided to the relevant Portfolio Management Group team, who must
approve the proxy vote in writing and return such written approval to the
Operations Group. If any authorized member of a Portfolio Management Group team
desires to vote in a manner that differs from the recommendations, the reason
for such differing vote shall be noted in the written approval form. A copy of
the written approval form is attached as an exhibit. The head of each relevant
Portfolio Management Group team is responsible for making sure that proxies are
voted in a timely manner. The Brokerage Allocation Committee shall receive
regular reports of all p IF THERE IS ANY POSSIBILITY THAT THE VOTE MAY INVOLVE
A MATERIAL CONFLICT OF INTEREST BECAUSE, FOR EXAMPLE, THE ISSUER SOLICITING THE
VOTE IS A BLACKROCK CLIENT OR THE MATTER BEING VOTED ON INVOLVES BLACKROCK, PNC
OR ANY AFFILIATE (INCLUDING A PORTFOLIO MANAGEMENT GROUP EMPLOYEE) OF EITHER OF
THEM, PRIOR TO APPROVING SUCH VOTE, THE BROKERAGE ALLOCATION COMMITTEE MUST BE
CONSULTED AND THE MATTER DISCUSSED. The Committee, in consultation with the
Legal and Compliance Department, shall determine whether the potential conflict
is material and if so, the appropriate method to resolve such conflict, based
on the particular facts and circumstances, the importance of the proxy issue,
whether the Portfolio Management Group team is proposing a vote that differs
from recommendations made by our third-party service provider with respect to
the issue and the nature of the conflict, so as to ensure that the voting of
the proxy is not affected by the potential conflict. If the conflict is
determined not to be material With respect to votes in connection with
securities held on a particular record date but sold from a client account
prior to the holding of the related meeting, BlackRock may take no action on
proposals to be voted on in such meeting. With respect to voting proxies of
non-U.S. companies, a number of logistical problems may arise that may have a
detrimental effect on BlackRock's ability to vote such proxies in the best
interests of our clients. These problems include, but are not limited to, (i)
untimely and/or inadequate notice of shareholder meetings, (ii) restrictions on
the ability of holders outside the issuer's jurisdiction of organization to
exercise votes, (iii) requirements to vote proxies in person, if not
practicable, (iv) the imposition of restrictions on the sale of the securities
for a period of time in proximity to the shareholder meeting, and (v)
impracticable or inappropriate requirements to provide local agents with power
of attorney to facilitate the voting instructions. Accordingly, BlackRock may
determine not to vote proxies if it believes that the restrictions or other
detriments associated with such vote outweigh the benefits that will be derived
by voting on the company's proposal.
* * * * *
Any questions regarding this Policy may be directed to the General
Counsel of BlackRock.
Approved: October 21, 1998
Revised: May 27, 2003
Part C-2
PART C
Other Information
Item 24. Financial Statements And Exhibits
(1) Financial Statements
Part A -- Financial Highlights (Unaudited).
Part B -- Report of Independent Accountants
Statement of Assets and Liabilities
Statement of Operations
Financial Statements (Unaudited)
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.(1)
(b) Amended and Restated By-Laws.(1)
(c) Inapplicable.
(d)(1) Statement of Preferences of Municipal Auction Rate
Cumulative Preferred Shares(3)
(d)(2) Form of Specimen Certificate(2)
(e) Dividend Reinvestment Plan.(2)
(f) Inapplicable.
(g)(1) Investment Management Agreement.(2)
(g)(2) Sub-Investment Advisory Agreement.(2)
(h) Form of Underwriting Agreement.(4)
(i) Form of Deferred Compensation Plan for Independent Trustees.(2)
(j) Custodian Agreement(3)
(k)(1) Transfer Agency Agreement(3)
(k)(2) Auction Agency Agreement(4)
(k)(3) Broker-Dealer Agreement(4)
(k)(4) Form of DTC Agreement(4)
(l) Opinion and Consent of Counsel to the Trust.(4)
(m) Inapplicable.
(n) Consent of Independent Public Accountants.(4)
(o) Inapplicable.
(p) Initial Subscription Agreement.(2)
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.(2)
(r)(2) Code of Ethics of Advisor and Sub-Advisor.(2)
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons, Inc.(2)
(r)(4) Code of Ethics of PNC Capital Markets, Inc.(3)
(s) Powers of Attorney.(1)
-----------
(1) Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the
Trust's Registration Statement relating to the common shares filed
with the Securities and Exchange Commission on August 22, 2003.
(2) Previously filed as an exhibit to Pre-Effective Amendment No. 3 to the
Trust's Registration Statement relating to the common shares filed
with the Securities and Exchange Commission on September 24, 2003.
(3) Previously filed as an exhibit to Pre-Effective Amendment No. 4 to the
Trust's Registration Statement relating to the common shares filed
with the Securities and Exchange Commission on September 25, 2003.
(4) To be filed by amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the
Registrant's shares of beneficial interest to be filed by amendment to this
registration statement.
Item 26. Other Expenses Of Issuance And Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this registration statement:
Registration fee................................................................
NYSE listing fee................................................................
Printing (other than certificates)..............................................
Engraving and printing certificates.............................................
Accounting fees and expenses....................................................
Legal fees and expenses.........................................................
NASD fee........................................................................
Miscellaneous...................................................................
Total...........................................................................
Item 27. Persons Controlled By Or Under Common Control With The Registrant
None.
Item 28. Number Of Holders Of Shares
As of September 25, 2003
Number of
Title Of Class Record Holders
Shares of Beneficial Interest................................ 1
Preferred Shares............................................. 0
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust
provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder of the Trust shall be subject in such capacity to any
personal liability whatsoever to any Person in connection with Trust
Property or the acts, obligations or affairs of the Trust.
Shareholders shall have the same limitation of personal liability as
is extended to stockholders of a private corporation for profit
incorporated under the Delaware General Corporation Law. No Trustee or
officer of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person, 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. (1) 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.
1. 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 Investment Company Act) nor parties to the
proceeding ("Disinterested Non-Party Trustees"), that the
indemnitee is entitled to indemnification hereunder, or (2)
if such quorum is not obtainable or even if obtainable, if
such majority so directs, independent legal counsel in a
written opinion 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.
2. 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.
3. 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 Investment Company Act) or
any other right to which he or she may be lawfully entitled.
4. Subject to any limitations provided by the
Investment Company 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
Investment Company 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 Article of the
underwriting agreement attached as Exhibit (h), which is incorporated
herein by reference.
Item 30. Business And Other Connections Of Investment Advisor
Not Applicable
Item 31. Location Of Accounts And Records
The Registrant's accounts, books and other documents are currently
located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100
Bellevue Parkway, Wilmington, Delaware 19809 and at the offices of State
Street Bank and Trust Company, the Registrant's Custodian, and EquiServe Trust
Company, N.A., the Registrant's Transfer Agent.
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 30th
day of September 2003.
/s/ Robert S. Kapito
----------------------------
Robert S. Kapito
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on the 30th day of September 2003.
NAME TITLE
/s/ Robert S. Kapito
-------------------
Robert S. Kapito Trustee, President and Chief
Executive Officer
/s/ Henry Gabbay
-------------------
Henry Gabbay Treasurer and Principal Financial
Officer
*
-------------------
Andrew F. Brimmer Trustee
*
-------------------
Richard E. Cavanagh Trustee
*
-------------------
Kent Dixon Trustee
*
-------------------
Frank J. Fabozzi Trustee
*
-------------------
James Clayburn La Force, Jr. Trustee
*
-------------------
Walter F. Mondale Trustee
*
-------------------
Ralph L. Schlosstein Trustee
/s/ Robert S. Kapito
-------------------------
*By: Robert S. Kapito
Attorney-in-fact
INDEX TO EXHIBITS
None