As filed with the Securities and Exchange Commission on September 27, 2001
Securities Act Registration No. 333-67994
Investment Company Registration No. 811-10331
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 6 [X]
----------------
BlackRock California Municipal Income Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock California Municipal Income Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
----------------
Copies to:
Michael K. Hoffman, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Simpson Thacher & Bartlett
Four Times Square 425 Lexington Avenue
New York, New York 10036 New York, New York 10017
----------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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--------------------------------------------------------------------------------
Amount Proposed Proposed
Title of Securities Being Maximum Offering Maximum Aggregate Amount of
Being Registered Registered Price per Unit Offering Price(1) Registration Fee(2)
------------------------------------------------------------------------------------------
Preferred Shares, $.001
par value............. 5,278 $25,000 131,950,000 $32,988
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $250 previously paid
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section
8(a), may determine.
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BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
CROSS REFERENCE SHEET
Part A--Prospectus
Items in Part A of Form
N-2 Location in Prospectus
----------------------- ----------------------
Item 1. Outside Front Cover..... Cover page
Item 2. Inside Front and Outside
Back Cover Page........ Cover page
Item 3. Fee Table and Synopsis.. Prospectus Summary
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 Trust; The Trust's Investments; Risks;
the Registrant......... Description of Preferred Shares; Certain
Provisions in the Agreement and
Declaration of Trust
Item 9. Management.............. Management of the Trust; Custodian and
Transfer Agent; Auction Agent
Item 10. Capital Stock, Long-Term
Debt, and Other Description of Preferred Shares;
Securities............. 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....... Legal Opinions
Item 13. Table of Contents of the
Statement of Additional Table of Contents for the Statement of
Information............ 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 Investment Objective and Policies;
Policies............... Investment Policies and Techniques; other
Investment Policies and Techniques;
Portfolio Transactions
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
Items in Part A of Form
N-2 Location in Prospectus
----------------------- ----------------------
Item 21. Brokerage Allocation and
Other Practices......... Portfolio Transactions and Brokerage
Item 22. Tax Status............... Tax Matters
Item 23. Financial Statements..... Report of Independent Auditors; Financial
Highlights (unaudited)
Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement
2
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2001
PROSPECTUS
[LOGO] BLACKROCK
$131,950,000
BlackRock California Municipal Income Trust
Municipal Auction Rate Cumulative Preferred Shares
("Preferred Shares")
2,639 Shares, Series T7
2,639 Shares, Series R7
Liquidation Preference $25,000 per share
-----------
Investment Objective. BlackRock California Municipal Income Trust (the
"Trust") is a recently organized, non-diversified, closed-end management
investment company. The Trust's investment objective is to provide current
income exempt from regular Federal income tax and California income taxes.
Portfolio Contents. The Trust will invest primarily in municipal bonds that
pay interest that is exempt from regular Federal income tax and California
income taxes. The Trust will invest in municipal bonds that, in the opinion of
the Trust's investment advisor and sub-advisor, are underrated or undervalued.
Under normal market conditions, the Trust expects to be fully invested in these
tax-exempt municipal bonds. The Trust will invest at least 80% of its total
assets in municipal bonds that at the time of investment are investment grade
quality. Investment grade quality bonds are bonds rated within the four highest
grades (Baa or BBB or better by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poors Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds
that are unrated but judged to be of comparable quality by the Trust's
investment advisor and sub-advisor. The Trust may invest up to 20% of its total
assets in municipal bonds that at the time of investment are rated Ba/BB or B
by Moody's, S&P or Fitch or bonds that are unrated but judged to be of
comparable quality by the Trust's investment advisor and sub-advisor. Bonds of
below investment grade quality are regarded as having predominately speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal, and are commonly referred to as "junk bonds." The Trust intends to
invest primarily in long-term bonds and expects bonds in its portfolio to have
a dollar weighted average maturity of 15 years or more under current market
conditions. The Trust cannot ensure that it will achieve its investment
objective.
-----------
Investing in the Preferred Shares involves certain risks. See "Risks"
beginning on page 16. 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 these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
-----------
Per Share Total
--------- -----
Public Offering Price........................ $25,000 $131,950,000
Sales Load................................... $ $
Proceeds to Fund (before expenses)(1)........ $ $
-----
(1) Not including offering expenses payable by the Trust estimated to be
$162,165. 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
under the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended.
The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to
purchasers, in book-entry form, through the facilities of The Depository Trust
Company on or about , 2001.
-----------
Salomon Smith Barney Merrill Lynch & Co.
A.G. Edwards & Sons, Inc. Prudential Securities
UBS Warburg
Gruntal & Co., L.L.C. J.J.B. Hilliard, W.L. Lyons, Inc.
A PNC Company
, 2001
You should read the prospectus, which contains important information about
the Trust, before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated September , 2001,
containing additional information about the Trust, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page of this
prospectus, by calling (888) 825-2257 or by writing to the Trust, or obtain a
copy (and other information regarding the Trust) from the Securities and
Exchange Commission web site (http://www.sec.gov).
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The Trust is offering 2,639 shares of Series T7 Municipal Auction Rate
Cumulative Preferred Shares and 2,639 shares of Series R7 Municipal Auction
Rate Cumulative Preferred Shares. The shares are referred to in this prospectus
as "Preferred Shares." The Preferred Shares have a liquidation preference of
$25,000 per share, plus any accumulated, unpaid dividends. The Preferred Shares
also have priority over the Trust's common shares as to distribution of assets
as described in this prospectus. It is a condition of closing this offering
that the Preferred Shares be offered with a rating of "aaa" from Moody's and
"AAA" from S&P.
The dividend rate for the initial dividend rate period will be % for Series
T7 and % for Series R7. The initial rate period is from the date of issuance
through October 16, 2001 for Series T7 and October 18, 2001 for Series R7. For
subsequent rate periods, Preferred Shares pay dividends based on a rate set at
auction, usually held weekly. Prospective purchasers should carefully review
the auction procedures described in this prospectus and should note: (1) a buy
order (called a "bid order") or sell order is a commitment to buy or sell
Preferred Shares based on the results of an auction; (2) auctions will be
conducted by telephone; and (3) purchases and sales will be settled on the next
business day after the auction.
The Preferred Shares are redeemable, in whole or in part, at the option of
the Trust on any date dividends are paid on the Preferred Shares, and will be
subject to mandatory redemption in certain circumstances at a redemption price
of $25,000 per share, plus accumulated but unpaid dividends to date of the
redemption, plus a premium in certain circumstances.
Preferred Shares are not listed on an exchange. You may only buy or sell
Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the auction agent and the
Trust or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.
Dividends on Preferred Shares, to the extent payable from tax-exempt income
earned on the Trust's investments, will be exempt from regular Federal income
tax in the hands of owners of such shares. All or a portion of the Trust's
dividends may be subject to the Federal alternative minimum tax. The Trust is
required to allocate net capital gains and other taxable income, if any,
proportionately between common and preferred shares, including the Preferred
Shares, based on the percentage of total dividends distributed to each class
for that year. The Trust may at its election give notice of the amount of any
income subject to Federal income tax to be included in a dividend on a
Preferred Share in advance of the related auction. If the Trust does not give
such advance notice, it generally 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.
2
You should rely only on the information contained or incorporated by
reference in this prospectus. The Trust has not authorized anyone to provide
you with different information. The Trust is not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information provided by this prospectus is accurate as of any date
other than the date on the front of this prospectus.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 4
Financial Highlights (Unaudited)........................................... 9
The Trust.................................................................. 10
Use of Proceeds............................................................ 10
Capitalization (Unaudited)................................................. 11
Portfolio Composition...................................................... 11
The Trust's Investments.................................................... 12
Risks...................................................................... 16
Management of the Trust.................................................... 19
Description of Preferred Shares............................................ 22
The Auction................................................................ 29
Description of Common Shares............................................... 33
Certain Provisions in the Agreement and Declaration of Trust............... 34
Repurchase of Common Shares................................................ 35
Tax Matters................................................................ 35
Underwriting............................................................... 38
Custodian and Transfer Agent; Auction Agent................................ 39
Legal Opinions............................................................. 39
Available Information...................................................... 39
Table of Contents for the Statement of Additional Information.............. 40
APPENDIX A--TAX EQUIVALENT YIELD TABLE..................................... A-1
----------------
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following information
is provided to help you understand what personal information the Trust
collects, how the Trust protects that information and why, in certain cases,
the Trust may share information with select other parties.
Generally, the Trust does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Trust. The Trust does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third
party administrator).
The Trust restricts access to non-public personal information about its
shareholders to employees of the Trust's investment advisor and its affiliates
with a legitimate business need for the information. The Trust maintains
physical, electronic and procedural safeguards designed to protect the non-
public personal information of its shareholders.
3
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in our Preferred Shares. You should
read the more detailed information contained in this prospectus, the Statement
of Additional Information and the Fund'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 California Municipal Income Trust
is a recently organized, diversified, closed-
end, management investment company.
Throughout the prospectus, we refer to
BlackRock California Municipal Income Trust
simply as the "Trust" or as "we," "us" or
"our." The Trust is designed to provide tax
benefits to investors who are residents of
California. See "The Trust." The Trust's
common shares are traded on the New York
Stock Exchange under the symbol "BFZ". See
"Description of Common Shares." As of
September 21, 2001, the Trust had 14,958,028
common shares outstanding and net assets of
$215,281,395.
Investment Objective........ The Trust's investment objective is to
provide current income exempt from regular
Federal income tax and California income
taxes.
Investment Policies......... The Trust will invest primarily in municipal
bonds that pay interest that is exempt from
regular Federal income tax and California
income taxes. The Trust will invest in
municipal bonds that, in the opinion of
BlackRock Advisors, Inc. ("BlackRock
Advisors" or the "Advisor") and BlackRock
Financial Management, Inc. ("BlackRock
Financial Management" or the "Sub-Advisor")
are underrated or undervalued. Underrated
municipal bonds are those whose ratings do
not, in the Advisor's or Sub-Advisor's
opinion, reflect their true creditworthiness.
Undervalued municipal bonds are bonds that,
in the Advisor's or Sub-Advisor's opinion,
are worth more than the value assigned to
them in the marketplace. Under normal market
conditions, the Trust expects to be fully
invested in these tax-exempt municipal bonds.
The Trust will invest at least 80% of its
total assets in municipal bonds that at the
time of investment are investment grade
quality. Investment grade quality bonds are
bonds rated within the four highest grades
(Baa or BBB or better by Moody's, S&P or
Fitch) or bonds that are unrated but judged
to be of comparable quality by the Advisor
and the Sub-Advisor. The Trust may invest up
to 20% of its total assets in municipal bonds
that at the time of investment are rated
Ba/BB or B by Moody's, S&P or Fitch or bonds
that are unrated but judged to be of
comparable quality by the Advisor and the
Sub-Advisor. Bonds of below investment grade
quality are regarded as having predominately
speculative characteristics with respect to
the issuer's capacity to pay interest and
repay principal, and are commonly referred to
as "junk bonds." The Trust intends to invest
4
primarily in long-term bonds and expects
bonds in its portfolio to have a dollar
weighted average maturity of 15 years or more
under current market conditions. The Trust
cannot ensure that it will achieve its
investment objective. See "The Trust's
Investments."
Investment Advisor.......... BlackRock Advisors will be the Trust's
investment advisor and BlackRock Advisors'
affiliate, BlackRock Financial Management,
will provide certain day-to-day investment
management services to the Trust. Throughout
the prospectus, we sometimes refer to
BlackRock Advisors and BlackRock Financial
Management collectively as "BlackRock."
The Offering................ The Trust is offering 2,639 shares of Series
T7 Preferred Shares and 2,639 shares of
Series R7 Preferred Shares, each at a
purchase price of $25,000 per share.
Preferred Shares are being offered by the
underwriters listed under "Underwriting."
Risk Factors Summary........ Risk is inherent in all investing. Therefore,
before investing in the Preferred Shares you
should consider certain risks carefully. The
primary risks of investing in the Preferred
Shares are:
. if an auction fails you may not be able to
sell some or all of your shares;
. 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;
. a rating agency could downgrade the rating
assigned to the Preferred Shares, which
could affect liquidity;
. 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;
. in extraordinary circumstances, the Trust
may not earn sufficient income from its
investments to pay dividends;
. if interest rates rise, the value of the
Trust's investment portfolio will decline,
reducing the asset coverage for the
Preferred Shares;
. 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;
. the Trust may invest up to 20% of its
total assets in securities that are below
investment grade quality which are
regarded as having predominately
speculative characteristics with respect
to the issuer's capacity to pay interest
and principal;
5
. the Trust is a non-diversified management
investment company and therefore may be
more susceptible to any single economic,
political or regulatory occurrence; and
. the Trust's policy of investing primarily
in municipal obligations of issuers
located in California makes the Trust more
susceptible to adverse economic, political
or regulatory occurrences affecting those
issuers. Through popular initiative and
legislative activity, the ability of the
State of California and its local
governments to raise money through
property taxes and to increase spending
has been the subject of considerable
debate and change in recent years. In
addition, during the past year California
has experienced difficulties with the
prices of natural gas and electricity in
much of the state. These difficulties are
likely to continue for several years. For
a discussion of economic and other
conditions in California, see "The Trusts
Investments--Municipal Bonds--Risks
Relating to California Municipal Bonds."
For additional risks of investing in the Trust,
see "Risks" below.
Trading Market.............. Preferred Shares are not listed on an
exchange. Instead, you may buy or sell the
Preferred Shares at an auction that normally
is held weekly, by submitting orders to a
broker-dealer that has entered into an
agreement with the auction agent and the
Trust (a "Broker-Dealer"), or to a broker-
dealer that has entered into a separate
agreement with a Broker-Dealer. In addition
to the auctions, Broker-Dealers and other
broker-dealers may maintain a secondary
trading market in Preferred Shares outside of
auctions, but may discontinue this activity
at any time. There is no assurance that a
secondary market will provide shareholders
with liquidity. You may transfer shares
outside of auctions only to or through a
Broker-Dealer or a broker-dealer that has
entered into a separate agreement with a
Broker-dealer.
The table below shows the first auction date
for 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 auction date unless
the then-current rate period is a special
rate period or the first day of the
subsequent rate period is not a business day.
First Auction
Series Date* Subsequent
------ ------------- ----------
T7.................................. October 16 Tuesday
R7.................................. October 18 Thursday
--------
* All Dates are 2001.
6
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 Rate. See "Description of Preferred
Shares--Dividends and Dividend Periods."
The table below also shows the date from
which dividends on the Preferred Shares will
accumulate at the initial rate, the dividend
payment date for the initial rate period and
the day on which dividends will normally be
paid. If the day on which dividends otherwise
would be paid is not a business day, then
your dividends will be paid on the first
business day that falls after that day.
Finally, the table below shows the number of
days of the initial rate period for the
Preferred Shares. Subsequent rate periods
generally will be seven days. The dividend
payment date for special rate periods of more
than seven days will be set out in the notice
designating a special rate period. See
"Description of Preferred Shares--Dividends
and Dividend Periods--Designation of Special
Rate Periods."
Dividend
Payment Number of
Date of Date for Subsequent Days of
Initial Accumulation Initial Dividend Initial
Dividend at Initial Rate Payment Rate
Rate Rate* Period* Day Period
-------- ------------ ---------- ---------- ---------
T7.... October 5 October 17 Wednesday 12
R7.... October 5 October 19 Friday 14
--------
* All Dates are 2001.
Special Tax
Considerations.............. Because under normal circumstances the Trust
will invest substantially all of its assets
in municipal bonds that pay interest that is
exempt from regular Federal income tax and
California income taxes, the income you
receive will ordinarily be exempt from
Federal income tax and California income
taxes. Your income may be subject to certain
other local taxes. All or a portion of the
income from these bonds will be subject to
the Federal alternative minimum tax, so
Preferred Shares may not be a suitable
investment if you are subject to this tax or
would become subject to such tax by investing
in Preferred Shares. Taxable income or gain
earned by the Trust will be allocated
proportionately to holders of Preferred
Shares and common shares, based on the
percentage of total dividends paid to each
class for that year. Accordingly, certain
specified Preferred Shares dividends may be
subject to income tax on income or gains
attributed to the Trust. The Trust may at its
election give notice before any applicable
auction of the amount of any taxable income
and gain to be distributed for the period
7
relating to that auction. If the Trust does
not provide such notice, the Trust generally
will make shareholders whole for taxes owing
on dividends paid to shareholders that
include taxable income and gain. See "Tax
Matters" and "Description of Preferred
Shares--Dividends and Dividend Periods--
Gross-up Payments."
Ratings..................... Shares of each series of Preferred Shares
will be issued with a rating of "aaa" from
Moody's and "AAA" from S&P. In order to
maintain this rating, the Trust must own
portfolio securities of a sufficient value
and with adequate credit quality to meet the
rating agencies' guidelines. See "Description
of Preferred Shares--Rating Agency Guidelines
and Asset Coverage."
Redemption.................. The Trust may be required to redeem shares
if, for example, the Trust does not meet an
asset coverage ratio required by law or to
correct a failure to meet a rating agency
guideline in a timely manner. The Trust
voluntarily may redeem Preferred Shares under
certain conditions. See "Description of
Preferred Shares--Redemption" and
"Description of Preferred Shares--Rating
Agency Guidelines and Asset Coverage."
Liquidation Preference...... The liquidation preference for shares of each
series of Preferred Shares will be $25,000
per share plus accumulated but unpaid
dividends. See "Description of Preferred
Shares--Liquidation."
Voting Rights............... The holders of preferred shares, including
Preferred Shares, voting as a separate class,
have the right to elect at least two trustees
of the Trust at all times. Such holders also
have the right to elect a majority of the
trustees in the event that two years'
dividends on the preferred shares are unpaid.
In each case, the remaining trustees will be
elected by holders of common shares and
preferred shares, including Preferred Shares,
voting together as a single class. The
holders of preferred shares, including
Preferred Shares, will vote as a separate
class or classes on certain other matters as
required under the Trust's Agreement and
Declaration of Trust, as amended and
restated, the Investment Company Act of 1940
(the "Investment Company Act") and Delaware
law. See "Description of Preferred Shares--
Voting Rights," "Certain Provisions in the
Agreement and Declaration of Trust" and
"Conversion to Open-End Fund."
8
FINANCIAL HIGHLIGHTS (Unaudited)
Information contained in the table below under the headings "Per Share
Operating Performance," "Ratios to Average Net Assets of Common Shareholders"
and "Supplemental Data" shows the unaudited operating performance of the Trust
from the commencement of the Trust's investment operations on July 27, 2001
through August 31, 2001. Since the Trust was recently organized and commenced
investment operations on July 27, 2001, the table covers less than six weeks of
operations, during which a substantial portion of the Trust's portfolio was
held in temporary investments pending investment in municipal securities that
meet the Trust's investment objectives and policies. Accordingly, the
information presented may not provide a meaningful picture of the Trust's
future operating performance.
For the Period
July 27, 2001*
Through
August 31, 2001
---------------
Per Common Share Operating Performance:
Net asset value, beginning of period**.......................... $ 14.33+
--------
Net investment income......................................... 0.03
Net unrealized gain on investments............................ 0.21
--------
Net increase from investment operations......................... 0.24
--------
Capital charge with respect to issuance of common shares........ (0.03)
--------
Net asset value, end of period**................................ $ 14.54
========
Market value, end of period**................................... $ 15.23
========
Total Investment Return++ 0.86%
========
Ratios To Average Net Assets Of Common Shareholders:
Expenses after fee waiver....................................... 0.65%#
Expenses before fee waiver...................................... 0.90%#
Net investment income after fee waiver.......................... 1.90%#
Net investment income before fee waiver......................... 1.65%#
Supplemental Data:
Average net assets of common shareholders (000)................. $189,083
Portfolio turnover.............................................. 0%
Net assets of common shareholders, end of period (000).......... $189,083
--------
* Commencement of investment operations.
** Net asset value and market value are published in Barron's on Saturday and
The Wall Street Journal on Monday.
+ Net asset value immediately after the closing of the first public offering
was $14.30.
++ 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. Total investment
return does reflect brokerage commissions. Total investment returns for
less than a full year are not annualized. Past performance is not a
guarantee of future results.
# Annualized
The information above represents the unaudited operation performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has
been determined based upon financial information provided in the financial
statements and market value data for the Trust's common shares.
9
THE TRUST
The Trust is a recently organized, non-diversified, closed-end, management
investment company registered under the Investment Company Act. The Trust was
organized as a Delaware business trust on March 30, 2001 pursuant to an
Agreement and Declaration of Trust, as later amended and restated, governed by
the laws of the Stare of Delaware. On July 31, 2001, the Trust issued an
aggregate of 13,000,000 common shares of beneficial interest, par value $.001
per share, pursuant to the initial public offering and commenced its investment
operations. The Trust's common shares are traded on the New York Stock Exchange
(the "Exchange") under the symbol "BFZ". The Trust's principal office is
located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone
number is (888) 825-2257. The Trust is designed to provide tax benefits to
investors who are residents of California for tax purposes.
The following provides information about the Trust's outstanding shares as
of September 21, 2001:
Amount held by
the Trust or
Amount for its Amount
Title of Class Authorized Account Outstanding
-------------- ---------- -------------- -----------
Common.................................... Unlimited 0 14,958,028
Preferred................................. 0 0
Series T7................................. 0 0
Series R7................................. 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $130,468,335 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
objective and policies as stated below. We currently anticipate that the Trust
will be able to invest substantially all of the net proceeds in municipal bonds
that meet the Trust's objective and policies at or shortly (within six to eight
weeks) after the completion of the offering. Pending such investment, it is
anticipated that the proceeds will be invested in short-term, tax-exempt or
taxable investment grade securities.
10
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Trust as of
September 21, 2001, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby.
As
Actual Adjusted
------------ ------------
Shareholder's Equity:
Preferred Shares, $.001 par value, $25,000 stated
value per share, at liquidation value; unlimited
shares authorized (no shares issued; 5,278
shares issued, as adjusted)..................... $ -- $131,950,000
Common shares, $.001 par value per share;
unlimited shares authorized, 14,958,028 shares
outstanding*.................................... 14,958 14,958
Paid-in surplus.................................... 213,825,292 212,343,627
Balance of undistributed net investment income..... 849,005 849,005
Accumulated net realized gain/loss from
investment transactions......................... (-- ) (-- )
Net unrealized appreciation/depreciation of
investments..................................... 592,140 592,140
------------ ------------
Net assets....................................... 215,281,395 345,749,730
============ ============
--------
* None of these outstanding shares are held by or for the account of the
Trust.
PORTFOLIO COMPOSITION
As of September 21, 2001, approximately 96.54% of the market value of the
Trust's portfolio was invested in long-term municipal securities and
approximately 3.46% 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 September 21, 2001, based on the highest rating assigned.
Credit Rating Value Percent
------------- -------- -------
AAA/Aaa*...................................................... $123,833 57.52 %
AA/Aa......................................................... 34,522 16.04 %
A/A........................................................... 19,329 8.98 %
BBB/Baa....................................................... 6,501 3.02 %
BB/Ba......................................................... -- -- %
Unrated+...................................................... 23,657 10.99 %
Short-Term.................................................... 7,443 3.46 %
-------- -----
TOTAL....................................................... 215,285 100.0 %
======== =====
--------
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of
principal and interest.
+ Refers to securities that have not been rated by Moody's, S&P or Fitch, but
that have been assessed by BlackRock Financial Management as being of
comparable credit quality to rated securities in which the Trust may invest.
See "The Trust's Investments--Investment Objective and Policies."
11
THE TRUST'S INVESTMENTS
Investment Objective and Policies
The Trust's investment objective is to provide current income exempt from
regular Federal income tax and California income taxes.
The Trust will invest primarily in municipal bonds that pay interest that is
exempt from regular Federal income tax and California income taxes. Under
normal market conditions, the Trust expects to be fully invested (at least 95%
of its net assets) in such tax-exempt municipal bonds, in which the Trust
generally will invest at least 80% of its total assets. Under normal market
conditions, the Trust will invest at least 80% of its total assets in
investment grade quality municipal bonds. Investment grade quality means that
such bonds are rated, at the time of investment, within the four highest grades
(Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be
of comparable quality by BlackRock. Municipal bonds rated Baa by Moody's are
investment grade, but Moody's considers municipal bonds rated Baa to have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity for municipal
bonds that are rated BBB or Baa (or that have equivalent ratings) to make
principal and interest payments than is the case for higher grade municipal
bonds. The Trust may invest up to 20% of its total assets in municipal bonds
that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch
or that are unrated but judged to be of comparable quality by BlackRock. Bonds
of below investment grade quality (Ba/BB or below) are commonly referred to as
"junk bonds." Bonds of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuer's capacity
to pay interest and repay principal. These credit quality policies apply only
at the time a security is purchased, and the Trust is not required to dispose
of a security if a rating agency downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
a security that a rating agency has downgraded, BlackRock may consider such
factors as BlackRock's assessment of the credit quality of the issuer of the
security, the price at which the security could be sold and the rating, if any,
assigned to the security by other rating agencies. Appendix B to the Statement
of Additional Information contains a general description of Moody's, S&P's and
Fitch's ratings of municipal bonds. See "Risks" below for a general description
of the economic and credit characteristics of municipal issuers in California.
The Trust may also invest in securities of other open- or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Trust may invest directly and in tax-exempt preferred shares that pay dividends
exempt from regular Federal income tax. Subject to the Trust's policy of
investing at least 80% of its total assets in municipal bonds exempt from
California income tax, the Trust may invest in securities that pay interest
that is not exempt from California income tax when, in the judgement of
BlackRock, the return to the shareholders after payment of applicable
California income taxes would be higher than the return available from
comparable securities that pay interest that is, or make other distributions
that are, exempt from California income tax. See "--Other Investment
Companies," and "--Tax-Exempt Preferred Shares."
The Trust will invest in municipal bonds that, in BlackRock's opinion, are
underrated or undervalued. Underrated municipal bonds are those whose ratings
do not, in BlackRock's opinion, reflect their true creditworthiness.
Undervalued municipal bonds are bonds that, in the opinion of BlackRock, are
worth more than the value assigned to them in the marketplace. BlackRock may at
times believe that bonds associated with a particular municipal market sector
(for example, electrical utilities), or issued by a particular municipal
issuer, are undervalued. BlackRock may purchase those bonds for the Trust's
portfolio because they represent a market sector or issuer that BlackRock
considers undervalued, even if the value of those particular bonds appears to
be consistent with the value of similar bonds. Municipal bonds of particular
types (for example, hospital bonds, industrial revenue bonds or bonds issued by
a particular municipal issuer) may be undervalued because there is a temporary
excess of supply in that market sector, or because of a general decline in the
market price of municipal bonds of the market sector for reasons that do not
apply to the particular municipal bonds that are considered undervalued. The
Trust's investment in underrated or undervalued municipal bonds will be based
on BlackRock's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest
12
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 tax.
The Trust may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements or escrow accounts. The credit quality of
companies which provide these credit enhancements will affect the value of
those securities. Although the insurance feature reduces certain financial
risks, the premiums for insurance and the higher market price paid for insured
obligations may reduce the Trust's income. Insurance generally will be obtained
from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P
or Fitch. The insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the common shares. The Trust may
purchase insured bonds and may purchase insurance for bonds in its portfolio.
During temporary defensive periods, including the period during which the
net proceeds of this offering are being invested, and in order to keep the
Trust's cash fully invested, the Trust may invest up to 100% of its net assets
in liquid, short-term investments, including high quality, short-term
securities that may be either tax-exempt or taxable. The Trust may not achieve
its investment objective under these circumstances. The Trust intends to invest
in taxable short-term investments only if suitable tax-exempt short-term
investments are not available at reasonable prices and yields.
The Trust cannot change its investment objective without the approval of the
holders of a majority of the outstanding common shares and the Preferred Shares
voting together as a single class, and of the holders of a majority of the
outstanding Preferred Shares voting as a separate class. A "majority of the
outstanding" means (1) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(2) more than 50% of the shares, whichever is less. See "Description of
Preferred Shares--Voting Rights" for additional information with respect to the
voting rights of holders of Preferred Shares.
Municipal Bonds
General. Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects, such as roads or public
buildings, to pay general operating expenses or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source. Revenue bonds may be repaid only from the
revenues of a specific facility or source. The Trust also may purchase
municipal bonds that represent lease obligations. These carry special risks
because the issuer of the bonds may not be obligated to appropriate money
annually to make payments under the lease. In order to reduce this risk, the
Trust will only purchase municipal bonds representing lease obligations where
BlackRock believes the issuer has a strong incentive to continue making
appropriations until maturity.
The municipal bonds in which the Trust will invest are generally issued by
the State of California, political subdivisions of the State, and authorities
or other intermediaries of the State and such political subdivisions and pay
interest that, in the opinion of bond counsel to the issuer, or on the basis of
another authority believed by BlackRock to be reliable, is exempt from regular
Federal income tax and California income taxes. BlackRock will not conduct its
own analysis of the tax status of the interest paid by municipal bonds held by
the Trust. The Trust may also invest in municipal bonds issued by United States
Territories (such as Puerto Rico or Guam) that are exempt from regular Federal
income tax and California income taxes. In addition to the types of municipal
bonds described in the prospectus, the Trust may invest in other securities
that pay interest that is, or make other distributions that are, exempt from
regular Federal income tax and/or state and local personal taxes, regardless of
the technical structure of the issuer of the instrument. The Trust treats all
of such tax-exempt securities as municipal bonds.
13
The yields on municipal bonds are dependent on a variety of factors,
including prevailing interest rates and the condition of the general money
market and the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The market value of
municipal bonds will vary with changes in interest rate levels and as a result
of changing evaluations of the ability of bond issuers to meet interest and
principal payments.
The Trust will invest primarily in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15 or more years, but the
weighted average maturity of obligations held by the Trust may be shortened,
depending on market conditions.
Risks Relating to California Municipal Bonds. Because the Trust invests
primarily in a portfolio of California municipal bonds, the Trust is more
susceptible to political, economic, regulatory or other factors affecting
issuers of California municipal bonds than a fund which does not limit its
investments to such issuers. These risks include possible legislative, State
constitutional or regulatory amendments that may affect the ability of State
and local governments or regional governmental authorities to raise money to
pay principal and interest on their municipal bonds. Economic, fiscal and
budgetary conditions throughout the State may also influence the Trust's
performance.
The following information is a summary of a more detailed description of
certain factors affecting California municipal securities which is contained in
the Trust's Statement of Additional Information. Investors should obtain a copy
of the Statement of Additional Information for a more detailed discussion of
such factors. Such information is derived from certain official statements of
the State of California published in connection with the issuance of specific
California municipal securities, as well as from other publicly available
documents. Such information has not been independently verified by the Trust
and may not apply to all California municipal securities acquired by the Trust.
The Trust assumes no responsibility for the completeness or accuracy of such
information.
California State and local government obligations may be adversely affected
by political and economic conditions and developments within the State of
California and the nation as a whole. With respect to an investment in the
Trust, through popular initiative and legislative activity, the ability of the
State of California and its local governments to raise money through property
taxes and to increase spending has been the subject of considerable debate and
change in recent years. Various State Constitutional amendments, for example,
have been adopted which have the effect of limiting property tax and spending
increases, while legislation has sometimes added to these limitations and has
at other times sought to reduce their impact. To date, these Constitutional,
legislative and budget developments do not appear to have severely decreased
the ability of the State and local governments to pay principal and interest on
their obligations. It can be expected that similar types of State legislation
or Constitutional proposals will continue to be introduced. The impact of
future developments in these areas is unclear.
During the past year, California has experienced difficulties with the
prices of natural gas and electricity in much of the State. These difficulties
are likely to continue for several years. Because of capacity constraints in
electric generation and transmission, California utilities have been forced to
purchase wholesale power at high prices. While the government of California and
the Federal Energy Regulatory Commission are considering further actions to
deal with the shortcomings of California's energy market, it is not possible to
predict what the longterm impact of these developments will be on California's
economy. Such fuel and energy issues could have severe adverse effects on the
State's economy. In turn, these recent developments regarding energy in
California may adversely influence the Trust's performance. For more
information regarding these developments, see "Investment Policies and
Techniques--Factors Pertaining to California--Recent Developments Regarding
Energy" in the Trust's Statement of Additional Information.
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties
14
and the resulting impact on State and local government finances will not
adversely affect the market value of the portfolio of the Trust or the ability
of the respective obligors to make timely payments of principal and interest on
such obligations.
The value of California municipal instruments may also be affected by
general conditions in the money markets or the municipal bond markets, the
levels of Federal income tax rates, the supply of tax-exempt bonds, the credit
quality and rating of the issues and perceptions with respect to the level of
interest rates.
There can be no assurance that there will not be a decline in economic
condition or that particular California municipal securities in the portfolio
of the Trust will not be adversely affected by any changes.
For more information, see "Investment Policies and Techniques--Factors
Pertaining to California" in the Statement of Additional Information.
When-Issued and Forward Commitment Securities
The Trust may buy and sell municipal bonds on a when-issued basis and may
purchase or sell municipal bonds on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment
for the securities takes place at a later date. This type of transaction may
involve an element of risk because no interest accrues on the bonds prior to
settlement and, because bonds are subject to market fluctuations, the value of
the bonds at the time of delivery may be less or more than cost. A separate
account of the Trust will be established with its custodian consisting of cash,
or other liquid high grade debt securities having a market value at all times,
at least equal to the amount of the commitment.
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Trust may invest directly. The Trust generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Trust receives the proceeds of the offering of its Preferred Shares, or during
periods when there is a shortage of attractive, high-yielding municipal bonds
available in the market. As a shareholder in an investment company, the Trust
will bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Trust's advisory and other fees and expenses
with respect to assets so invested. Holders of Preferred Shares would therefore
be subject to duplicative expenses to the extent the Trust invests in other
investment companies. BlackRock will take expenses into account when evaluating
the investment merits of an investment in an investment company relative to
available municipal bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to
leverage 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. Investment companies may have
investment policies that differ from those of the Trust. In addition, to the
extent the Trust invests in other investment companies, the Trust will be
dependent upon the investment and research abilities of persons other than
BlackRock. The Trust treats its investments in such open- or closed-end
investment companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Trust may also invest up to 10% of its total assets in preferred
interests of other investment funds that pay dividends that are exempt from
regular Federal income tax. A portion of such dividends may be capital gain
distributions subject to Federal capital gains tax. Such funds in turn invest
in municipal bonds and other assets that generally pay interest or make
distributions that are exempt from regular Federal income tax, such as revenue
bonds issued by state or local agencies to fund the development of low-income,
multi-family housing. Investment in such tax-exempt preferred shares involves
many of the same issues as investing in other open- or closed-end investment
companies as discussed above. These investments also have additional risks,
including
15
liquidity risk, the absence of regulation governing investment practices,
capital structure and leverage, affiliated transactions and other matters, and
concentration of investments in particular issuers or industries. Revenue bonds
issued by state or local agencies to finance the development of low-income,
multi-family housing involve special risks in addition to those associated with
municipal bonds generally, including that the underlying properties may not
generate sufficient income to pay expenses and interest costs. Such bonds are
generally non-recourse against the property owner, may be junior to the rights
of others with an interest in the properties, may pay interest that changes
based in part on the financial performance of the property, may be prepayable
without penalty and may be used to finance the construction of housing
developments which, until completed and rented, do not generate income to pay
interest. Increases in interest rates payable on senior obligations may make it
more difficult for issuers to meet payment obligations on subordinated bonds.
The Trust treats investments in tax-exempt preferred shares as investments in
municipal bonds.
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in Preferred Shares.
Interest Rate Risk
Interest rate risk is the risk that bonds, and the Trust's net assets, will
decline in value because of changes in interest rates. Generally, municipal
bonds will decrease in value when interest rates rise and increase in value
when interest rates decline. The Trust issues Preferred Shares, which pay
dividends based on short-term interest rates. The Trust then uses the proceeds
from the sale of Preferred Shares to buy municipal bonds, which pay interest
based on long-term rates. Both long-term and short-term interest rates may
fluctuate. If short term interest rates rise, the Preferred Shares dividend
rates may rise so that the amount of dividends paid to holders of Preferred
Shares exceeds the income from the portfolio securities purchased with the
proceeds from the sale of Preferred Shares. Because income from the Trust's
entire investment portfolio (not just the portion of the portfolio purchased
with the proceeds of the Preferred Shares offering) is available to pay
Preferred Share dividends, however, Preferred Share dividend rates would need
to greatly exceed the yield on the Trust's portfolio before the Trust's ability
to pay Preferred Share dividends would be impaired. If long-term rates rise,
the value of the Trust's investment portfolio will decline, reducing the amount
of assets serving as asset coverage for the Preferred Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through an
auction process. In the auction, holders of Preferred Shares may indicate the
dividend rate at which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction also provides
liquidity for the sale of Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You may not be able to
sell your Preferred Shares at an auction if the auction fails. Also, if you
place hold orders (orders to retain Preferred Shares) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction, you
will not retain your Preferred Shares. Finally, if you buy shares or elect to
retain shares without specifying a dividend rate below which you would not wish
to buy or continue to hold those shares, you could receive a lower rate of
return on your shares than the market rate. See "Description of Preferred
Shares" and "The Auction--Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions you may not be
able to sell any or all of your shares or you may not be able to sell them for
$25,000 per share or $25,000 per share plus accumulated
16
dividends. If the Trust has designated a special rate period (a rate period of
more than seven days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market. Broker-dealers
that maintain a secondary trading market for Preferred Shares are not required
to maintain this market, and the Trust is not required to redeem shares either
if an auction or an attempted secondary market sale fails because of a lack of
buyers. Preferred Shares are not listed on a stock exchange or the NASDAQ stock
market. If you sell your Preferred Shares to a broker-dealer between auctions,
you may receive less than the price you paid for them, especially if market
interest rates have risen since the last auction.
Ratings and Asset Coverage Risk
While Moody's assigns a rating of "aaa" to the Preferred Shares and S&P
assigns a rating of "AAA" to the Preferred Shares, such ratings do not
eliminate or necessarily mitigate the risks of investing in Preferred Shares.
Moody's or S&P could downgrade Preferred Shares, which may make your shares
less liquid at an auction or in the secondary market. If Moody's or S&P
downgrades Preferred Shares, the Trust may alter its portfolio or redeem
Preferred Shares in an effort to improve the rating, although there is no
assurance that it will be able to do so to the extent necessary to restore the
prior rating. The Trust may voluntarily redeem Preferred Shares under certain
circumstances. See "Description of Preferred Shares--Rating Agency Guidelines
and Asset Coverage" for a description of the asset maintenance tests the Trust
must meet.
Credit Risk
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the Trust's net asset value or dividends. The
Trust may invest up to 20% of its total assets in municipal bonds that are
rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be
of comparable quality by BlackRock. Bonds rated Ba/BB or B are regarded as
having predominately speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and these bonds are commonly
referred to as junk bonds. These securities are subject to a greater risk of
default. The prices of these lower grade bonds are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general economic
downturn, than are the prices of higher grade securities. Lower grade
securities tend to be less liquid than investment grade securities. The market
values of lower grade securities tend to be more volatile than is the case for
investment grade securities.
State Concentration Risk.
Because the Trust primarily purchases municipal bonds issued by the State of
California or county or local government municipalities or their agencies,
districts, political subdivisions or other entities, shareholders may be
exposed to additional risks. In particular, the Trust is susceptible to
political, economic or regulatory factors affecting issuers of California
municipal bonds. There can be no assurance that California will not experience
a decline in economic conditions or that the California municipal bonds
purchased by the Trust will not be affected by such a decline.
For a discussion of economic and other conditions in California, see "The
Trust's Investments--Municipal Bonds--Risks Relating to California Municipal
Bonds."
Municipal Bond Market Risk
Investing in the municipal bond market involves certain risks. The amount of
public information available about the municipal bonds in the Trust's portfolio
is generally less than that for corporate equities or bonds, and the investment
performance of the Trust may therefore be more dependent on the analytical
abilities of BlackRock than would be a stock fund or taxable bond fund. The
secondary market for municipal bonds, particularly the below investment grade
bonds in which the Trust may invest, also tends to be less well-developed or
liquid than many other securities markets, which may adversely affect the
Trust's ability to sell its bonds at attractive prices.
17
The ability of municipal issuers to make timely payments of interest and
principal may be diminished in general economic downturns and as governmental
cost burdens are reallocated among Federal, state and local governments. In
addition, laws enacted in the future by Congress or state legislatures or
referenda could extend the time for payment of principal and/or interest, or
impose other constraints on enforcement of such obligations or on the ability
of municipalities to levy taxes. Issuers of municipal bonds might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Trust could experience delays in collecting principal and interest
and the Trust may not, in all circumstances, be able to collect all principal
and interest to which it is entitled. To enforce its rights in the event of a
default in the payment of interest or repayment of principal, or both, the
Trust may take possession of and manage the assets securing the issuer's
obligations on such securities, which may increase the Trust's operating
expenses. Any income derived from the Trust's ownership or operation of such
assets may not be tax-exempt.
Reinvestment Risk
Reinvestment risk is the risk that income from the Trust's bond portfolio
will decline if and when the Trust invests the proceeds from matured, traded,
prepaid or called bonds at interest rates that are below the portfolio's
current earnings rate. A decline in income could affect the Trust's ability to
pay dividends on the Preferred Shares.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation occurs, the real value of the Preferred Shares and
distributions declines. In an inflationary period, however, it is expected
that, through the auction process, dividend rates on the Preferred Shares would
increase, tending to offset this risk.
Economic Sector Risk
The Trust may invest 25% or more of its total assets in municipal
obligations in the same economic sector, including without limitation the
following: lease rental obligations of state and local authorities; obligations
dependent on annual appropriations by a state's legislature for payment;
obligations of state and local housing finance authorities; municipal utilities
systems or public housing authorities; obligations of hospitals or life care
facilities; and industrial development or pollution control bonds issued for
electrical utility systems, steel companies, paper companies or other purposes.
This may make the Trust more susceptible to adverse economic, political or
regulatory occurrences affecting an economic sector. For example, health care
related issuers are susceptible to Medicare, Medicaid and other third party
payor reimbursement policies, and national and state health care legislation.
As concentration increases, so does the potential for fluctuation in the value
of the Trust's assets.
Non-Diversification.
The Trust has registered as a "non-diversified " investment company under
the Investment Company Act. For Federal income tax purposes, the Trust, with
respect to up to 50% of its total assets, will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Trust invests a relatively high percentage
of its assets in the obligations of a limited number of issuers, the Trust may
be more susceptible than a more widely diversified investment company to any
single economic, political or regulatory occurrence.
Recent Developments
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, the U.S. securities markets were closed for a
four-day period. These terrorist attacks and related events have led to
increased short-term market volatility and may have long-term effects on U.S.
and world economies and markets. A similar disruption of the financial markets
could impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors affecting the Preferred Shares.
18
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of the
Trust, including supervision of the duties performed by BlackRock. There are
eight trustees of the Trust. Two of the trustees are "interested persons" (as
defined in the Investment Company Act). The name and business address of the
trustees and officers of the Trust and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Trust" in the Statement of Additional Information.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc., 345 Park Avenue, New York, New York, 10154, acts
as the Trust's investment advisor. BlackRock Financial Management, Inc., 345
Park Avenue, New York, New York, 10154, acts as the Trust's sub-advisor.
BlackRock Advisors and BlackRock Financial Management both are wholly owned
subsidiaries of BlackRock, Inc., which is one of the largest publicly traded
investment management firms in the United States with $220 billion of assets
under management as of July 31, 2001. BlackRock, Inc. and its affiliates manage
assets on behalf of more than 3,300 institutions and 200,000 individuals
worldwide, including nine of the 10 largest companies in the U.S. as determined
by Fortune Magazine, through a variety of equity, fixed income, liquidity and
alternative investment separate accounts and mutual funds, including the
company's flagship fund families, BlackRock Funds and BlackRock Provident
Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset
management firm according to Pensions & Investments, May 14, 2001.
The BlackRock organization has over 13 years of experience managing closed-
end products and currently advises a closed-end family of 25 funds. BlackRock
has 18 leveraged municipal closed-end funds and six open-end municipal funds
under management and approximately $17.2 billion in municipal assets firm-wide.
Clients are served from the company's headquarters in New York City, as well as
offices in Wilmington, Delaware, San Francisco, California, Hong Kong,
Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC
Financial Services Group, Inc. ("PNC"), one of the largest diversified
financial services organizations in the United States, and is majority-owned by
PNC and by BlackRock employees.
Investment Philosophy. BlackRock's investment decision-making process for
the municipal bond sector is subject to the same discipline, oversight and
investment philosophy that the firm applies to other sectors of the fixed
income market.
BlackRock uses a relative value strategy that evaluates the trade-off
between risk and return to seek to achieve the Trust's investment objective of
generating current income exempt from Federal income tax and California income
taxes. This strategy is combined with disciplined risk control techniques and
applied in sector, sub-sector and individual security selection decisions.
BlackRock's extensive personnel and technology resources are the key drivers of
the investment philosophy.
BlackRock's Municipal Bond Team. BlackRock uses a team approach to managing
municipal portfolios. BlackRock believes that this approach offers substantial
benefits over one that is dependent on the market wisdom or investment
expertise of only a few individuals.
BlackRock's municipal bond team includes five portfolio managers with an
average experience of 14 years and five credit research analysts with an
average experience of 11 years. Kevin M. Klingert, a managing director, senior
portfolio manager and head of municipal bonds at BlackRock, leads the team, a
position he has held since joining BlackRock in 1991. Mr. Klingert has over 17
years of experience in the municipal market. Prior to joining BlackRock in
1991, Mr. Klingert was an Assistant Vice President at Merrill Lynch, Pierce,
Fenner & Smith Incorporated, which he joined in 1985. The portfolio management
team also includes Craig Kasap, James McGinley, F. Howard Downs and Anthony
Pino. Mr. Kasap, CFA, has been a portfolio manager at BlackRock for over four
years and is a member of BlackRock's Investment Strategy Group. Prior to
joining BlackRock in 1997, Mr. Kasap spent the previous three years as a
municipal bond trader with Keystone
19
Investments Inc. in Boston where he was involved in formulating the firm's
municipal bond investment strategies. Mr. McGinley has been a portfolio manager
and a member of the Investment Strategy Group at BlackRock since 1999. Prior to
joining BlackRock in 1999, Mr. McGinley was Vice President of Municipal Trading
from 1996 to 1999 and Manager of the Municipal Strategy Group from 1995 to 1999
with Prudential Securities Incorporated. Mr. McGinley joined Prudential
Securities Incorporated in 1993 as an Associate in Municipal Research. F.
Howard Downs has been a portfolio manager since joining BlackRock in 1999.
Prior to joining BlackRock in 1999, Mr. Downs was a Vice President,
Institutional Salesman and Sales Manager from 1990 to 1999 at William E. Simon
& Sons Municipal Securities, Inc. Mr. Downs was one of the original employees
of William E. Simon & Sons Municipal Securities, Inc., founded in 1990, and was
responsible for sales of municipal bonds. Anthony Pino has been a portfolio
manager since joining BlackRock in 1999. Prior to joining BlackRock in 1999, he
was a Brokerage Coordinator at CPI Capital. From 1996 to 1999, Mr. Pino was an
Assistant Vice President and trader in the Municipal Strategy Group at
Prudential Securities Incorporated.
BlackRock's municipal bond portfolio managers are responsible for over 70
municipal bond portfolios, valued at approximately $12.6 billion. Municipal
mandates include the management of open- and closed-end mutual funds,
municipal-only separate accounts or municipal allocations within larger
institutional mandates. In addition, BlackRock manages 14 municipal liquidity
accounts valued at approximately $4.6 billion. Currently, the team manages 18
closed-end municipal funds with approximately $4.6 billion in managed assets as
of July 31, 2001.
BlackRock's Investment Process. BlackRock has in-depth expertise in the
fixed income market. BlackRock applies the same risk-controlled, active sector
rotation style to the management process for all of its fixed income
portfolios. BlackRock believes that it is unique in its integration of taxable
and municipal bond specialists. Both taxable and municipal bond portfolio
managers share the same trading floor and interact frequently for determining
the firm's overall investment strategy. This interaction allows each portfolio
manager to access the combined experience and expertise of the entire portfolio
management group at BlackRock.
BlackRock's portfolio management process emphasizes research and analysis of
specific sectors and securities, not interest rate speculation. BlackRock
believes that market-timing strategies can be highly volatile and potentially
produce inconsistent results. Instead, BlackRock thinks that value over the
long-term is best achieved through a risk-controlled approach, focusing on
sector allocation, security selection and yield curve management.
In the municipal market, BlackRock believes one of the most important
determinants of value is supply and demand. BlackRock's ability to monitor
investor flows and frequency and seasonality of issuance is helpful in
anticipating the supply and demand for sectors. BlackRock believes that the
breadth and expertise of its municipal bond team allow it to anticipate
issuance flows, forecast which sectors are likely to have the most supply and
plan its investment strategy accordingly.
BlackRock also believes that over the long-term, intense credit analysis
will add incremental value and avoid significant relative performance
impairments. The municipal credit team is led by Susan C. Heide, Ph.D., who has
been, since 1999, Managing Director, Head of Municipal Credit Research and co-
chair of BlackRock's Credit Committee. From 1995 to 1999, Dr. Heide was a
Director and Head of Municipal Credit Research. Dr. Heide specializes in the
credit analysis of municipal securities and as such chairs the monthly
municipal bond presentation to the Credit Committee. In addition, Dr. Heide
supervises the team of municipal bond analysts that assists with the ongoing
surveillance of the $12.6 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.
20
Dr. Heide initiated the Disclosure Task Force of the National Federation of
Municipal Analysts in 1988 and was co-chairperson of this committee from its
inception through the completion of the Disclosure Handbook for Municipal
Securities--1992 Update, published in January 1993. As a result of these
efforts, the SEC implemented primary and secondary disclosure regulations for
municipal bonds in July 1995. Dr. Heide has authored a number of articles on
municipal finance and edited The Handbook of Municipal Bonds published in the
fall of 1994. Dr. Heide was selected by the Bond Buyer as a first team All-
American Municipal Analyst in 1990 and was recognized in subsequent years.
BlackRock's approach to credit risk incorporates a combination of sector-
based, top-down macro-analysis of industry sectors to determine relative
weightings with a name-specific (issuer-specific), bottom-up detailed credit
analysis of issuers and structures. The sector-based approach focuses on
rotating into sectors that are undervalued and exiting sectors when
fundamentals or technicals become unattractive. The name-specific approach
focuses on identifying special opportunities where the market undervalues a
credit, and devoting concentrated resources to research the credit and monitor
the position. BlackRock's analytical process focuses on anticipating change in
credit trends before market recognition. Credit research is a critical,
independent element of BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock Advisors
and the Trust and certain waivers relating thereto, the Trust has agreed to pay
for the investment advisory services and facilities provided by BlackRock
Advisors a fee payable monthly in arrears at an annual rate equal to 0.60% of
the average weekly value of the Trust's Managed Assets (the "management fee").
BlackRock Advisors has voluntarily agreed to waive receipt of a portion of the
management fee or other expenses of the Trust in the amount of 0.25% of the
average weekly value of the Trust's Managed Assets for the first five years of
the Trust's operations (through July 31, 2006), and for a declining amount for
an additional four years (through July 31, 2010). The Trust will also reimburse
BlackRock Advisors for all out-of-pocket expenses BlackRock Advisors incurs in
connection with performing administrative services for the Trust. In addition,
with the approval of the board of trustees, a pro rata portion of the salaries,
bonuses, health insurance, retirement benefits and similar employment costs for
the time spent on Trust operations (other than the provision of services
required under the investment management agreement) of all personnel employed
by BlackRock Advisors who devote substantial time to Trust operations or the
operations of other investment companies advised by the Advisor may be
reimbursed to BlackRock Advisors. Managed Assets are the total assets of the
Trust, which includes any proceeds from the Preferred Shares, minus the sum of
accrued liabilities (other than indebtedness attributable to leverage). This
means that during periods in which the Trust is using leverage, the fee paid to
BlackRock Advisors will be higher than if the Trust did not use leverage
because the fee is calculated as a percentage of the Trust's Managed Assets,
which include those assets purchased with leverage.
In addition to the management fee of BlackRock Advisors, the Trust pays all
other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with BlackRock Advisors), custodian,
transfer and dividend disbursing agent expenses, legal fees, rating agency
fees, expenses of independent auditors, expenses of repurchasing shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies, and taxes, if any.
21
For the first nine years of the Trust's operation, BlackRock Advisors has
undertaken to waive its management fee and expenses payable by the Trust in the
amounts, and for the time periods, set forth below:
Percentage Waived
Twelve Month (as a percentage
Period Ending of average weekly
July 31 Managed Assets)
------------- -----------------
2002*.................................................... 0.25%
2003..................................................... 0.25%
2004..................................................... 0.25%
2005..................................................... 0.25%
2006..................................................... 0.25%
2007..................................................... 0.20%
2008..................................................... 0.15%
2009..................................................... 0.10%
2010..................................................... 0.05%
--------
* From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the Trust's
fees and expenses beyond July 31, 2010 or after termination of the investment
management agreement.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Statement of Preferences (the
"Statement") attached as Appendix A to the statement of additional information.
General
The Trust's Agreement and Declaration of Trust, as amended and restated,
authorizes the issuance of an unlimited number of preferred shares, par value
$.001 per share, in one or more classes or series with rights as determined by
the Board of Trustees without the approval of common shareholders. The
Statement currently authorizes the issuance of Preferred Shares, Series T7
and Preferred Shares, Series R7. 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 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 Dividend Periods
The following is a general description of dividends and Rate Periods.
Rate Periods. With respect to the T7 Preferred Shares, the Initial Rate
Period will be 12 days. With respect to the R7 Preferred Shares, the Initial
Rate Period will be 14 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 designating them
as Special Rate Periods. See "--Designation of Special Dividend Periods" below.
22
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, as
amended and restated, the Statement and applicable law. Dividends are scheduled
to be paid for each series of Preferred Shares as follows:
Subsequent Dividend
Initial Dividend Payment Dates
Series Payment Date on Each
------ ---------------- -------------------
T7 October 17, 2001 Wednesday
R7 October 19, 2001 Friday
If dividends are payable on a day that is not a Business Day, then dividends
will be payable on the next Business Day. In addition, the Trust may specify
different Dividend Payment Dates for any Special Rate Period of more than 28
Rate Period Days.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository, in accordance with its current
procedures, is expected to distribute dividends received from the Trust in
next-day funds on each Dividend Payment Date to Agent Members. These Agent
Members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Trust that dividend payments will be available in same-day
funds on each Dividend Payment Date to customers that use such Broker-Dealer or
that Broker-Dealer's designee as Agent Member.
Calculation of Dividend Payment. The Trust computes the dividends per share
payable on shares of a series of Preferred Shares by multiplying the applicable
rate for shares of such series in effect by a fraction. The numerator of this
fraction will normally be seven (i.e., the number of days in the Dividend
Period) and the denominator will normally be 365. If the Trust has designated a
special dividend period, then the numerator will be the number of days in the
special dividend period, and the denominator will be 360. In either case, this
rate is then multiplied by $25,000 to arrive at dividends per share.
Dividends on shares of each series of Preferred Shares will accumulate from
the date of their original issue. For each dividend payment period after the
initial dividend period, the dividend rate will be the dividend rate determined
at auction, except that the dividend rate that results from an auction will not
be greater than the maximum applicable rate described below.
The maximum applicable rate for any rate period for a series of Preferred
Shares will be the applicable percentage (set forth in the Applicable
Percentage Payment Table below) of the reference rate (set forth in the
Reference Rate Table below) for the applicable rate period. The applicable
percentage for a series of Preferred Shares is determined on the day that a
notice of a special dividend period is delivered if the notice specifies a
maximum applicable rate for a special dividend period. If Moody's or S&P or
both shall not make such rating available, the rate shall be determined by
reference to equivalent ratings issued by a substitute rating agency. If the
Trust has provided notification to the auction agent prior to an auction
establishing the applicable rate for a dividend period that net capital gains
or other taxable income will be included in the dividend determined at such
auction, the applicable percentage will be derived from the column captioned
"Applicable Percentage: Notification" in the Applicable Percentage Table below:
Applicable Percentage Table
--------------------------------------------------------------------------------
Credit Ratings Applicable Percentage Table
------------------------------- ---------------------------------------------
Applicable Percentage: 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%
23
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:
.""AA'' Composite
Commercial Paper Rate
.Taxable Equivalent of the
Short-Term Municipal Bond Rate
29 days to 182 days "AA" Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
If the rate period for a series of Preferred Shares immediately preceding
the current rate period was a period of 29 days or more and an auction for a
regular 7-day rate period has not yet been held, then the maximum applicable
rate will be the greatest of:
. the dividend rate applicable to that series of Preferred Shares for the
preceding rate period;
. the applicable percentage of the reference rate as it exists on the
Auction Date for the current rate period assuming the length of the
current rate period was the same as the preceding rate period; and
. the applicable percentage of the reference rate for the current dividend
period.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" means 90% of an
amount equal to the per annum rate payable on taxable bonds in order for such
rate, on an after-tax basis, to equal the per annum rate payable on tax-exempt
bonds issued by "high grade" issuers as determined in accordance with the
procedures set forth in the Statement.
Prior to each dividend payment date, the Trust is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any
auction. The Trust does not intend to establish any reserves for the payment of
dividends.
If an auction for any series of Preferred Shares is not held when scheduled
for any reason, the dividend rate for the corresponding rate period will be the
maximum applicable rate on the date the auction was scheduled to be held.
Additional Dividends. Under Federal income tax rules applicable to the
Trust, the Trust may, in certain circumstances, allocate net capital gains or
other taxable income to a dividend paid on Preferred Shares after the dividend
has been paid (a "Retroactive Taxable Allocation"). If the Trust makes a
Retroactive Taxable Allocation on the Preferred Shares without giving advance
notice thereof as described under "The Auction--Auction Proceeds", the Trust
will, in the circumstances below, pay to the holders of Preferred Shares, out
of funds legally available therefore, an additional dividend. The additional
dividend will be in an amount equal to the amount of taxes paid by a holder of
Preferred Shares on the Retroactive Taxable Allocation, provided that the
additional dividend will be calculated:
. 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 Retroactive Taxable Allocation would be taxable in
the hands of each holder of Preferred Shares at the maximum marginal
combined regular Federal, California income tax rate applicable to
individuals or corporations, whichever is greater, in effect during the
fiscal year in question.
24
Although the Trust generally intends to designate any additional dividend as
an exempt-interest dividend to the extent permitted by applicable law, it is
possible that all or a portion of any additional dividend will be taxable to
the recipient thereof. See "Taxes." The Trust will not pay a further additional
dividend with respect to any taxable portion of an additional dividend.
The Trust will, within 90 days (and generally within 60 days) after the end
of its fiscal year for which a Retroactive Taxable Allocation is made, provide
notice thereof to the auction agent. The Trust will pay, out of legally
available funds, any additional dividend due on all Retroactive Taxable
Allocations made during the fiscal year in question, within 30 days after such
notice is given to the auction agent.
Restrictions on Dividends and Other Distributions. While the Preferred
Shares are outstanding, the Trust generally may not declare, pay or set apart
for payment, any dividend or other distribution in respect of its common
shares. In addition, the Trust may not call for redemption or redeem any of its
common shares. However, the Trust is not confined by the above restrictions if:
. 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);
. 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;
. any additional dividend required to be paid on or before the date of
such transaction has been paid; and
. 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 Dividend Periods. The Trust may, at its sole option,
declare a special dividend period of shares of a particular series of Preferred
Shares. To declare a special dividend period, the Trust will give notice (a
"request for special dividend period") to the auction agent and to each Broker-
Dealer. The notice will request that the next succeeding dividend period for
the series of Preferred Shares be a number of days (other than seven) evenly
divisible by seven as specified in such notice and not more than 1,820 days
long. The Trust may not request a special dividend period unless sufficient
clearing bids for shares of such series were made in the most recent auction.
In addition, full cumulative dividends, any amounts with respect to mandatory
redemptions and any additional dividends payable on shares of such series prior
to such date must be paid in full.
Redemption
Mandatory Redemption. The Trust is required to maintain (a) a Discounted
Value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the Investment Company Act Preferred Shares Asset
Coverage. Eligible portfolio securities for these purposes will be determined
from time
25
to time by the rating agencies then rating the Preferred Shares. If the Trust
fails to maintain such asset coverage amounts and does not timely cure such
failure in accordance with the requirements of the rating agency that rates the
Preferred Shares, the Trust must redeem all or a portion of the Preferred
Shares. This mandatory redemption will take place on a date that the board of
trustees specifies out of legally available funds in accordance with the
Agreement and Declaration of Trust, as amended and restated, the Statement and
applicable law, at the redemption price of $25,000 per share plus accumulated
but unpaid dividends (whether or not earned or declared) to the date fixed for
redemption. The number of Preferred Shares that must be redeemed in order to
cure such failure will be allocated pro rata among the outstanding Preferred
Shares of the Trust. The mandatory redemption will be limited to the number of
Preferred Shares necessary to restore the required Discounted Value or the
Investment Company Act Preferred Shares Asset Coverage, as the case may be.
Optional Redemption. The Trust, at its option, may redeem the shares of each
series of Preferred Shares, in whole or in part, out of funds legally available
therefore. Any optional redemption will occur on the second business day prior
to any dividend payment date at the optional redemption price per share of
$25,000 per share plus an amount equal to accumulated but unpaid dividends to
the date fixed for redemption. No shares of a series of Preferred Shares may be
redeemed if the redemption would cause the Trust to violate the 1940 Act or
applicable law. In addition, holders of a series of Preferred Shares may be
entitled to receive additional dividends if the redemption causes the Trust to
make a Retroactive Taxable Allocation. Shares of a series of Preferred Shares
may not be redeemed in part if fewer than 300 Shares of the series would remain
outstanding after the redemption. The Trust has the authority to redeem the
series of Preferred Shares for any reason.
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:
. the sale of all or substantially all the property or business of the
Trust;
. the merger or consolidation of the Trust into or with any other
corporation; or
. the merger or consolidation of any other 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
26
(a) the aggregate liquidation preference of the Preferred Shares then
outstanding and (b) certain accrued and projected payment obligations of the
Trust.
The Trust is also required under the Investment Company Act to maintain
asset coverage of at least 200% with respect to senior securities which are
equity shares, including the Preferred Shares ("Investment Company Act
Preferred Shares Asset Coverage"). The Trust's Investment Company Act Preferred
Shares Asset Coverage is tested as of the last business day of each month in
which any senior equity securities are outstanding. The minimum required
Investment Act Preferred Shares Asset Coverage amount of 200% may be increased
or decreased if the Investment Company Act is amended. Based on the composition
of the portfolio of the Trust and market conditions as of September 21, 2001,
the Investment Company Act Preferred Shares Asset Coverage with respect to all
of the Trust's preferred shares, assuming the issuance on that date of all
Preferred Shares offered hereby and giving effect to the deduction of related
sales load and related offering costs estimated at $1,481,665, would have been
computed as follows:
Value of Trust assets less
liabilities not constituting
senior securities
$345,749,730
----------------------------------- =
= ------------- 262%
Senior securities representing indebtedness
plus liquidation value of $131,950,000
the preferred shares
In the event the Trust does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the Investment Company Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the Preferred Shares, the Trust will be required to
redeem Preferred Shares as described under "--Redemption--Mandatory Redemption"
above.
The Trust may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above
or a withdrawal of ratings altogether. In addition, any rating agency providing
a rating for the Preferred Shares may, at any time, change or withdraw any such
rating. The Board may, without shareholder approval, amend, alter or repeal any
or all of the definitions and related provisions which have been adopted by the
Trust pursuant to the rating agency guidelines in the event the Trust receives
written confirmation from Moody's or S&P, as the case may be, that any such
amendment, alteration or repeal would not impair the rating then assigned to
the Preferred Shares.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the Preferred Shares is not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an auction or otherwise.
The rating is based on current information furnished to Moody's and S&P by the
Trust and the Advisor and information obtained from other sources. The rating
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common shares have not been rated by a
nationally recognized statistical rating organization.
The rating agency's guidelines will apply to the Preferred Shares only so
long as the rating agency is rating the shares. The Trust will pay certain fees
to Moody's and S&P for rating the Preferred Shares.
Voting Rights
Except as otherwise provided in this prospectus and in the Statement of
Additional Information or as otherwise required by law, holders of Preferred
Shares will have equal voting rights with holders of common shares and any
other preferred shares (one vote per share) and will vote together with holders
of common shares and any preferred shares as a single class.
27
Holders of outstanding preferred shares, including Preferred Shares, voting
as a separate class, are entitled to elect two of the Trust's trustees. The
remaining trustees are elected by holders of common shares and preferred
shares, including Preferred Shares, voting together as a single class. In
addition, if at any time dividends (whether or not earned or declared) on
outstanding preferred shares, including Preferred Shares, are due and unpaid in
an amount equal to two full years of dividends, and sufficient cash or
specified securities have not been deposited with the auction agent for the
payment of such dividends, then, the sole remedy of holders of outstanding
preferred shares, including Preferred Shares, is that the number of trustees
constituting the Board will be automatically increased by the smallest number
that, when added to the two trustees elected exclusively by the holders of
preferred shares including Preferred Shares as described above, would
constitute a majority of the Board. The holders of preferred shares, including
Preferred Shares, will be entitled to elect that smallest number of additional
trustees at a special meeting of shareholders held as soon as possible and at
all subsequent meetings at which trustees are to be elected. The terms of
office of the persons who are trustees at the time of that election will
continue. If the Trust thereafter shall pay, or declare and set apart for
payment, in full, all dividends payable on all outstanding preferred shares,
including Preferred Shares, the special voting rights stated above will cease,
and the terms of office of the additional trustees elected by the holders of
preferred shares, including Preferred Shares, will automatically terminate.
As long as any Preferred Shares are outstanding, the Trust will not, without
the affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting as a separate class):
(a) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of stock ranking prior to or on a parity
with the Preferred Shares with respect to payment of dividends or the
distribution of assets on liquidation, or increase the authorized amount of
the Preferred Shares or any other preferred stock, unless, in the case of
shares of preferred stock on parity with the Preferred Shares, the Trust
obtains written confirmation from Moody's (if Moody's is then rating
preferred shares), S&P (if S&P is then rating preferred shares) or any
substitute rating agency (if any such substitute rating agency is then
rating preferred shares) that the issuance of a class or series would not
impair the rating then assigned by such rating agency to the Preferred
Shares and the Trust continues to comply with Section 13 of the Investment
Company Act, the Investment Company Act Preferred Shares Asset Coverage
requirements and the Preferred Shares Basic Maintenance Amount
requirements, in which case the vote or consent of the holders of the
Preferred Shares is not required;
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust, as amended and restated, or the Statement, by merger,
consolidation or otherwise, so as to adversely affect any preference, right
or power of the Preferred Shares or holders of Preferred Shares; provided,
however, that (i) none of the actions permitted by the exception to (a)
above will be deemed to affect such preferences, rights or powers, (ii) a
division of Preferred Shares will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the
holders of Preferred Shares and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to the Preferred
Shares with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Trust, will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating the Preferred Shares and such issuance would,
at the time thereof, cause the Trust not to satisfy the Investment Company
Act Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount.
(c) authorize the Trust's conversion from a closed-end to an open-end
investment company; or
(d) amend the provisions of the Agreement and Declaration of Trust, as
amended and restated, or the Statement, which provide for the
classification of the board of directors of the Trust into three classes,
each with a term of office of three years with only one class of directors
standing for election in any year.
So long as any shares of the Preferred Shares are outstanding, the Trust
shall not, without the affirmative vote or consent of the Holders of at least
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
28
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent.
To the extent permitted under the Investment Company Act, the Trust will not
approve any of the actions set forth in (a) or (b) above which adversely
affects the rights expressly set forth in the Agreement and Declaration of
Trust, as amended and restated, or the Statement, of a holder of shares of a
series of preferred shares differently than those of a holder of shares of any
other series of preferred shares without the affirmative vote or consent of the
holders of at least a majority of the shares of each series adversely affected.
Unless a higher percentage is provided for under the Agreement and Declaration
of Trust, as amended and restated, or the Statement, the affirmative vote of
the holders of a majority of the outstanding Preferred Shares, voting together
as a single class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares of any
action requiring a vote of security holders under Section 13(a) of the 1940
Act. However, to the extent permitted by the Agreement and Declaration of
Trust, as amended and restated, or the Statement, no vote of holders of common
stock, 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 60 days
notice to the Trust. If the auction agent should resign, the Trust will use its
best efforts to enter into an agreement with a successor auction agent
containing substantially the same terms and conditions as the auction agency
agreement. The Trust may remove the auction agent provided that, prior to
removal, the Trust has entered into a replacement agreement with a successor
auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Trust, which provide for the participation of
those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Trust, a service charge at the annual rate of 1/4 to 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 agreement.
29
Auction Procedures
Prior to the submission deadline on each auction date for shares of a series
of Preferred Shares, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the auction agent) as a
beneficial owner of such series of Preferred Shares may submit the following
types of orders with respect to shares of such series of Preferred Shares to
that Broker-Dealer.
1. Hold order--indicating its desire to hold shares of such series without
regard to the applicable rate for the next dividend period.
2. Bid--indicating its desire to sell shares of such series at $25,000 per
share if the applicable rate for shares of such series for the next
dividend period is less than the rate or spread specified in the bid.
3. Sell order--indicating its desire to sell shares of such series at
$25,000 per share without regard to the applicable rate for shares of
such series for the next dividend period.
A beneficial owner may submit different types of orders to its Broker-Dealer
with respect to shares of a series of Preferred Shares then held by the
beneficial owner. A beneficial owner for shares of such series that submits its
bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the maximum applicable rate for shares of such series on the
auction date will be treated as having submitted a sell order to its Broker-
Dealer. A beneficial owner of shares of such series that fails to submit an
order to its Broker-Dealer with respect to such shares will ordinarily be
deemed to have submitted a hold order with respect to such shares of such
series to its Broker-Dealer. However, if a beneficial owner of shares of such
series fails to submit an order with respect to such shares of such series to
its Broker-Dealer for an auction relating to a dividend period of more than 28
days, such beneficial owner will be deemed to have submitted a sell order to
its Broker-Dealer. A sell order constitutes an irrevocable offer to sell the
Preferred Shares subject to the sell order. A beneficial owner that offers to
become the beneficial owner of additional Preferred Shares is, for purposes of
such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of a series of Preferred Shares but that wishes to purchase
shares of such series or that is a beneficial owner of shares of such series
that wishes to purchase additional shares of such series. A potential holder
may submit bids to its Broker-Dealer in which it offers to purchase shares of
such series at $25,000 per share if the applicable rate for shares of such
series for the next dividend period is not less than the specified 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 the number of shares of such series subject to sell
orders 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
30
applicable rate for shares of such series for the next succeeding dividend
period thereof will be the lowest rate specified in the submitted bids which,
taking into account such rate and all lower rates bid by Broker-Dealers as or
on behalf of existing holders and potential holders, would result in existing
holders and potential holders owning the shares of such series available for
purchase in the auction.
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next dividend period will be the maximum applicable
rate for shares of such series on the auction date. If this happens, beneficial
owners of shares of such series that have submitted or are deemed to have
submitted sell orders may not be able to sell in the auction all shares of such
series subject to such sell orders. If all of the outstanding shares of such
series are the subject of submitted hold orders, then the dividend period
following the auction will automatically be the same length as the preceding
dividend period for such series. The applicable rate for the next dividend
period will then be:
. (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
. 1 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is
greater.
If the applicable rate period is less than 183 days and the Kenny Index is less
than amount determined above for a rate period of less than 183 days, then the
applicable rate for an all hold period will be the rate equal to the Kenny
Index.
The "AA' Composite Commercial Paper Rate" on any date for any Rate Period of
shares of a series of Preferred Shares, shall mean (i) (A) in the case of any
7-day Rate Period or any Special Rate Period of fewer than 49 Days, the
interest equivalent of the 30-day rate; provided, however, that if such Rate
Period is a 7-day Rate Period and the "AA" Composite Commercial Paper Rate is
being used to determine the applicable rate for a series of Preferred Shares
when all of the outstanding shares of the series are subject to a hold orders,
then the interest equivalent of the 7-day rate, and (B) in the case of any
Special Rate Period of (1) 49 or more but fewer than 70 days, the interest
equivalent of the 60-day rate; (2) 70 or more but fewer than 85 days, the
arithmetic average of the interest equivalent of the 60-day and 90-day rates;
(3) 85 or more but fewer than 99 days, the interest equivalent of the 90-day
rate; (4) 99 or more but fewer than 120 days, the arithmetic average of the
interest equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer
than 141 days, the interest equivalent of the 120-day rate; (6) 141 or more but
fewer than 162 days, the arithmetic average of the 120-day and 180-day rates;
and (7) 162 or more but fewer than 183 days, the interest equivalent of the
180-day rate, in each case on commercial paper placed on behalf of issuers
whose corporate bonds are rated "AA" by S&P or the equivalent of such rating by
S&P or another rating agency, as made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the business day next
preceding such date; or (ii) in the event that the Federal Reserve Bank of New
York does not make available any such rate, then the arithmetic average of such
rates, as quoted on a discount basis or otherwise, by the commercial paper
dealers to the Auction Agent for the close of business on the business day next
preceding such date. If any commercial paper dealer does not quote a rate
required to determine the "AA" Composite Commercial Paper Rate, the "AA"
Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining commercial paper dealers to
provide such rate or rates not being supplied by the other commercial paper
dealers. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
days' maturity shall be equal to the quotient (rounded upwards to the next
higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction, the numerator of which shall be
the product of the discount rate
times the number of days in which such commercial paper matures and the
denominator of which shall be 360.
The "Kenny Index" is the Kenny S&P 30 day High Grade Index or any successor
index.
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The "Treasury Bill Rate" is either (i) the bond equivalent yield, calculated
in accordance with prevailing industry convention, of the rate on the most
recently auctioned Treasury bill with a remaining maturity closest to the
length of such Rate Period, as quoted in The Wall Street Journal on such date
for the business day next preceding such date; or (ii) in the event that any
such rate is not published in The Wall Street Journal, then the bond equivalent
yield, calculated in accordance with prevailing industry convention, as
calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury bill with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the business day immediately preceding such date
obtained by the Auction Agent.
The "Treasury Note Rate" is on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall
Street Journal on such date for the business day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall Street
Journal, then the yield as calculated by reference to the arithmetic average of
the bid price quotations of the most recently auctioned Treasury note with a
remaining maturity closest to the length of such Rate Period, as determined by
bid price quotations as of the close of business on the business day
immediately preceding such date obtained by the Auction Agent.
If all the shares of a series are subject to hold orders and the Trust has
notified the Auction Agent of its intent to allocate to a series of Preferred
Shares any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the applicable rate for the series of Preferred
Shares for the applicable rate period will be (i) if the Taxable Yield Rate is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate
equal to the sum of (x) the amount determined pursuant to the two bullet points
above, and (y) the product of the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income, whichever is
greater, multiplied by the Taxable Yield Rate.
The "Taxable Yield Rate" is the rate determined by (i) dividing the amount
of Taxable Income available for distribution on each Preferred Share in the
affected series by the number of days in the Dividend Period in respect of
which the Taxable Income is 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 T7 will normally be held every Tuesday, and each
subsequent dividend period will normally begin on the following Wednesday. The
auctions for Series R7 will normally be held every Thursday, and each
subsequent dividend period will normally begin on the following Friday.
Whenever the Trust intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on Preferred Shares,
the Trust may notify the auction agent of the amount to be so included not
later than the dividend payment date before the auction date. Whenever the
auction agent receives
32
such notice from the Trust, it will be required in turn to notify each Broker-
Dealer, who, on or prior to such auction date, will be required to notify its
customers who are beneficial owners and potential holders believed by it to be
interested in submitting an order in the auction to be held on such auction
date. In the event of such notice, the Trust will not be required to pay an
Additional Dividend with respect to such dividend.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance than any
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares are not registered on any stock exchange or
on the Nasdaq Stock Market. 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:
. pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
. to a Broker-Dealer; or
. to such other persons as may be permitted by the Trust;
provided, however, that
. a sale, transfer or other disposition of Preferred Shares from a
customer of Broker-Dealer who is listed on the records of that Broker-
Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale,
transfer or other disposition if such Broker-Dealer remains the existing
holder of the shares; and
. in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Trust) to whom such
transfer is made will advise the auction agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the Preferred Shares, the Agreement and Declaration of Trust,
as amended and restated, authorizes the issuance of an unlimited number of
common shares of beneficial interest, par value $.001 per share. Each common
share has one vote and is fully paid and non-assessable, except that the
trustees shall have the power to cause shareholders to pay expenses of the
Trust by setting off charges due from common shareholders from declared but
unpaid dividends or distributions owed 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 "BFZ".
33
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust, as amended and restated, includes
provisions that could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust or to change the composition of its
board of trustees. This could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control over the Trust. Such
attempts could have the effect of increasing the expenses of the Trust and
disrupting the normal operation of the Trust. The board of trustees is divided
into three classes, with the terms of one class expiring at each annual meeting
of shareholders. At each annual meeting, one class of trustees is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the board of trustees. A trustee may be removed from office by
the action of a majority of the remaining trustees followed by a vote of the
holders of at least 75% of the shares then entitled to vote for the election of
the respective trustee.
In addition, the Trust's Agreement and Declaration of Trust, as amended and
restated, requires the favorable vote of a majority of the Trust's board of
trustees followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of the Trust, voting
separately as a class or series, to approve, adopt or authorize certain
transactions with 5% or greater holders of a class or series of shares and
their associates, unless the transaction has been approved by at least 80% of
the trustees, in which case "a majority of the outstanding voting securities"
(as defined in the Investment Company Act) of the Trust shall be required. For
purposes of these provisions, a 5% or greater holder of a class or series of
shares (a "Principal Shareholder") refers to any person who, whether directly
or indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of any class or series
of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements
are:
. the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder;
. the issuance of any securities of the Trust to any Principal Shareholder
for cash, except pursuant to the Dividend Reinvestment Plan;
. the sale, lease or exchange of all or any substantial part of the assets
of the Trust to any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the
purpose of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period; or
. the sale, lease or exchange to the Trust or any subsidiary of the Trust,
in exchange for securities of the Trust, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
twelve-month period.
To convert the Trust to an open-end investment company, the Trust's
Agreement and Declaration of Trust, as amended and restated, requires the
favorable vote of a majority of the board of the trustees 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 all
outstanding Preferred Shares. The board of trustees
34
believes, however, that the closed-end structure is desirable in light of the
Trust's investment objective and policies. Therefore, you should assume that it
is not likely that the board of trustees would vote to convert the Trust to an
open-end fund.
To liquidate the Trust, 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 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.
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 or series of the Trust shall vote together as a single
class, except to the extent required by the 1940 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 Agreement and
Declaration of Trust, as amended and restated, on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their
net asset values, and the Trust's common shares may also trade at a discount to
their net asset value. The market price of the Trust's common shares will be
determined by such factors as relative demand for and supply of such common
shares in the market, the Trust's net asset value, general market and economic
conditions and other factors beyond the control of the Trust. Although the
Trust's common shareholders will not have the right to redeem their common
shares, the Trust may take action to repurchase common shares in the open
market or make tender offers for its common shares at their net asset value.
This may have the effect of reducing any market discount from net asset value.
Any such repurchase may cause the Trust to repurchase Preferred Shares to
maintain asset coverage requirements imposed by the Investment Company Act or
any rating agency rating the Preferred Shares at that time.
TAX MATTERS
Federal Income Tax Matters
The following is a description of certain U.S. federal income tax
consequences to a stockholder of acquiring, holding and disposing of Preferred
Shares of the Trust. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the "IRS") retroactively or prospectively. No attempt is made to present a
detailed explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Trust and its stockholders, and the discussion set forth herein
does not constitute tax advice. Investors are urged to consult their own tax
advisers to determine the tax consequences to them of investing in the Trust.
The Trust intends to elect to be treated and to qualify to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") and intends to distribute substantially all of
its net income and gains to its shareholders. Therefore, it is not expected
that the Trust will
35
be subject to any U.S. federal income tax. The Trust expects that substantially
all of the dividends it distributes to its common shareholders and Preferred
Shareholders will qualify as "exempt-interest dividends." A shareholder treats
an exempt-interest dividend as interest on state and local bonds which is
exempt from regular U.S. federal income tax. Some or all of an exempt-interest
dividend, however, may be subject to U.S. federal alternative minimum tax
imposed on the shareholder. Different U.S. federal alternative minimum tax
rules apply to individuals and to corporations. In addition to exempt-interest
dividends, the Trust also may distribute to its shareholders amounts that are
treated as long-term capital gain or ordinary income. The Trust will allocate
tax-exempt interest income, long-term capital gain and other taxable income, if
any, proportionately among the common shares and the Preferred Shares in
proportion to total dividends paid to each class for the year. The Trust
intends to notify Preferred Shareholders in advance if it will allocate income
to them that is not exempt from regular U.S. federal income tax. In certain
circumstances, the Trust will make payments to Preferred Shareholders to offset
the tax effects of the taxable distribution. See "Description of Preferred
Shares--Dividends and Dividend Periods--Additional Dividends." The sale or
other disposition of common shares or Preferred Shares of the Trust will
normally result in capital gain or loss to shareholders. Both long-term and
short-term capital gains of corporations are taxed at the rates applicable to
ordinary income. For non-corporate taxpayers, short-term capital gains and
ordinary income are taxed currently at a maximum rate of 39.1%, while long-term
capital gains are generally taxed at a maximum rate of 20% (or 18% for capital
assets that have been held for more than five years and the holding period of
which began after December 31, 2000).* Because of certain limitations on
itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective rate of tax may be higher in certain
circumstances. Losses realized by a shareholder on the sale or exchange of
shares of the Trust held for six months or less are disallowed to the extent of
any exempt-interest dividends received with respect to such shares, and, if not
disallowed, such losses are treated as long-term capital losses to the extent
of any capital gain dividends received (or amounts credited as an undistributed
capital gain) with respect to such shares. A shareholder's holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any
loss realized on a sale or exchange of shares of the Trust will be disallowed
to the extent those shares of the Trust are replaced by other shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the original shares. In that event, the basis of the replacement
shares of the Trust will be adjusted to reflect the disallowed loss.
This summary of tax consequences is intended for general information only.
You should consult a tax advisor concerning the tax consequences of your
investment in the Trust. The foregoing discussion is subject to and qualified
in its entirety by the discussion in "Tax Matters" in the Statement of
Additional Information below.
California Tax Matters
Under existing California income tax law, if at the close of each quarter of
the Trust's taxable year at least 50% of the value of its total assets consists
of obligations that, when held by individuals, pay interest that is exempt from
tax under California law, shareholders of the Trust who are subject to
California personal income tax will not be subject to such tax on distributions
with respect to their shares of the Trust to the extent that such distributions
are attributable to such tax-exempt interest from such obligations (less
expenses applicable thereto). If such distributions are received by a
corporation subject to the California franchise tax, however, the distributions
will be includable in its gross income for purposes of determining its
California franchise tax.
--------
* The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for
taxable years beginning after December 31, 2000, creates a new 10 percent
income tax bracket and reduces the tax rates applicable to ordinary income
over a six year phase-in period. Beginning in the taxable year 2006,
ordinary income will be subject to a 35% maximum rate, with approximately
proportionate reductions in the other ordinary rates.
36
Corporations subject to the California corporate income tax may be subject to
such taxes with respect to distributions from the Trust. Under California
personal property tax law, securities owned by the Trust and any interest
thereon are exempt from such personal property tax.
Generally, any proceeds paid to the Trust under an insurance policy which
represent matured interest on defaulted obligations should be exempt from
California personal income tax if, and to the same extent that,
such interest would have been exempt if paid by the issuer of such defaulted
obligations. California tax laws substantially incorporate those provisions of
the Code governing the treatment of regulated investment companies.
The state tax discussion set forth above is for general information only.
Prospective investors should consult their own tax advisors regarding the
specific state tax consequences of holding and disposing of shares of the Trust
as well as the effects of Federal, local and foreign tax law and any proposed
tax law changes.
37
UNDERWRITING
Salomon Smith Barney Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives of the underwriters named below.
Subject to the terms and conditions of the underwriting agreement dated the
date hereof, each underwriter named below has severally agreed to purchase, and
the Trust has agreed to sell to such underwriter, the number of Preferred
Shares set forth opposite the name of such underwriter.
Number of
Name Shares
---- -------------
Series Series
T7 R7
------ ------
Salomon Smith Barney Inc.....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
Prudential Securities Incorporated...........................
UBS Warburg LLC..............................................
A.G. Edwards & Sons, Inc. ...................................
Gruntal & Co., L.L.C. .......................................
J.J.B. Hilliard, W.L. Lyons, Inc. ...........................
---- ----
Total......................................................
==== ====
The underwriting agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
underwriters are obligated to purchase all the Preferred Shares if they
purchase any 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. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share on sales to certain other dealers.
After the initial public offering, the underwriters may change the public
offering price and the concession. Investors must pay for any Preferred Shares
purchased in the initial public offering on or before 2001.
The Trust anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Trust's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of,
and dealers in, securities and act as market makers in a number of such
securities, and therefore can be expected to engage in portfolio transactions
with the Trust.
The Trust anticipates that 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."
J.J.B. Hilliard, W.L. Lyons, Inc., one of the underwriters, is an affiliate
of BlackRock Advisors and BlackRock Financial Management.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013. The principal business address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated is Four World Financial Center, New
York, New York 10080.
The settlement date for the purchase of the Preferred Shares will be ,
2001, as agreed upon by the underwriters, the Trust and BlackRock Advisors
pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
38
CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT
The Custodian of the assets of the Trust is State Street Bank and Trust
Company, 225 Franklin Street, Boston , Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services.
EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021,
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, and for the underwriters by Simpson Thacher & Bartlett, New York, New
York. Simpson Thacher & Bartlett may rely as to certain matters of Delaware law
on the opinion of 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 Securities and
Exchange Commission (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 and Chicago Regional Office, Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the Trust
can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
This prospectus does not contain all of the information in the Trust's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contact or other
document are not necessarily complete and in each instance reference is made to
the copy of the contact or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Trust and Preferred Shares can be found in
the Trust's registration statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains the Trust's registration statement, other
documents incorporated by reference, and other information the Trust has filed
electronically with the Commission, including proxy statements and reports
filed under the Securities Exchange Act of 1934.
39
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds.......................................................... B-2
Investment Objective and Policies........................................ B-2
Investment Policies and Techniques....................................... B-4
Other Investment Policies and Techniques................................. B-18
Management of the Trust.................................................. B-21
Portfolio Transactions and Brokerage..................................... B-27
Additional Information Concerning the Auctions for Preferred Shares...... B-28
Description of Common Shares............................................. B-29
Repurchase of Common Shares.............................................. B-29
Tax Matters.............................................................. B-31
Experts.................................................................. B-35
Additional Information................................................... B-35
Independent Auditors' Report............................................. F-1
Financial Statements..................................................... F-2
APPENDIX A--Statement of Preferences of Municipal Auction Rate Cumulative
Preferred Shares........................................................ AA-1
APPENDIX B--Ratings of Investments....................................... BB-1
APPENDIX C--General Characteristics and Risks of Hedging Transactions.... CC-1
40
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like the
Trust with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields and tax
rates:
Tax-Free Yields
---------------
Tax
Rate 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
----- ----- ----- ----- ----- ----- -----
15.0% 1.76% 2.35% 2.94% 3.53% 4.12% 4.71%
27.5% 2.05% 2.74% 3.42% 4.11% 4.79% 5.52%
30.5% 2.14% 2.86% 3.57% 4.29% 5.00% 5.76%
35.5% 2.31% 3.08% 3.85% 4.62% 5.38% 6.20%
39.1% 2.44% 3.26% 4.07% 4.89% 5.70% 6.57%
The following tables show the approximate taxable yields for individuals
that are equivalent to tax free yields under combined Federal and California
state taxes, using published 2001 marginal Federal tax rates and marginal
California tax rates currently available and scheduled to be in effect.
2001
Taxable Equivalent Estimated
Federal State Combined Current Return
Tax Tax Tax ----------------------------------
Single Return Joint Return Bracket Bracket* Bracket* 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
------------- ------------ ------- -------- -------- ---- ---- ---- ---- ---- ----
$ 0--27,050 $ 0--45,200 15.00% 6.000% 20.10% 1.88% 2.50% 3.13% 3.75% 4.38% 5.01%
27,050--65,550 45,200--109,250 27.50 9.300 34.20 2.28 3.04 3.80 4.56 5.32 6.08
65,550--136,750 109,250--166,500 30.50 9.300 37.00 2.38 3.17 3.97 4.76 5.55 6.35
136,750--297,350 166,500--297,350 35.50 9.300 41.50 2.56 3.42 4.27 5.13 5.98 6.84
Over 297,350 Over 297,350 39.10 9.300 44.80 2.72 3.62 4.53 5.43 6.34 7.24
--------
* The combined State and Federal tax rates shown reflect the fact that state
tax payments are currently deductible for Federal tax purposes. Please note
that the table does not reflect (i) any Federal or state limitations on the
amounts of allowable itemized deductions, phase-outs of personal or dependent
exemption credits or other allowable credits, (ii) any local taxes imposed,
or (iii) any taxes other than personal income taxes. The table assumes that
Federal taxable income is equal to state income subject to tax, and in cases
where more than one state rate falls within a Federal bracket, the highest
state rate corresponding to the highest income within that Federal bracket is
used. The numbers in the Combined Tax Rate column are rounded to the nearest
one-tenth of one percent.
A-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$131,950,000
BlackRock
California Municipal Income Trust
Municipal Auction Rate Cumulative Preferred Shares
2,639, Series T7
2,639, Series R7
----------------
PROSPECTUS
September , 2001
----------------
Salomon Smith Barney
Merrill Lynch & Co.
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg
Gruntal & Co., L.L.C.
J.J.B. Hilliard, W.L. Lyons, Inc.
A PNC Company
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Statement of Additional Information is not complete +
+and may be changed. We may not sell these securities until the Registration +
+Statement filed with the Securities and Exchange Commission is effective. +
+This Statement of Additional Information is not an offer to sell these +
+securities and it is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2001
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
BlackRock California Municipal Income Trust (the "Trust") is a recently
organized, non-diversified, closed-end, management investment company. 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 September , 2001. This Statement of Additional
Information 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
Page
----
Use of Proceeds.......................................................... B-2
Investment Objective and Policies........................................ B-2
Investment Policies and Techniques....................................... B-4
Other Investment Policies and Techniques................................. B-18
Management of the Trust.................................................. B-21
Portfolio Transactions and Brokerage..................................... B-27
Additional Information Concerning the Auctions for Preferred Shares...... B-28
Description of Common Shares............................................. B-29
Repurchase of Common Shares.............................................. B-29
Tax Matters.............................................................. B-31
Experts.................................................................. B-35
Additional Information................................................... B-35
Independent Auditors' Report............................................. F-1
Financial Statements..................................................... F-2
APPENDIX A--Statement of Preferences of Municipal Auction Rate Cumulative
Preferred Shares........................................................ AA-1
APPENDIX B--Ratings of Investments....................................... BB-1
APPENDIX C--General Characteristics and Risks of Hedging Transactions.... CC-1
This Statement of Additional Information is dated September , 2001.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objective and policies the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Policies and Techniques--
Short-Term Taxable Fixed Income Securities," the income on which is subject to
regular Federal income tax and California income taxes and securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the type in which the Trust may invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The Trust has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of Federal tax law, and the Trust expects that a portion of the
income it produces will be includable in alternative minimum taxable income.
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 Preferred Shares. The suitability of
an investment in Preferred Shares will depend upon a comparison of the after-
tax yield likely to be provided from the Trust with that from comparable tax-
exempt investments not subject to the alternative minimum tax, and from
comparable fully taxable investments, in light of each such investor's tax
position. Special considerations apply to corporate investors. See "Tax
Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding common
shares and Preferred Shares, voting together as a single class, and of the
holders of a majority of the outstanding Preferred Shares voting as a separate
class:
(1) invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to municipal bonds
other than those municipal bonds backed only by assets and revenues of non-
governmental users;
(2) issue senior securities or borrow money other than as permitted by
the Investment Company Act or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short sales, when-
issued and forward commitment transactions and similar investment
strategies;
(3) make loans of money or property to any person, except through loans
of portfolio securities, the purchase of fixed income securities consistent
with the Trust's investment objective and policies or the entry into
repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own securities the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other than
municipal bonds secured by real estate or interests therein; provided that
the Trust may hold and sell any real estate acquired in connection with its
investment in portfolio securities; or
(6) purchase or sell commodities or commodity contracts for any purposes
except as, and to the extent, permitted by applicable law without the Trust
becoming subject to registration with the Commodity Futures Trading
Commission (the "CFTC") as a commodity pool.
B-2
When used with respect to particular shares of the Trust, "majority of the
outstanding" means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1) above,
securities of the U.S. government, its agencies, or instrumentalities, and
securities backed by the credit of a governmental entity are not considered to
represent industries. However, obligations backed only by the assets and
revenues of non-governmental issuers may for this purpose be deemed to be
issued by such non-governmental issuers. Thus, the 25% limitation would apply
to such obligations. It is nonetheless possible that the Trust may invest more
than 25% of its total assets in a broader economic sector of the market for
municipal obligations, such as revenue obligations of hospitals and other
health care facilities or electrical utility revenue obligations. The Trust
reserves the right to invest more than 25% of its assets in industrial
development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1)
above, a non-governmental issuer shall be deemed the sole issuer of a security
when its assets and revenues are separate from other governmental entities and
its securities are backed only by its assets and revenues. Similarly, in the
case of a non-governmental issuer, such as an industrial corporation or a
privately owned or operated hospital, if the security is backed only by the
assets and revenues of the non-governmental issuer, then such non-governmental
issuer would be deemed to be the sole issuer. Where a security is also backed
by the enforceable obligation of a superior or unrelated governmental or other
entity (other than a bond insurer), it shall also be included in the
computation of securities owned that are issued by such governmental or other
entity. Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated
as an issue of such government, other entity or bank. When a municipal bond is
insured by bond insurance, it shall not be considered a security that is issued
or guaranteed by the insurer; instead, the issuer of such municipal bond will
be determined in accordance with the principles set forth above. The foregoing
restrictions do not limit the percentage of the Trust's assets that may be
invested in municipal bonds insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10% of its
total assets in the aggregate in shares of other investment companies and up to
5% of its total assets in any one investment company, provided the investment
does not represent more than 3% of the voting stock of the acquired investment
company at the time such shares are purchased. As a shareholder in any
investment company, the Trust will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Trust's advisory
fees and other expenses with respect to assets so invested. Holders of common
shares would therefore be subject to duplicative expenses to the extent the
Trust invests in other investment companies. In addition, the securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks described herein and in the prospectus. As described
in the prospectus in the section entitled "Risks," the net asset value and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.
In addition to the foregoing fundamental investment policies, the Trust is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, after giving effect to
such sale, the market value of all securities sold short does not exceed
25% of the value of the Trust's total assets and the Trust's aggregate
short sales of a particular class of securities does not exceed 25% of the
then outstanding securities of that class. The Trust may also make short
sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the Trust owns or has the immediate
and unconditional right to acquire at no additional cost the identical
security;
(2) purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act or any exemptive
relief obtained thereunder; or
B-3
(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 its taxable year, (a) no more
than 25% of the value of the Trust's total assets are invested in the
securities (other than United States government securities or securities of
other regulated investment companies) of a single issuer or two or more issuers
controlled by the Trust and engaged in the same, similar or related trades or
businesses and (b) with regard to at least 50% of the Trust's total assets, no
more than 5% of its total assets are invested in the securities (other than
United States government securities or securities of other regulated investment
companies) of a single issuer. These tax-related limitations may be changed by
the Trustees to the extent appropriate in light of changes to applicable tax
requirements.
The Trust intends to apply for ratings for the Preferred Shares from Moody's
and S&P. In order to obtain and maintain the required ratings, the Trust will
be required to comply with investment quality, diversification and other
guidelines established by Moody's and S&P. Such guidelines will likely be more
restrictive than the restrictions set forth above. The Trust does not
anticipate that such guidelines would have a material adverse effect on the
Trust's holders of common shares or its ability to achieve its investment
objective. The Trust presently anticipates that any Preferred Shares that it
intends to issue would be initially given the highest ratings by Moody's (aaa)
and by S&P (AAA), but no assurance can be given that such ratings will be
obtained. No minimum rating is required for the issuance of Preferred Shares by
the Trust. Moody's and S&P receive fees in connection with their ratings
issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trust's
investment objectives, policies and techniques that are described in the
prospectus.
Portfolio Investments
The Trust will invest primarily in a portfolio of investment grade municipal
bonds that are exempt from regular Federal income tax and California income
taxes.
Issuers of bonds rated Ba/BB or B are regarded as having current capacity to
make principal and interest payments but are subject to business, financial or
economic conditions which could adversely affect such payment capacity.
Municipal bonds rated Baa or BBB are considered "investment grade" securities;
municipal bonds rated Baa are considered medium grade obligations which lack
outstanding investment characteristics and have speculative characteristics,
while municipal bonds rated BBB are regarded as having adequate capacity to pay
principal and interest. Municipal bonds rated AAA in which the Trust may invest
may have been so rated on the basis of the existence of insurance guaranteeing
the timely payment, when due, of all principal and interest. Municipal bonds
rated below investment grade quality are obligations of issuers that are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility of issuer
default and bankruptcy and increased market price volatility. Municipal bonds
rated below investment grade tend to be less marketable than higher-quality
bonds because the market for them is less broad. The market for unrated
municipal bonds is even narrower. During periods of thin trading in these
markets, the spread between bid and asked prices is likely to increase
significantly and the Trust may have greater difficulty selling its portfolio
securities. The Trust will be more dependent on BlackRock's research and
analysis when investing in these securities.
B-4
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix B hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Trust will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15 or more years, but the
average weighted maturity may be shortened from time to time depending on
market conditions. As a result, the Trust's portfolio at any given time may
include both long-term and intermediate-term municipal bonds. Moreover, during
temporary defensive periods (e.g., times when, in BlackRock's opinion,
temporary imbalances of supply and demand or other temporary dislocations in
the tax-exempt bond market adversely affect the price at which long-term or
intermediate-term municipal bonds are available), and in order to keep cash on
hand fully invested, including the period during which the net proceeds of the
offering are being invested, the Trust may invest any percentage of its assets
in short-term investments including high quality, short-term securities which
may be either tax-exempt or taxable and securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Trust may invest directly. The Trust intends to invest in taxable
short-term investments only in the event that suitable tax-exempt temporary
investments are not available at reasonable prices and yields. Tax-exempt
temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax
anticipation notes and revenue anticipation notes or other such municipal bonds
maturing in three years or less from the date of issuance) and municipal
commercial paper. The Trust will invest only in taxable temporary investments
which are U.S. government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. Taxable temporary
investments of the Trust may include certificates of deposit issued by U.S.
banks with assets of at least $1 billion, commercial paper or corporate notes,
bonds or debentures with a remaining maturity of one year or less, or
repurchase agreements. See "Other Investment Policies and Techniques--
Repurchase Agreements." To the extent the Trust invests in taxable investments,
the Trust will not at such times be in a position to achieve its investment
objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security and the Trust will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Also included within the general category of municipal bonds described in
the prospectus are participations in lease obligations or installment purchase
contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However,
certain Municipal Lease Obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. In the case of a "non-appropriation" lease, the Trust's
ability to recover under the lease in the event of non-appropriation or default
will be limited solely to the repossession of the leased property, without
recourse to the general credit of the lessee, and the disposition or re-leasing
of the property might prove difficult. In order to reduce this risk, the Trust
will only purchase Municipal Lease Obligations where BlackRock believes the
issuer has a strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or up on municipalities to levy taxes. There is
also the
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possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
In addition to the types of municipal bonds described in the prospectus, the
Trust may invest in other securities that pay interest that is, or make other
distributions that are, exempt from regular Federal income tax and/or state and
local personal taxes, regardless of the technical structure of the issuer of
the instrument. The Trust treats all such tax-exempt securities as municipal
bonds.
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, the
Trust may invest up to 100% of its total assets in cash equivalents and short-
term taxable fixed-income securities, although the Trust intends to invest in
taxable short-term investments only in the event that suitable tax-exempt
short-term investments are not available at reasonable prices and yields.
Short-term taxable fixed income investments are defined to include, without
limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or
a savings and loan association. Such certificates are for a definite period
of time, earn a specified rate of return, and are normally negotiable. The
issuer of a certificate of deposit agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon.
Certificates of deposit purchased by the Trust may not be fully insured by
the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Trust purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities
to the seller, who also simultaneously agrees to buy back the securities at
a fixed price and time. This assures a predetermined yield for the Trust
during its holding period, since the resale price is always greater than
the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Trust to invest temporarily available cash.
The Trust may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Trust may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Trust is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Trust is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Trust could
incur a loss of both principal and interest. BlackRock monitors the value
of the collateral at the time the action is entered into and at all times
during the term of the repurchase agreement. BlackRock does so in an effort
to determine that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Trust. If the seller were to
be subject to a Federal bankruptcy proceeding, the ability
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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.
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While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are available
in the marketplace and the Trust may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
Factors Pertaining to California
As described in the Prospectus, except during temporary periods, the Trust
will invest primarily in California municipal bonds. The portfolio of the Trust
may include securities issued by the State of California (the "State"), by its
various public bodies (the "Agencies") and/or by other municipal entities
located within the State (securities of all such entities are referred to
herein as "California municipal securities"). In addition, the specific
California municipal bonds in which the Trust will invest will change from time
to time. The Trust is therefore susceptible to political, economic, regulatory
or other factors affecting issuers of California municipal bonds. The following
information constitutes only a brief summary of a number of the complex factors
which may impact issuers of California municipal bonds and does not purport to
be a complete or exhaustive description of all adverse conditions to which
issuers of California municipal bonds may be subject. Such information is
derived from official statements utilized in connection with the issuance of
California municipal bonds, as well as from other publicly available documents.
Such information has not been independently verified by the Trust, and the
Trust assumes no responsibility for the completeness or accuracy of such
information. The summary below does not include all of the information
pertaining to the budget, receipts and disbursements of the State of California
that would ordinarily be included in various public documents issued thereby,
such as an Official Statement prepared in connection with the issuance of
general obligation bonds of the State of California. Such an Official
Statement, together with any updates or supplements thereto, may generally be
obtained upon request to the Budget Office of the State of California.
The California Economy. According to the State's Legislative Analyst Office,
with a gross state product in excess of $1 trillion, California's economy is
the largest state economy in the United States, accounting for 13% of the
nation's output, and the sixth largest economy in the world, trailing only the
United States as a whole, Japan, Germany, England and France. In addition to
its size, California's economy is diverse, with no industry sector accounting
for more than one-quarter of the State's output.
While California's economy is broad, it does have major concentrations in
high technology, aerospace and defense related manufacturing, entertainment,
and real estate and financial services, and may be sensitive to economic
factors affecting those industries. One example of such potential sensitivity
occurred from mid-1990 to late 1993, when the State suffered a recession.
Construction, manufacturing (especially aerospace) and financial services,
among others, were all severely affected, particularly in Southern California.
More recently, reflective of the nationwide economic slowdown, the high
technology sector of the State's economy has entered a cyclical downturn.
State Indebtedness. The State Treasurer is responsible for the sale of debt
obligations of the State and its various authorities and agencies. The State
has always paid the principal of and interest on its general obligation bonds,
general obligation commercial paper, lease-purchase debt and short-term
obligations, including revenue anticipation notes and revenue anticipation
warrants, when due.
Capital Facilities Financing. The State Constitution prohibits the creation
of general obligation indebtedness of the State unless a bond law is approved
by a majority of the electorate voting at a general election or a direct
primary. General obligation bond acts provide that debt service on general
obligation bonds shall be appropriated annually from the State's General Fund
and all debt service on general obligation bonds is paid from the General Fund.
Under the State Constitution, debt service on general obligation bonds is the
second charge to the General Fund after the application of moneys in the
General Fund to the support of the public school system and public institutions
of higher education. Certain general obligation bond programs receive revenues
from sources other than the sale of bonds or the investment of bond proceeds.
B-8
As of August 1, 2001, the State had outstanding $23,683,878,000 aggregate
principal amount of long-term general obligation bonds, and unused voter
authorizations for the future issuance of $10,937,499,000 of long-term general
obligation bonds. This latter figure consists of $3,897,034,000 of authorized
commercial paper notes, described below (of which $596,445,000 was
outstanding), which has not yet been refunded by general obligation bonds, and
$7,040,465,000 of other authorized but unissued general obligation debt.
The General Obligation Bond Law permits the State to issue as variable rate
indebtedness up to 20% of the aggregate amount of long-term general obligation
bonds outstanding. As of August 1, 2001, there was no variable rate
indebtedness outstanding; however, the State plans to issue such indebtedness
in the future.
Pursuant to legislation enacted in 1995, voter-approved general obligation
indebtedness may be issued either as long-term bonds, or, for some but not all
bond acts, as commercial paper notes. Commercial paper notes may be renewed or
may be refunded by the issuance of long-term bonds. The State issues long-term
general obligation bonds from time to time to retire its general obligation
commercial paper notes. Pursuant to the terms of the bank credit agreement
presently in effect supporting the general obligation commercial paper program,
not more than $1.5 billion of general obligation commercial paper notes may be
outstanding at any time; this amount may be increased or decreased in the
future. Commercial paper notes are deemed issued upon authorization by the
respective Finance Committees, whether or not such notes are actually issued.
As of August 1, 2001, the Finance Committees had authorized the issuance of up
to $3,897,034,000 of commercial paper notes; as of that date, $596,445,000
aggregate principal amount of general obligation commercial paper notes was
outstanding.
In addition to general obligation bonds, the State builds and acquires
capital facilities through the use of lease-purchase borrowing. Under these
arrangements, the State Public Works Board, another State or local agency or a
joint powers authority issues bonds to pay for the construction of facilities
such as office buildings, university buildings or correctional institutions.
These facilities are leased to a State agency or the University of California
under a long-term lease which provides the source of payment of the debt
service on the lease-purchase bonds. In some cases, there is not a separate
bond issue, but a trustee directly creates certificates of participation in the
State's lease obligation, which are marketed to investors. Under applicable
court decisions, such lease arrangements do not constitute the creation of
"indebtedness" within the meaning of the Constitutional provisions which
require voter approval. For purposes of this section, "lease-purchase debt" or
"lease-purchase financing" means principally bonds or certificates of
participation for capital facilities where the rental payments providing the
security are a direct or indirect charge against the General Fund and also
includes revenue bonds for a State energy efficiency program secured by
payments made by various State agencies under energy service contracts. Certain
of the lease-purchase financings are supported by special funds rather than the
General Fund. The State had $6,591,878,464 General Fund-supported lease-
purchase debt outstanding at August 1, 2001. The State Public Works Board,
which is authorized to sell lease revenue bonds, had $2,955,937,000 authorized
and unissued as of August 1, 2001.
Certain State agencies and authorities issue revenue obligations for which
the General Fund has no liability. Revenue bonds represent obligations payable
from State revenue-producing enterprises and projects, which bonds are not
payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by the revenue bonds. The
enterprises and projects include transportation projects, various public works
projects, public and private educational facilities (including the California
State University and University of California systems), housing, health
facilities and pollution control facilities. There are 17 agencies and
authorities authorized to issue revenue obligations (excluding lease-purchase
debt). State agencies and authorities had $29,034,926,224 aggregate principal
amount of revenue bonds and notes which are non-recourse to the General Fund
outstanding as of August 1, 2001.
State Finances and the Budget Process. The State's fiscal year begins on
July 1 and ends on June 30. The State operates on a budget basis, using a
modified accrual system of accounting, with revenues credited in the period in
which they are measurable and available and expenditures debited in the period
in which the corresponding liabilities are incurred.
B-9
The annual budget is proposed by the Governor by January 10 of each year for
the next fiscal year (the "Governor's Budget"). Under state law, the annual
proposed Governor's Budget cannot provide for projected expenditures in excess
of projected revenues and balances available from prior fiscal years. Following
the submission of the Governor's Budget, the Legislature takes up the proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds
majority vote of each House of the Legislature. The Governor may reduce or
eliminate specific line items in the Budget Act or any other appropriations
bill without vetoing the entire bill. Such individual line-item vetoes are
subject to override by a two-thirds majority vote of each House of the
Legislature.
Appropriations also may be included in legislation other than the Budget
Act. Bills containing appropriations (except for local school and community
college ("K-14") education) must be approved by a two-thirds majority vote in
each House of the Legislature and be signed by the Governor. Bills containing
K-14 education appropriations only require a simple majority vote. Continuing
appropriations, available without regard to fiscal year, may also be provided
by statute or the State Constitution. There is litigation pending concerning
the validity of such continuing appropriations.
Funds necessary to meet an appropriation need not be in the State Treasury
at the time such appropriation is enacted, revenues may be appropriated in
anticipation of their receipt.
The moneys of the State are segregated into the General Fund and over 900
special funds, including bond, trust and pension funds. The General Fund
consists of revenues received by the State Treasury and not required by law to
be credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the
depository of most of the major revenue sources of the State. The General Fund
may be expended as a consequence of appropriation measures enacted by the
Legislature and approved by the Governor, as well as appropriations pursuant to
various constitutional authorizations and initiative statutes.
The Special Fund for Economic Uncertainties ("SFEU") is funded with General
Fund revenues and was established to protect the State from unforeseen revenue
reductions and/or unanticipated expenditure increases. Amounts in the SFEU may
be transferred by the State Controller as necessary to meet cash needs of the
General Fund. The State Controller is required to return moneys so transferred
without payment of interest as soon as there are sufficient moneys in the
General Fund.
Local Governments. The primary units of local government in California are
the counties, ranging in population from 1,200 in Alpine County to over
9,900,000 in Los Angeles County. Counties are responsible for the provision of
many basic services, including indigent health care, welfare, jails and public
safety in unincorporated areas. There are also 476 incorporated cities, and
thousands of special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property tax and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. Counties, in particular, have had fewer options to raise revenues
than many other local government entities, and have been required to maintain
many services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding K-12
schools and community colleges. During the recession of the early 1990s, the
Legislature eliminated most of the remaining components of post-Proposition 13
aid to local government entities other than K-14 education districts by
requiring cities and counties to transfer some of their property tax revenues
to school districts. However, the Legislature also provided additional funding
sources (such as sales tax) and reduced certain mandates for local services.
B-10
The 2001 Budget Act and related legislation provide significant assistance
to local governments, including $357 million for various local public safety
programs, including the Citizens' Option for Public Safety ("COPS") program to
support local front-line law enforcement, sheriffs' departments for jail
construction and operations, and district attorneys for prosecution. For 2001-
02, the administration proposes to reduce funding for local law enforcement
technology grants but to provide $232.6 million for the COPS and county
juvenile justice crime prevention programs. This is intended to provide for a
continuum of response to juvenile crime and delinquency and a swift, certain
and graduated response to juvenile offenders. The Budget also provides $154
million for deferred maintenance of local streets and roads, $60 million in
assistance for housing, $209 million for mental health and social services, and
$34 million for environmental protection. In addition, legislation was enacted
in 1999 to provide annual relief to cities based on 1997-98 costs of jail
booking and processing fees paid to counties. For 2001-02, cities will receive
approximately $38 million in booking fees.
Prior to legislation enacted in 1997, local governments provided the
majority of funding for the State's trial court system. The legislation
consolidated the trial court funding at the State level in order to streamline
the operation of the courts, provide a dedicated revenue source, and relieve
fiscal pressure on the counties. This resulted in decreasing county
contribution for court operations by $415 million and allowed cities to retain
$68 million in fine and penalty revenue previously remitted to the State. In
the 2001-02 fiscal year, the State's trial court system will receive
approximately $1.7 billion in State resources and $475 million in resources
from the counties.
The entire statewide welfare system has been changed in response to the
change in Federal welfare law enacted in 1996. Under the CalWORKs program,
counties are given flexibility to develop their own plans, consistent with
State law, to implement the program and to administer many of its elements, and
their costs for administrative and supportive services are capped at the 1996-
97 levels. Counties are also given financial incentives if, at the individual
county level or statewide, the CalWORKs program produces savings associated
with specified standards. Counties will still be required to provide "general
assistance" aid to certain persons who cannot obtain welfare from other
programs.
In 1996, voters approved Proposition 218, entitled the "Right to Vote on
Taxes Act," which incorporates new Articles XIII C and XIII D into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges
and assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy
or collect taxes.
State Appropriations Limit. The State is subject to an annual appropriations
limit imposed by Article XIII B of the State Constitution (the "Appropriations
Limit"). The Appropriations Limit does not restrict appropriations to pay debt
service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds
of taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized on or prior to January 1, 1979 or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the Federal government, appropriations for qualified
capital outlay projects,
B-11
appropriations of revenues derived from any increase in gasoline taxes and
motor vehicle weight fees above January 1, 1990 levels, and appropriation of
certain special taxes imposed by initiative (e.g., cigarette and tobacco
taxes). The Appropriations Limit may also be exceeded in cases of emergency.
The Appropriations Limit in each year is based on the limit for the prior
year, adjusted annually for changes in state per capita personal income and
changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government or any transfer of the financial source for the provisions of
services from tax proceeds to non-tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
The Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year period
above the combined Appropriations Limits for those two years is divided equally
between transfers to K-14 districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B which
defines certain terms used in Article XIII B and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative Constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (as modified by Proposition 111, which was enacted on June 5,
1990), K-14 schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues ("Test 1"), (b) the amount appropriated to K-
14 schools in the prior year, adjusted for changes in the cost of living
(measured as in Article XIII B by reference to State per capita personal
income) and enrollment ("Test 2"), or (c) a third test, which would replace
Test 2 in any year when the percentage growth in per capita General Fund
revenues from the prior year plus one half of one percent is less than the
percentage growth in State per capita personal income ("Test 3"). Under Test 3,
schools would receive the amount appropriated in the prior year adjusted for
changes in enrollment and per capita General Fund revenues, plus an additional
small adjustment factor. If Test 3 is used in any year, the difference between
Test 3 and Test 2 would become a "credit" to schools which would be the basis
of payments in future years when per capita General Fund revenue growth exceeds
per capita personal income growth. Legislation adopted prior to the end of the
1988-89 fiscal year implementing Proposition 98 determined the K-14 schools'
funding guarantee under Test 1 to be 40.3 percent of the General Fund tax
revenues, based on 1986-87 appropriations. However, that percentage has been
adjusted to approximately 35 percent to account for a subsequent redirection of
local property taxes, since such redirection directly affects the share of
General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both Houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit
to K-14 schools.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State's share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward
satisfying the Proposition 98 guarantee "below" the current base. Repayments
are spread over the eight-year period of 1994-95 through 2001-02 to mitigate
any adverse fiscal impact.
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Tobacco Litigation. In 1998, the State signed a settlement agreement with
the four major cigarette manufacturers. The State agreed to drop its lawsuit
and not to sue in the future. Tobacco manufacturers agreed to billions of
dollars in payments and restrictions in marketing activities. Under the
settlement, the companies agreed to pay California state and local governments
approximately $25 billion over a period of 25 years. Beyond 2025, payments of
approximately $1 billion per year will continue in perpetuity. Under a separate
Memorandum of Understanding, half of the moneys will be paid to the State and
half to local governments (all counties and the cities of San Diego, Los
Angeles, San Francisco and San Jose). The Budget forecasts payments to the
State totaling $474 million in 2001-02, of which $72 million will go to the
General Fund and the balance will be deposited in a special fund to pay certain
healthcare costs.
The specific amount to be received by State and local governments is subject
to adjustment. The settlement agreement allows reduction of the companies'
payments for decreases in cigarette sales and certain types of Federal
legislation. Settlement payments can increase due to inflation or increases in
cigarette sales. The "second annual" payment, received in April 2001, was 7.2
percent lower than the base settlement amount due to reduced sales. Future
payment estimates have been reduced by a similar percentage. If any of the
companies goes into bankruptcy, the State could seek to terminate the agreement
with respect to those companies filing bankruptcy actions thereby reinstating
all claims against those companies. The State may then pursue those claims in
bankruptcy litigation, or as otherwise provided by law. Several parties have
brought a lawsuit challenging the settlement and seeking damages.
Recent Developments Regarding Energy. In mid-2000, wholesale electricity
prices in California began to rise, swiftly and dramatically. Retail
electricity rates permitted to be charged by California's investor-owned
utilities had previously been frozen by California law. The resulting shortfall
between revenues and costs adversely affected the creditworthiness of the
investor-owned utilities and their ability to purchase electricity.
In January, 2001, the Governor of California determined that the electricity
available from California's utilities was insufficient to prevent widespread
and prolonged disruption of electric service in California and proclaimed a
state of emergency to exist in California under the California Emergency
Services Act. The Governor directed the Department of Water Resources of the
State ("DWR") to enter into contracts and arrangements for the purchase and
sale of electric power as necessary to assist in mitigating the effects of the
emergency (the "Power Supply Program"). The Governor's proclamation under the
California Emergency Services Act was followed by the enactment of legislation
(Chapters 4 and 9, First Extraordinary Session of 2001, hereafter referred to
as the "Power Supply Act") authorizing the Power Supply Program and related
orders of the California Public Utilities Commission ("CPUC").
DWR began selling electricity to approximately 10 million retail end-use
customers in California (the "Customers") in January, 2001. The Customers are
also served by three investor-owned utilities, Pacific Gas and Electric Company
("PG&E"), Southern California Edison Company ("SCE") and San Diego Gas &
Electric Company ("SDG&E") (collectively called the "IOUs"). DWR purchases
power from wholesale suppliers under long-term contracts and in short-term and
spot market transactions. DWR electricity is delivered to the Customers through
the transmission and distribution systems of the IOUs and payments from the
Customers are collected for DWR by the IOUs pursuant to servicing arrangements
ordered by the CPUC.
DWR has announced plans to issue approximately $12.5 billion aggregate
principal amount of revenue bonds in a series of bond sales to finance and
refinance the Power Supply Program. The bonds will be limited obligations of
DWR payable solely from revenues and other funds held under the revenue bond
trust indenture after provision is made for the payment of power purchase costs
and other operating expenses of the Power Supply Program. Revenues will consist
primarily of payments to DWR by Customers for electricity. Although DWR may be
able to start selling revenue bonds in October, 2001, the timing of the DWR
bond sales is dependent upon action by the CPUC and other factors, including
potential legal challenges or other impediments to the sales, and cannot be
determined with certainty.
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Between January 17, 2001 and August 23, 2001, DWR has committed $10.2
billion under the Power Supply Program. DWR's Power Supply Program has been
financed by: (i) unsecured, interest-bearing loans from the General Fund of the
State ("State loans") aggregating $6.1 billion; (ii) secured loans from banks
and other financial institutions aggregating $4.3 billion ("Interim loans");
and (iii) DWR revenues from power sales to Customers aggregating $2.0 billion
through August 23, 2001. Proceeds of the DWR revenue bonds (net of expenses and
provisions for capitalized interest and reserve funds) will be used first, to
repay the Interim loans, and second, to repay the State loans and provide
working capital for the Power Supply Program. The last State loans were made in
late June, 2001, before the Interim loans were made; as of August 14, 2001,
approximately $1.9 billion of proceeds from the Interim loans had not been
contractually committed and was available for Power Supply Program
expenditures. The Interim loans are not a general obligation of the State and
are not repayable from the General Fund.
The Administration does not project that the State will need to make
additional State loans to support the DWR Power Supply Program even if DWR does
not issue its revenue bonds as planned during the 2001-02 fiscal year. DWR
projects that its funds on hand at the date of this Official Statement and
projected revenues appear to be sufficient to finance the Power Supply Program.
The cash needs of the Power Supply Program depend, among other things, on
future power purchase costs, the timing and amount of revenues from power
sales, the availability of additional interim loans, and the timing of the
issuance of revenue bonds by DWR. The Power Supply Act limits loans and
advances from the State under the Power Supply Act after November 15, 2001, to
amounts required for short-term cash flow purposes of no more than $500 million
in the aggregate and requires repayment within 180 days. However, the Governor
has the power under the Emergency Services Act to order additional loans or
other advances to DWR if needed to further mitigate the emergency.
The State expects to maintain adequate cash reserves to fund its normal
operations during the 2001-02 fiscal year whether or not DWR repays the State
loans during the fiscal year. The State plans to issue short-term notes to
assure that adequate cash balances are maintained. The State has regularly
issued short-term debt in the past to meet its cash flow needs.
DWR's Power Supply Program is designed to cover the shortfall between the
amount of electricity required by Customers and the amount of electricity
furnished to the Customers by the IOUs (the "net short") until December 31,
2002. Thereafter and until the DWR revenue bonds are retired, DWR will sell
electricity purchased under long-term contracts to Customers but under current
law is not authorized to provide the balance of any net short required by the
Customers (the "residual net short"). The Administration and the CPUC are
developing plans to have the IOUs purchase the residual net short after DWR is
no longer authorized to do so. Alternatively, it is possible that the Power
Supply Program will be extended by legislation or that another State agency
will be authorized to develop a successor program.
Under the California Public Utilities Code, the retail rates of the IOUs are
established by the CPUC. The CPUC has authorized substantial rate increases in
2001. Under the Power Supply Act, DWR is directed to establish, revise and
notify the CPUC of its revenue requirements for its sales of electricity and
repayment of the DWR revenue bonds at least annually, and more frequently as
required. In August, DWR submitted its revenue requirement to the CPUC. On
August 21, 2001, PG&E filed Pacific Gas and Electric Company v. The California
Department of Water Resources, et. al., (Sacramento County Superior Court)
contesting the DWR determination that its revenue requirement is just and
reasonable in the absence of a public hearing. DWR is vigorously defending this
case.
In September, 2001 the CPUC is expected to consider rate action and related
matters, including the establishment of the portion of retail rates charged to
Customers for power being sold by DWR (based upon DWR's revenue requirement),
the adoption of agreements between DWR and the CPUC and between DWR and each of
the IOUs pertaining to the Power Supply Program, and the suspension of the
right of Customers to purchase electricity from suppliers other than DWR and
the IOUs until DWR is no longer a supplier of electricity. However, the timing
of CPUC action may be impacted by the PG&E lawsuit referred to in the preceding
paragraph or appeals or litigation brought by IOUs, consumer groups or other
interested parties.
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Although under State law, appeals and litigation of CPUC actions related to the
Power Supply Program must be granted an expedited appeal process, there can be
no assurance that any such appeals or litigation will not delay the issuance of
DWR's revenue bonds or the implementation of the DWR's rates.
A number of lawsuits and regulatory proceeding have been commenced
concerning various aspects of the current energy situation. These include
disputes over rates set by the CPUC; responsibility for the electricity and
natural gas purchases made by the IOUs and the California Independent Systems
Operator ("ISO"); continuing contractual obligations of certain small
independent power generators; and antitrust and fraud claims against various
parties. These actions do not seek a judgment against the State's General Fund,
and in some cases neither the State nor the DWR is even a party to these
actions. However, these cases may have an impact on the price or supply of
energy in California.
2000-01 Fiscal Year Budget. The 2001-02 Governor's Budget, released January
10, 2001, estimated 2001-02 General Fund revenues and transfers to be about
$79.4 billion and proposed $82.9 billion in expenditures, utilizing a portion
of the surplus expected from 2000-01. The Governor proposed budget reserves in
2001-02 of $2.4 billion, including $500 million for unplanned litigation costs.
The May revision of the budget disclosed a reversal of the recent General
Fund financial trend, as a result of the slowdown in economic growth in the
State starting in the first quarter of 2001 and, most particularly, the steep
drop in stock market levels since early 2000. The 2001 Budget Act projects
General Fund revenues in 2001-02 will be about $75.1 billion, a drop of $2.9
billion from revised 2000-01 estimates and $4.3 billion below the estimate in
the 2001-02 Governor's Budget. Most of the drop is attributed to the personal
income tax, which reflects both slower job and wage growth and a severe decline
in capital gains and stock option income, which is included in personal income
tax statistics. Lower corporate earnings are projected to result in a drop in
the corporate income tax, while sales taxes are projected to increase slightly.
The Fiscal Year 2001 Budget Act was signed by the Governor on July 26, 2001,
almost four weeks after the start of the fiscal year. The Governor vetoed
almost $500 million in General Fund expenditures from the Budget passed by the
legislature. The spending plan for 2001-02 includes General Fund expenditures
of $78.8 billion, a reduction of $1.3 billion from the prior year. This could
be accomplished without serious program cuts because such a large part of the
2000 Budget Act comprised one-time expenditures. The spending plan utilizes
more than half of the budget surplus as of June 30, 2001, but still leaves a
projected balance in the SFEU at June 30, 2002 of $2.6 billion, the largest
appropriated reserve in State history. The 2001 Budget Act assumes that, during
the course of the fiscal year, the $6.1 billion advanced by the General Fund to
the Department of Water Resources for power purchases will be repaid with
interest.
The 2001 Budget Act also includes Special Fund expenditures of $21.3 billion
and Bond Fund expenditures of $3.2 billion. The State anticipates issuing
approximately $5.7 billion of revenue anticipation notes during the fiscal year
as part of its cash management program.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management techniques and
instruments. The Trust may purchase and sell futures contracts, enter into
various interest rate transactions and may purchase and sell exchange-listed
and over-the-counter put and call options on securities, financial indices and
futures contracts (collectively, "Additional Investment Management
Techniques"). These Additional Investment Management Techniques may be used for
duration management and other risk management techniques in an attempt to
protect against possible changes in the market value of the Trust's portfolio
resulting from trends in the debt securities markets and changes in interest
rates, to protect the Trust's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to establish a position in the securities markets as a temporary substitute for
purchasing particular securities and to enhance income or gain. There is no
particular strategy that requires use of one technique rather than another as
the decision to use any particular strategy or instrument is a function of
market conditions and the composition of the portfolio. The
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Additional Investment Management Techniques are described below. The ability of
the Trust to use them successfully will depend on BlackRock's ability to
predict pertinent market movements as well as sufficient correlation among the
instruments, which cannot be assured. Inasmuch as any obligations of the Trust
that arise from the use of Additional Investment Management Techniques will be
covered by segregated liquid assets or offsetting transactions, the Trust and
BlackRock believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. Commodity options and futures contracts regulated by the CFTC
have specific margin requirements described below and are not treated as senior
securities. The use of certain Additional Investment Management Techniques may
give rise to taxable income and have certain other consequences. See "Tax
Matters."
Interest Rate Transactions. The Trust may enter into interest rate swaps and
the purchase or sale of interest rate caps and floors. The Trust expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities the
Trust anticipates purchasing at a later date. The Trust will ordinarily use
these transactions as a hedge or for duration or risk management although it is
permitted to enter into them to enhance income or gain. The Trust will not sell
interest rate caps or floors that it does not own. Interest rate swaps involve
the exchange by the Trust with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal. The purchase of
an interest rate cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined interest rate, to receive payments of interest on
a notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments on the payment dates. The Trust will accrue the net amount of the
excess, if any, of the Trust's obligations over its entitlements with respect
to each interest rate swap on a daily basis and will segregate with a custodian
an amount of cash or liquid high grade securities having an aggregate net asset
value at all times at least equal to the accrued excess. The Trust will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in the highest rating category of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
If there is a default by the other party to such a transaction, the Trust will
have contractual remedies pursuant to the agreements related to the
transaction.
Futures Contracts and Options on Futures Contracts. The Trust may also enter
into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will ordinarily engage in such transactions
only for bona fide hedging, risk management (including duration management) and
other portfolio management purposes. However, the Trust is also permitted to
enter into such transactions for non-hedging purposes to enhance income or
gain, in accordance with the rules and regulations of the CFTC, which currently
provide that no such transaction may be entered into if at such time more than
5% of the Trust's net assets would be posted as initial margin and premiums
with respect to such non-hedging transactions.
Calls on Securities, Indices and Futures Contracts. The Trust may sell or
purchase call options ("calls") on municipal bonds and indices based upon the
prices of futures contracts and debt securities that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets. A call gives
the purchaser of the option the right to buy, and obligates the seller to sell,
the underlying security, futures contract or index at the exercise price at any
time or at a specified time during the option period. All such calls sold by
the Trust must be "covered" as long as the call is outstanding (i.e., the Trust
must own the securities or futures contract subject to the call or other
securities acceptable for applicable escrow requirements). A call sold by the
Trust
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exposes the Trust during the term of the option to possible loss of opportunity
to realize appreciation in the market price of the underlying security, index
or futures contract and may require the Trust to hold a security or futures
contract which it might otherwise have sold. The purchase of a call gives the
Trust the right to buy a security, futures contract or index at a fixed price.
Calls on futures on municipal bonds must also be covered by deliverable
securities or the futures contract or by liquid high grade debt securities
segregated to satisfy the Trust's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may purchase
put options ("puts") that relate to municipal bonds (whether or not it holds
such securities in its portfolio), indices or futures contracts. The Trust may
also sell puts on municipal bonds, indices or futures contracts on such
securities if the Trust's contingent obligations on such puts are secured by
segregated assets consisting of cash or liquid high grade debt securities
having a value not less than the exercise price. The Trust will not sell puts
if, as a result, more than 50% of the Trust's assets would be required to cover
its potential obligations under its hedging and other investment transactions.
In selling puts, there is a risk that the Trust may be required to buy the
underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell Municipal
Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock permits the Trust
to lock in a specified municipal interest rate for a portion of its portfolio
to preserve a return on a particular investment or a portion of its portfolio
as a duration management technique or to protect against any increase in the
price of securities to be purchased at a later date. The Trust will ordinarily
use these transactions as a hedge or for duration or risk management although
it is permitted to enter into them to enhance income or gain. An MMD Rate Lock
is a contract between the Trust and an MMD Rate Lock provider pursuant to which
the parties agree to make payments to each other on a notional amount,
contingent upon whether the Municipal Market Data AAA General Obligation Scale
is above or below a specified level on the expiration date of the contract. For
example, if the Trust buys an MMD Rate Lock and the Municipal Market Data AAA
General Obligation Scale is below the specified level on the expiration date,
the counterparty to the contract will make a payment to the Trust equal to the
specified level minus the actual level, multiplied by the notional amount of
the contract. If the Municipal Market Data AAA General Obligation Scale is
above the specified level on the expiration date, the Trust will make a payment
to the counterparty equal to the actual level minus the specified level,
multiplied by the notional amount of the contract. In entering into MMD Rate
Locks, there is a risk that municipal yields will move in the direction
opposite of the direction anticipated by the Trust. The Trust will not enter
into MMD Rate Locks if, as a result, more than 50% of its assets would be
required to cover its potential obligations under its hedging and other
investment transactions.
Appendix D contains further information about the characteristics, risks and
possible benefits of Additional Investment Management Techniques and the
Trust's other policies and limitations (which are not fundamental policies)
relating to investment in futures contracts and options. The principal risks
relating to the use of futures contracts and other Additional Investment
Management Techniques are: (a) less than perfect correlation between the prices
of the instrument and the market value of the securities in the Trust's
portfolio; (b) possible lack of a liquid secondary market for closing out a
position in such instruments; (c) losses resulting from interest rate or other
market movements not anticipated by BlackRock; and (d) the obligation to meet
additional variation margin or other payment requirements, all of which could
result in the Trust being in a worse position than if such techniques had not
been used.
Certain provisions of the Code may restrict or affect the ability of the
Trust to engage in Additional Investment Management Techniques. See "Tax
Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a
transaction in which the Trust sells a security it does not own in anticipation
that the market price of that security will decline. The Trust may make
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short sales to hedge positions, for duration and risk management, in order to
maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Trust may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities. The Trust will also be
required to segregate similar collateral with its custodian to the extent, if
any, necessary so that the aggregate collateral value is at all times at least
equal to the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Trust on such security,
the Trust may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Trust replaces the borrowed security, the Trust
will incur a loss; conversely, if the price declines, the Trust will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Trust's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Trust will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Trust's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Trust
may also make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the Trust
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid securities are
subject to legal or contractual restrictions on disposition or lack an
established secondary trading market. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-
counter markets. Restricted securities may sell at a price lower than similar
securities that are not subject to restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis and may
purchase or sell municipal bonds on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment
for the securities take place at a later date. When-issued and forward
commitment securities may be sold prior to the settlement date, but the Trust
will enter into when-issued and forward commitment securities only with the
intention of actually receiving or delivering the securities, as the case may
be. If the Trust disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it can incur a gain or loss. At the time the Trust entered
into a transaction on a when-issued or forward commitment basis, it will
segregate with its custodian cash or other liquid high grade debt securities
with a value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that
their marked to market value will at all times equal or
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exceed the corresponding obligations of the Trust. There is always a risk that
the securities may not be delivered and that the Trust may incur a loss.
Settlements in the ordinary course are not treated by the Trust as when-issued
or forward commitment transactions and accordingly are not subject to the
foregoing restrictions.
Borrowing
Although it has no present intention of doing so, the Trust reserves the
right to borrow funds to the extent permitted as described under the caption
"Investment Objective and Policies--Investment Restrictions." The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investments and repurchases of shares of the Trust. Borrowing is a
form of leverage and, in that respect, entails risks including volatility in
net asset value, market value and income available for distribution.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Trust
with an agreement by the Trust to repurchase the securities at an agreed upon
price, date and interest payment. At the time the Trust enters into a reverse
repurchase agreement, it may establish and maintain a segregated account with
the custodian containing liquid instruments having a value not less than the
repurchase price (including accrued interest). If the Trust establishes and
maintains such a segregated account, a reverse repurchase agreement will not be
considered a borrowing by the Trust; however, under certain circumstances in
which the Trust does not establish and maintain such a segregated account, such
reverse repurchase agreement will be considered a borrowing for the purpose of
the Trust's limitation on borrowings. The use by the Trust of reverse
repurchase agreements involves many of the same risks of leverage since the
proceeds derived from such reverse repurchase agreements may be invested in
additional securities. Reverse repurchase agreements involve the risk that the
market value of the securities acquired in connection with the reverse
repurchase agreement may decline below the price of the securities the Trust
has sold but is obligated to repurchase. Also, reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Trust in connection with the reverse repurchase agreement may
decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Trust's
obligation to repurchase the securities, and the Trust's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Trust would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. government securities or municipal bonds) agrees to repurchase
the same security at a specified price on a future date agreed upon by the
parties. The agreed-upon repurchase price determines the yield during the
Trust's holding period. Repurchase agreements are considered to be loans
collateralized by the underlying security that is the subject of the repurchase
contract. Income generated from transactions in repurchase agreements will be
taxable. See "Tax Matters" for information relating to the allocation of
taxable income between common shares and Preferred Shares. 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
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bankruptcy proceedings are commenced with respect to the seller of the
security, realization upon the collateral by the Trust may be delayed or
limited. BlackRock will monitor the value of the collateral at the time the
transaction is entered into and at all times subsequent during the term of the
repurchase agreement in an effort to determine that such value always equals or
exceeds the agreed-upon repurchase price. In the event the value of the
collateral declines below the repurchase price, BlackRock will demand
additional collateral from the issuer to increase the value of the collateral
to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Trust accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to brokers, dealers and other
financial institutions which meet the creditworthiness standards established by
the board of trustees of the Trust ("Qualified Institutions"). By lending its
portfolio securities, the Trust attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that may occur during the term of the loan will be for the
account of the Trust. The Trust may lend its portfolio securities so long as
the terms and the structure of such loans are not inconsistent with the
requirements of the Investment Company Act, which currently require that (a)
the borrower pledge and maintain with the Trust collateral consisting of cash,
a letter of credit issued by a U.S. bank, or securities issued or guaranteed by
the U.S. government having a value at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is "marked to
the market" on a daily basis), (c) the loan be made subject to termination by
the Trust at any time and (d) the Trust receive reasonable interest on the loan
(which may include the Trust's investing any cash collateral in interest
bearing short-term investments), any distributions on the loaned securities and
any increase in their market value. The Trust will not lend portfolio
securities if, as a result, the aggregate value of such loans exceeds 33 1/3%
of the value of the Trust's total assets (including such loans). Loan
arrangements made by the Trust will comply with all other applicable regulatory
requirements, including the rules of the New York Stock Exchange. All relevant
facts and circumstances, including the creditworthiness of the Qualified
Institution, will be monitored by BlackRock and will be considered in making
decisions with respect to lending of securities, subject to review by the
Trust's board of trustees.
The Trust may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Trust's board of trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting
such a loan, the loan must be called and the securities voted.
Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest municipal
bonds. Residual interest municipal bonds pay interest at rates that bear an
inverse relationship to the interest rate on another security or the value of
an index ("inverse floaters"). An investment in inverse floaters may involve
greater risk than an investment in a fixed-rate bond. Because changes in the
interest rate on the other security or index inversely affect the residual
interest paid on the inverse floater, the value of an inverse floater is
generally more volatile than that of a fixed-rate bond. Inverse floaters have
interest rate adjustment formulas which generally reduce or, in the extreme,
eliminate the interest paid to the Trust when short-term interest rates rise,
and increase the interest paid to the Trust when short-term interest rates
fall. Inverse floaters have varying degrees of liquidity,
B-20
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. Although the Trust does not intend initially to
invest in inverse floaters, the Trust may do so at some point in the future.
The Trust will provide shareholders 30 days' written notice prior to any change
in its policy of not investing in inverse floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort to the
business of the Trust as is reasonably necessary to perform its duties to the
Trust, the services of BlackRock Advisors are not exclusive and BlackRock
Advisors provides similar services to other investment companies and other
clients and may engage in other activities.
The investment management agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, BlackRock Advisors is not liable to the Trust or any of
the Trust's shareholders for any act or omission by BlackRock Advisors in the
supervision or management of its respective investment activities or for any
loss sustained by the Trust or the Trust's shareholders and provides for
indemnification by the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain limitations and
conditions.
The investment management agreement and certain waivers of the management
fees were approved by the Trust's board of trustees, on May 24, 2001, including
a majority of the trustees who are not parties to the agreement or interested
persons of any such party (as such term is defined in the Investment Company
Act). This agreement provides for the Trust to pay a management fee at an
annual rate equal to 0.70% of the average weekly value of the Trust's Managed
Assets. A related waiver letter from BlackRock Advisors provided for a
temporary fee waiver of 0.30% of the average weekly value of the Trust's total
Managed Assets in each of the first five years of the Trust's operations
(through July 31, 2006) and for a declining amount for an additional five
years. Subsequently, BlackRock Advisors unilaterally agreed to permanently
waive a portion of the management fee to which it is entitled equal to 0.10% of
the average weekly value of the Trust's total Managed Assets and adjusted the
temporary fee waiver so that BlackRock Advisors would waive 0.25% of the
average weekly value of the Trust's total Managed Assets in each of the first
five years and would waive a declining amount for an additional four years as
set forth in the prospectus under "Management of the Trust--Investment
Management Agreement." The net effect of the permanent fee waiver and the
adjusted temporary fee waiver schedule was to reduce the management fees paid
by the Trust by 0.05% of the Trust's total Managed Assets in each of the first
ten years of the Trust's operations and to reduce the management fees paid by
the Trust by 0.10% of the Trust's total Managed Assets in each year thereafter.
The investment management agreement and the waivers of management fees were
approved by the sole common shareholder of the Trust as of July 19, 2001. The
investment management agreement will continue in effect for a period of two
years from its effective date, and if not sooner terminated, will continue in
effect for successive periods of 12 months thereafter, provided that each
continuance is specifically approved at least annually by both (1) the vote of
a majority of the Trust's board of trustees or the vote of a majority of the
outstanding voting securities of the Trust (as such term is defined in the
Investment Company Act) and (2) by
B-21
the vote of a majority of the trustees who are not parties to the investment
management agreement or interested persons (as such term is defined in the
Investment Company Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval. The investment management agreement
may be terminated as a whole at any time by the Trust, without the payment of
any penalty, upon the vote of a majority of the Trust's board of trustees or a
majority of the outstanding voting securities of the Trust or by BlackRock
Advisors, on 60 days' written notice by either party to the other. The
investment management agreement will terminate automatically in the event of
its assignment (as such term is defined in the Investment Company Act and the
rules thereunder).
Sub-Investment Advisory Agreement
BlackRock Financial Management, the Sub-Advisor, is a wholly owned
subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory
agreement, BlackRock Advisors has appointed BlackRock Financial Management, one
of its affiliates, to perform certain of the day-to-day investment management
of the Trust. BlackRock Financial Management will receive a portion of the
management fee paid by the Trust to BlackRock Advisors. From the management
fees, BlackRock Advisors will pay BlackRock Financial Management, for serving
as Sub-Advisor, a fee equal to: (i) prior to July 31, 2002, 38% of the monthly
management fees received by BlackRock Advisors, (ii) from August 1, 2002 to
July 31, 2003, 19% of the monthly management fees received by BlackRock
Advisors; and (iii) after July 31, 2003, 0% of the management fees received by
BlackRock Advisors; provided thereafter that the Sub-Advisor may be compensated
at cost for any services rendered to the Trust at the request of BlackRock
Advisors and approved of by the board of trustees.
The sub-investment advisory agreement also provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Trust will indemnify BlackRock Financial
Management, its directors, officers, employees, agents, associates and control
persons for liabilities incurred by them in connection with their services to
the Trust, subject to certain limitations.
Although BlackRock Financial Management intends to devote such time and
effort to the business of the Trust as is reasonably necessary to perform its
duties to the Trust, the services of BlackRock Financial Management are not
exclusive and BlackRock Financial Management provides similar services to other
investment companies and other clients and may engage in other activities.
The sub-investment advisory agreement was approved by the Trust's board of
trustees on May 24, 2001, including a majority of the trustees who are not
parties to the agreement or interested persons of any such party (as such term
is defined in the Investment Company Act). The sub-investment advisory
agreement was approved by the sole common shareholder of the Trust as of July
19, 2001. The sub-investment advisory agreement will continue in effect for a
period of two years from its effective date, and if not sooner terminated, will
continue in effect for successive periods of 12 months thereafter, provided
that each continuance is specifically approved at least annually by both (1)
the vote of a majority of the Trust's board of trustees or the vote of a
majority of the outstanding voting securities of the Trust (as defined in the
Investment Company Act) and (2) by the vote of a majority of the trustees who
are not parties to such agreement or interested persons (as such term is
defined in the Investment Company Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The sub-investment
advisory agreement may be terminated as a whole at any time by the Trust,
without the payment of any penalty, upon the vote of a majority of the Trust's
board of trustees or a majority of the outstanding voting securities of the
Trust, or by BlackRock Advisors or BlackRock Financial Management, on 60 days'
written notice by 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
B-22
of the trustees and officers of the Trust and a brief statement of their
present positions and principal occupations during the past five years.
Trustees who are interested persons of the Trust (as defined in the Investment
Company Act) are denoted by an asterisk (*). Trustees who are independent
trustees (as defined in the Investment Company Act) (the "Independent
Trustees") are denoted without an asterisk. The business address of the Trust,
BlackRock Advisors and their board members and officers is 100 Bellevue
Parkway, Wilmington, Delaware 19809, unless specified otherwise below. The
trustees listed below are either trustees or directors of other closed-end
funds in which BlackRock Advisors acts as investment advisor.
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Andrew F. Brimmer....... Trustee President of Brimmer & Company, Inc., a
4400 MacArthur Blvd., Washington, D.C.-based economic and financial
N.W. consulting firm. Director of CarrAmerica Realty
Suite 302 Corporation and Borg-Warner Automotive. Formerly
Washington, DC 20007 member of the Board of Governors of the Federal
Age: 74 Reserve System. Formerly Director of AirBorne
Express, BankAmerica Corporation (Bank of
America), Bell South Corporation, College
Retirement Equities Fund (Trustee), Commodity
Exchange, Inc. (Public Governor), Connecticut
Mutual Life Insurance Company, E.I. Dupont de
Nemours & Company, Equitable Life Assurance
Society of the United States, Gannett Company,
Mercedes-Benz of North America, MNC Financial
Corporation (American Security Bank), NMC
Capital Management, Navistar International
Corporation, PHH Corp. and UAL Corporation
(United Airlines).
Richard E. Cavanagh..... Trustee President and Chief Executive Officer of The
845 Third Avenue Conference Board, Inc., a leading global
New York, NY 10022 business membership organization, from 1995-
Age: 54 present. Former Executive Dean of the John F.
Kennedy School of Government at Harvard
University from 1988-1995. Acting Director,
Harvard Center for Business and Government
(1991-1993). Formerly Partner (principal) of
McKinsey & Company, Inc. (1980-1988). Former
Executive Director of Federal Cash Management,
White House Office of Management and Budget
(1977-1979). Co-author, The Winning Performance
(best selling management book published in 13
national editions). Trustee Emeritus, Wesleyan
University. Trustee, Drucker Foundation,
Airplanes Group, Aircraft Finance Trust (AFT)
and Educational Testing Service (ETS). Director,
Arch Chemicals, Fremont Group and The Guardian
Life Insurance Company of America.
Kent Dixon.............. Trustee Consultant/Investor. Former President and Chief
430 Sandy Hook Road Executive Officer of Empire Federal Savings Bank
St. Petersburg, FL 33706 of America and Banc PLUS Savings Association,
Age: 63 former Chairman of the Board, President and
Chief Executive Officer of Northeast Savings.
Former Director of ISFA (the owner of INVEST, a
national securities brokerage service designed
for banks and thrift institutions).
B-23
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Frank J. Fabozzi........ Trustee Consultant. Editor of The Journal of Portfolio
858 Tower View Circle Management and Adjunct Professor of Finance at
New Hope, PA 18938 the School of Management at Yale University.
Age: 52 Director, Guardian Mutual Funds Group. Author
and editor of several books on fixed income
portfolio management. Visiting Professor of
Finance and Accounting at the Sloan School of
Management, Massachusetts Institute of
Technology from 1986 to August 1992.
Laurence D. Fink* ...... Trustee Director, Chairman and Chief Executive Officer
Age: 48 of BlackRock, Inc. since its formation in 1998
and of BlackRock, Inc.'s predecessor entities
since 1988. Chairman of the Management Committee
of BlackRock, Inc. Formerly, Managing Director
of the First Boston Corporation, Member of its
Management Committee, Co-head of its Taxable
Fixed Income Division and Head of its Mortgage
and Real Estate Products Group. Currently,
Chairman of the Board of each of the closed-end
Trusts in which BlackRock Advisors, Inc. acts as
investment advisor, President, Treasurer and a
Trustee of the BlackRock Funds, Chairman of the
Board and Director of Anthracite Capital, Inc.,
a Director of BlackRock's offshore funds and
alternative products and Chairman of the Board
of Nomura BlackRock Asset Management Co., Ltd.
Currently, Vice Chairman of the Board of
Trustees of Mount Sinai-New York University
Medical Center and Health System and a Member of
the Board of Phoenix House.
James Clayburn LaForce,
Jr. .................. Trustee Dean Emeritus of The John E. Anderson Graduate
P.O. Box 1595 School of Management, University of California
Pauma Valley, CA 92061 since July 1, 1993. Director, Jacobs Engineering
Age: 72 Group, Inc., Payden & Rygel Investment Trust,
Provident Investment Counsel Funds, Timken
Company, Motor Cargo Industries and Trust for
Investment Managers. Acting Dean of The School
of Business, Hong Kong University of Science and
Technology 1990-1993. From 1978 to September
1993, Dean of The John E. Anderson Graduate
School of Management, University of California.
Walter F. Mondale....... Trustee Partner, Dorsey & Whitney, a law firm (December
220 South Sixth Street 1996-present, September 1987-August 1993).
Minneapolis, MN 55402 Formerly, U.S. Ambassador to Japan (1993-1996).
Age: 73 Formerly Vice President of the United States,
U.S. Senator and Attorney General of the State
of Minnesota. 1984 Democratic Nominee for
President of the United States. Director,
Northwest Airlines Corporation, NWA Inc.,
Northwest Airlines, Inc. and UnitedHealth Group
Corporation.
Ralph L. Schlosstein*... Trustee and Director since 1999 and President of BlackRock,
Age: 50 President Inc. since its formation in 1998 and of
BlackRock, Inc.'s predecessor entities since
1988. Member of the
B-24
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Management Committee and Investment Strategy
Group of BlackRock, Inc. Formerly, Managing
Director of Lehman Brothers, Inc. and Co-head of
its Mortgage and Savings Institutions Group.
Currently, President of each of the closed-end
Trusts in which BlackRock Advisors, Inc. acts as
investment advisor and a Director and Officer of
BlackRock's alternative products. Currently, a
Member of the Visiting Board of Overseers of the
John F. Kennedy School of Government at Harvard
University, the Financial Institutions Center
Board of the Wharton School of the University of
Pennsylvania, and a Trustee of New Visions for
Public Education in New York City. Formerly, a
Director of Pulte Corporation and a Member of
Fannie Mae's Advisory Council.
Anne F. Ackerley........ Secretary Managing Director of BlackRock, Inc. since 2000.
Age: 39 Formerly First Vice President and Chief
Operating Officer, Mergers and Acquisitions
Group at Merrill Lynch & Co. from 1997 to 2000;
First Vice President and Chief Operating
Officer, Public Finance Group at Merrill Lynch &
Co. from 1995 to 1997; First Vice President,
Emerging Markets Fixed Income Research at
Merrill Lynch & Co. prior thereto.
Henry Gabbay............ Treasurer Managing Director of BlackRock, Inc. and its
Age: 53 predecessor entities.
Robert S. Kapito........ Vice Vice Chairman of BlackRock, Inc. and its
Age: 44 President predecessor entities.
Kevin Klingert.......... Vice Managing Director of BlackRock, Inc. and its
Age 38 President predecessor entities.
James Kong.............. Assistant Managing Director of BlackRock, Inc. and its
Age: 38 Treasurer predecessor entities.
Richard Shea, Esq....... Vice Managing Director of BlackRock, Inc. since 2000;
Age: 41 President/Tax Chief Operating Officer and Chief Financial
Officer of Anthracite Capital, Inc. since 1998.
Formerly, Director of BlackRock, Inc. and its
predecessor entities.
As of September 21, 2001, no person is known to the Trust to own of record
or beneficially 5% or more of the outstanding common shares or Preferred
Shares.
The fees and expenses of the Independent Trustees of the Trust are paid by
the Trust. The trustees who are members of the BlackRock organization receive
no compensation from the Trust. During the year ended December 31, 2000, the
Independent Trustees/Directors earned the compensation set forth below in their
capacities as trustees/directors of the funds in the BlackRock Family of Funds.
It is estimated that the Independent Trustees will receive from the Trust the
amounts set forth below for the Trust's calendar year ending December 31, 2001,
assuming the Trust had been in existence for the full calendar year.
B-25
Total Compensation from
Estimated the Trust and Fund
Compensation Complex Paid to
Name of Board Member From Trust Board Member(/1/)
-------------------- ------------ -----------------------
Andrew R. Brimmer.................. $6,000(/2/)(/3/) $160,000(/4/)
Richard E. Cavanagh................ $6,000(/2/) $160,000(/4/)
Kent Dixon......................... $6,000(/2/) $160,000(/4/)
Frank J. Fabozzi................... $6,000(/2/) $160,000(/4/)
James Clayburn La Force, Jr........ $6,000(/2/) $160,000(/4/)
Walter F. Mondale.................. $6,000(/2/) $160,000(/4/)
--------
(/1/) Represents the total compensation earned by such persons during the
calendar year ended December 31, 2000 from the twenty-two closed-end funds
advised by the Advisor (the "Fund Complex"). Two of these funds, BlackRock
Target Term Trust and the BlackRock 2001 Term Trust were terminated on
December 29, 2000 and June 30, 2001 respectively.
(/2/) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La
Force and Mondale will defer $1,500, $1,500, $3,750 and $1,500,
respectively, pursuant to the Fund Complex's deferred compensation plan.
(/3/) At a meeting of the boards of directors/trustees of the Fund Complex held
on August 24, 2000, Dr. Brimmer was appointed "lead director" for each
board of trustees/directors in the Fund Complex. For his services as lead
trustee/director, Dr. Brimmer will be compensated in the amount of $40,000
per annum by the Fund Complex to be allocated among the funds in the Fund
Complex based on each fund's relative net assets.
(/4/) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale deferred
$12,000, $12,000, $77,500 and $31,000, respectively, pursuant to the Fund
Complex's deferred compensation plan.
Each Independent Trustee/Director receives an annual fee calculated as
follows: (i) $6,000 from each fund/trust in the Fund Complex and (ii) $1,500
for each meeting of each board in the Fund Complex attended by such Independent
Trustee/Director. The total annual aggregate compensation for each Independent
Trustee/Director is capped at $160,000 per annum, except that Dr. Brimmer
receives an additional $40,000 from the Fund Complex for acting as the lead
trustee/director for each board of trustees/directors in the Fund Complex. In
the event that the $160,000 cap is met with respect to an Independent
Trustee/Director, the amount of the Independent Trustee/Director's fee borne by
each fund in the Fund Complex is reduced by reference to the net assets of the
Trust relative to the other funds in the Fund Complex. In addition, the
attendance fees of each Independent Trustee/Director of the funds/trusts are
reduced proportionately, based on each respective fund's/trust's net assets, so
that the aggregate per meeting fee for all meetings of the boards of
trustees/directors of the funds/trusts held on a single day does not exceed
$20,000 for any Independent Trustee/Director.
Codes of Ethics
The Trust, the Advisor, the Sub-Advisor and the Trust's principal
underwriters have adopted codes of ethics under Rule 17j-1 of the Investment
Company Act. These codes permit personnel subject to the codes to invest in
securities, including securities that may be purchased or held by the Trust.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors and
BlackRock Financial Management are both wholly owned subsidiaries of BlackRock,
Inc., which is one of the largest publicly traded investment management firms
in the United States with $220 billion of assets under management as of July
31, 2001. BlackRock Advisors is one of the nation's leading fixed income
managers with over $129 billion of fixed income assets under management.
BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300
institutions and 200,000 individuals worldwide, including nine of the 10
largest companies in the U.S. as determined by Fortune Magazine, through a
variety of equity, fixed income, liquidity and alternative investment separate
accounts and mutual funds, including the company's flagship fund families,
BlackRock Funds and BlackRock Provident
B-26
Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset
management firm according to Pensions & Investments, May 14, 2001.
The BlackRock organization has over 13 years of experience managing closed-
end products and currently advises a closed-end family of 25 funds. BlackRock
has 18 leveraged municipal closed-end funds under management and approximately
$17.2 billion in municipal assets firm-wide. As of July 31, 2001, BlackRock
managed over $6.6 billion in closed-end products. In March 2001, a Fortune
Magazine article entitled "The Hidden Beauty of Bonds" by Andy Serwer called
BlackRock "perhaps the greatest success story on Wall Street in the past half-
decade." In addition, BlackRock provides risk management and investment system
services to a growing number of institutional investors under the BlackRock
Solutions name. In January 2001, Risk Magazine named BlackRock "Asset
Management Risk Manager of the Year." Clients are served from the company's
headquarters in New York City, as well as offices in Wilmington, Delaware, San
Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan.
BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"),
one of the largest diversified financial services organizations in the United
States, and is majority-owned by PNC and by BlackRock employees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to buy and
sell securities for the Trust, the selection of brokers and dealers to effect
the transactions and the negotiation of prices and any brokerage commissions.
The securities in which the Trust invests are traded principally in the over-
the-counter market. In the over-the-counter market, securities are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission, although the price of such securities usually
includes a mark-up to the dealer. Securities purchased in underwritten
offerings generally include, in the price, a fixed amount of compensation for
the manager(s), underwriter(s) and dealer(s). The Trust may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. Purchases and sales of debt securities on a
stock exchange are effected through brokers who charge a commission for their
services.
The Advisor and the Sub-Advisor are responsible for effecting securities
transactions of the Trust and will do so in a manner deemed fair and reasonable
to shareholders of the Trust and not according to any formula. The Advisor's
and the Sub-Advisor's primary considerations in selecting the manner of
executing securities transactions for the Trust will be prompt execution of
orders, the size and breadth of the market for the security, 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
B-27
Trust are made independently from those of such other investment companies or
accounts; however, from time to time, the same investment decision may be made
for more than one company or account. When two or more companies or accounts
seek to purchase or sell the same securities, the securities actually purchased
or sold will be allocated among the companies and accounts on a good faith
equitable basis by the Advisor and/or the Sub-Advisor in their discretion in
accordance with the accounts' various investment objectives. In some cases,
this system may adversely affect the price or size of the position obtainable
for the Trust. In other cases, however, the ability of the Trust to participate
in volume transactions may produce better execution for the Trust. It is the
opinion of the Trust's board of trustees that this advantage, when combined
with the other benefits available due to the Advisor's or the Sub-Advisor's
organization, outweighs any disadvantages that may be said to exist from
exposure to simultaneous transactions.
It is not the Trust's policy to engage in transactions with the objective of
seeking profits from short-term trading. It is expected that the annual
portfolio turnover rate of the Trust will be approximately 100% excluding
securities having a maturity of one year or less. Because it is difficult to
predict accurately portfolio turnover rates, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Trust costs, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR PREFERRED SHARES
General
Securities Depository. The Depository Trust Company ("DTC") will act as the
Securities Depository with respect to each series of Preferred Shares. One
certificate for all of the shares of each series will be registered in the name
of Bankers Trust Company, 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, Bankers Trust Company 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
any error of judgment made in good faith unless the auction agent will have
been 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
B-28
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.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its shareholders
will not have the right to cause the Trust to redeem their shares. Instead, the
Trust's common shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, 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
B-29
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 common 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 consistent with the Trust's
investment objective and policies in order to repurchase shares; or (3) there
is, in the board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation on
prices for trading securities on the New York Stock Exchange, (c) declaration
of a banking moratorium by Federal or state authorities or any suspension of
payment by United States or New York banks, (d) material limitation affecting
the Trust or the issuers of its portfolio securities by Federal or state
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Trust or its
shareholders if shares were repurchased. The board of trustees may in the
future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Trust's 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 total assets which would likely have the effect of increasing the
Trust's expense ratio. Any purchase by the Trust of its common shares at a time
when Preferred Shares are outstanding will increase the leverage applicable to
the outstanding common shares then remaining.
B-30
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 U.S. 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 U.S. federal income tax in the hands of its shareholders, subject
to the possible application of the U.S. federal alternative minimum tax.
In order to qualify to be taxed as a regulated investment company, 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 derived (including but
not limited to gains from options, futures and forward contracts) with respect
to its business of investing in such stock, securities or currencies, 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 the Trust's 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 Trust's 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
U.S. 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 loss, and, among other items, dividends, taxable interest, the excess
of any net short-term capital gain over net long-term capital loss, and any
other taxable income other than net capital gain (as defined below) reduced by
deductible expenses) determined without regard to the deductions for dividends
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 gains dividend in a notice to its shareholders who, if
subject to U.S. federal income tax on long-term capital gains (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 U.S. federal tax liability, if any, and
to claim refunds to the extent the credit exceeds such liability. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Trust will be increased by the amount of undistributed capital gain
included in the gross income of such shareholder less the tax deemed paid by
such shareholder under clause (ii) of the preceding sentence. In meeting these
requirements of subchapter M of the Code, the Trust may be restricted in the
utilization of certain of the investment techniques described above and in the
prospectus.
B-31
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
U.S. 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 98% of its ordinary
taxable income for such year and 98% of its capital gain net income (adjusted
for certain ordinary losses) for a one year period generally ending October 31
in the calendar year, and 100% of all ordinary income and capital gains for
previous years that were not distributed during such years and on which the
Trust paid no U.S. federal income tax, is liable for a 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, if 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 U.S. federal income tax, subject to the possible application of the
U.S. federal alternative minimum tax. Insurance proceeds received by the Trust
under any insurance policies in respect of scheduled interest payments on
defaulted municipal bonds, as described herein, will generally be excludable
from gross income under Section 103(a) of the Code. See "Investment Policies
and Techniques" above. Gains of the Trust that are attributable to market
discount on certain municipal obligations are treated as ordinary income.
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. Distributions by the Trust of net capital gains (which are
the excess of net long-term capital gains over net short term capital loss), if
any, are taxable as long-term capital gain, regardless of the length of time
the shareholder has owned common shares or Preferred 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 U.S. 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 gains to the shareholder
(assuming the shares are held as a capital asset). As long as the Trust
qualifies as a regulated investment company under the Code, no part of its
distributions to shareholders will qualify for the dividends received deduction
for corporations. The interest on private activity bonds 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." As a result,
the Trust may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. 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
B-32
not a complete description of all of the provisions of the Code covering the
definitions of "substantial user" and "related person."
U.S. 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) is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that the
Trust receives income from municipal obligations subject to the U.S. federal
alternative minimum tax, a portion of the dividends paid by it, although
otherwise exempt from U.S. federal income tax, will be taxable to its
shareholders to the extent that their tax liability is determined under the
alternative minimum tax. The Trust will annually supply a report indicating the
percentage of the Trust's income attributable to municipal obligations subject
to the alternative minimum tax. In addition, 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 U.S.
federal income tax.
The IRS requires that a regulated investment company that has two or more
classes of shares must 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. The Trust intends each year
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. To the extent permitted
under applicable law, the Trust reserves the right to make special allocations
of income within a class, consistent with the objectives of the Trust. The
Trust may, at its election, notify the Auction Agent of the amount of any net
capital gain or other income taxable for U.S. 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 U.S. 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 U.S. federal income tax effect of the taxable income so allocated as
described under "Description of Preferred Shares--Dividends and Dividend
Periods--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--Dividends and Dividend Periods--Restrictions on Dividends and
Other Distributions" in the prospectus. This may prevent the Trust from
distributing at least an amount 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 its shares of 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.
B-33
The Trust may, at its option, redeem its 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, a Preferred Shareholder's ownership of
common 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 taxable net investment income (which includes net short-
term capital gains). To the extent received by foreign investors, exempt-
interest dividends, distributions of net capital gains and gain from the sale
or other disposition of Preferred Shares generally are exempt from U.S. 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 gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however, short-term
capital gains and ordinary income will currently be taxed at a maximum rate of
39.1% while long-term capital gains generally will be taxed at a maximum rate
of 20% (or 18% for capital assets that have been held for more than five years
and the holding period of which began after December 31, 2000).** However,
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. A shareholder's holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a result
of holding one or more other positions in substantially similar or related
property, or through certain options or short sales. Any loss realized on a
sale or exchange of shares of the Trust will be
--------
** The Economic Growth and Tax Relief Reconciliation Act of 2001, effective
for taxable years beginning after December 31, 2000, creates a new 10
percent income tax bracket and reduces the tax rates applicable to ordinary
income over a six year phase-in period. Beginning in the taxable year 2006,
ordinary income will be subject to a 35% maximum rate, with approximately
proportionate reductions in the other ordinary rates.
B-34
disallowed to the extent those shares of the Trust are replaced by other shares
within a period of 61 days beginning 30 days before and ending 30 days after
the date of disposition of the original shares. In that event, the basis of the
replacement shares of the Trust will be adjusted to reflect the disallowed
loss.
The Trust is required in certain circumstances to backup withhold 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 U.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.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the alternative minimum
tax. Shareholders are advised to consult their own tax advisers for more
detailed information concerning the U.S. federal, state, local, foreign and
other income tax consequences to them of purchasing, holding and disposing of
Trust shares.
EXPERTS
The statement of Assets and Liabilities of the Trust as of July 16 and
statement of operations for the period then ended appearing in this statement
of additional information has been audited by Deloitte and Touche LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing. Deloitte and Touche LLP,
located at 200 Berkeley Street, Boston, Massachusetts, 02116, provides auditing
services to the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 relating to the shares offered hereby,
has been filed by the Trust with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. The prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further
information with respect to the Trust and the shares offered hereby, reference
is made to the Registration Statement. Statements contained in the prospectus
and this Statement of Additional Information as to the contents of any contract
or other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
B-35
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder of
The BlackRock California Municipal Income Trust
We have audited the accompanying statement of assets and liabilities of The
BlackRock California Municipal Income Trust (the "Trust") as of July 16, 2001
and the related statement of operations and changes in net assets for the
period March 30, 2001 (date of inception) to July 16, 2001. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements presents fairly, in all material
respects, the financial position of the Trust at July 16, 2001 and the results
of its operations and changes in its net assets for the period then ended, in
conformity with accounting principles generally accepted in the United States
of America.
Boston, Massachusetts
July 18, 2001
F-1
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
July 16, 2001
Assets:
Cash................................................................ $115,001
Liabilities:
Payable for organization costs...................................... 15,000
--------
Net Assets.......................................................... $100,001
========
Net assets were comprised of:
Common stock at par (Note 1)...................................... $ 8
Paid-in capital in excess of par.................................. 114,993
--------
115,001
Undistributed net investment loss................................. (15,000)
--------
Net assets, July 16, 2001......................................... $100,001
========
Net asset value per share:
Equivalent to 8,028 shares of common stock issued and outstanding,
par value $0.001, unlimited shares authorized...................... $ 12.46
========
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF OPERATIONS
For the period March 30, 2001 (date of inception) to July 16, 2001
Investment Income................................................... $ --
Expenses
Organization expenses............................................. 15,000
--------
Net investment loss................................................. $(15,000)
========
F-2
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF CHANGES IN NET ASSETS
For the period March 30, 2001 (date of inception) to July 16, 2001
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment loss................................................ $(15,000)
--------
Net decrease in net assets resulting from operations............... (15,000)
--------
Capital Stock Transactions
Net proceeds from the issuance of common shares.................... 115,001
--------
Total increase................................................... 100,001
--------
NET ASSETS
Beginning of year.................................................. 0
--------
End of year........................................................ $100,001
========
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
The Blackrock California Municipal Income Trust (the "Trust") was organized
as a Delaware business trust on March 30, 2001 and is registered as a non-
diversified, closed-end management investment company under the Investment
Company Act of 1940. The Trust had no operations other than a sale to Blackrock
Advisors, Inc. of 8,028 shares of common stock for $115,001 ($14.325 per
share).
Note 2. Agreements
The Trust has entered into an Investment Advisory Agreement with BlackRock
Advisors, Inc. The Trust will pay BlackRock Advisors, Inc. a monthly fee (the
"Investment Management Fee") at an annual rate of 0.60% of the average weekly
value of the Trust's Managed Assets. BlackRock Advisors has voluntarily agreed
to waive receipt of a portion of the Investment Management Fee or other
expenses of the trust in the amount of 0.25% of average weekly Managed Assets
for the first 5 years of the Trust's operations, 0.20% in year 6, 0.15% in year
7, 0.10% in year 8 and 0.05% in year 9.
Note 3. Organization Expenses and Offering Costs
Organization expenses of $15,000 have been expensed. Offering costs,
estimated to be approximately $441,200 will be charged to paid-in capital at
the time shares of beneficial interest are sold.
Note 4. Cash & Cash Equivalents
The Trust considers all highly liquid debt instruments with a maturity of
three months or less at time of purchase to be cash equivalents.
F-3
FINANCIAL STATEMENTS
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2001 (Unaudited)
Assets:
Investments at value (cost $195,902,651) (Note 1)................ $198,666,269
Cash............................................................. 5,967,075
Receivable for investments sold.................................. 27,432,029
Interest receivable.............................................. 1,428,562
Receivable for fund shares sold.................................. 50,000
------------
233,543,935
------------
Liabilities:
Payable for investments purchased................................ 43,965,609
Investment advisory fee payable (Note 2)......................... 62,912
Payable for organization and offering costs...................... 390,000
Other accrued expenses........................................... 42,724
------------
44,461,245
------------
Net Investment Assets............................................ 189,082,690
============
Net assets were comprised of:
Common shares of beneficial interest:
Par value (Note 4)........................................... 13,008
Paid in capital in excess of par............................. 185,951,993
------------
185,965,001
Undistributed net investment income (Note 1)................... 354,071
Net unrealized appreciation (Note 1)........................... 2,763,618
------------
Net investment assets, August 31, 2001......................... $189,082,690
============
Net asset value per share:
Equivalent to 13,008,028 common shares of beneficial interest
issued and outstanding, par value $0.001, unlimited shares
authorized...................................................... $ 14.54
============
See Notes to Financial Statements
F-4
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF OPERATIONS
For the period July 27, 2001 (date of inception) to August 31, 2001 (Unaudited)
Net Investment Income
Income Interest..................................................... $ 474,707
----------
Expenses
Investment advisory............................................... 107,849
Organization expenses............................................. 15,000
Independent accountants........................................... 13,247
Reports to shareholders........................................... 8,430
Custodian......................................................... 7,154
Trustees.......................................................... 4,101
Transfer agent.................................................... 2,236
Registration...................................................... 1,720
Legal............................................................. 1,052
Miscellaneous..................................................... 4,784
----------
Total expenses.................................................... 165,573
Less fees waived by Advisor (Note 2).............................. (44,937)
----------
Net expenses...................................................... 120,636
----------
Net investment income............................................. 354,071
----------
Net change in unrealized appreciation on investments.............. 2,763,618
----------
Net Increase in Net Investment Assets Resulting from Operations... $3,117,689
==========
See Notes to Financial Statements
F-5
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF CHANGES IN NET ASSETS
For the period July 27, 2001 (date of inception) to August 31, 2001 (Unaudited)
Increase in Net Investment Assets
Operations:
Net Investment income........................................... $ 354,071
Net change in unrealized appreciation on investments............ 2,763,618
------------
Net increase in net assets resulting from operations.......... 3,117,689
------------
Capital Share Transactions:
Net proceeds from the issuance of common shares................... 185,965,001
------------
Total increase.................................................. 189,082,690
------------
Net Investment Assets
Beginning of period............................................... --
------------
End of period (including undistributed net investment income of
$354,071)........................................................ $189,082,690
============
See Notes to Financial Statements
F-6
THE BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
FINANCIAL HIGHLIGHTS (Unaudited)
For the Period
July 27, 2001*
Through
August 31, 2001
---------------
Per Common Share Operating Performance:
Net asset value, beginning of period**.......................... $ 14.33+
--------
Net investment income......................................... 0.03
Net unrealized gain on investments............................ 0.21
--------
Net increase from investment operations......................... 0.24
--------
Capital charge with respect to issuance of common shares........ (0.03)
--------
Net asset value, end of period**................................ $ 14.54
========
Market value, end of period**................................... $ 15.23
========
Total Investment Return++ 0.86%
========
Ratios To Average Net Assets Of Common Shareholders:
Expenses after fee waiver....................................... 0.65%#
Expenses before fee waiver...................................... 0.90%#
Net investment income after fee waiver.......................... 1.90%#
Net investment income before fee waiver......................... 1.65%#
Supplemental Data:
Average net assets of common shareholders (000)................. $189,083
Portfolio turnover.............................................. 0%
Net assets of common shareholders, end of period (000).......... $189,083
* Commencement of investment operations. (Note 1)
** Net asset value and market value are published in Barron's on Saturday and
The Wall Street Journal on Monday.
+ Net asset value immediately after the closing of the first public offering
was $14.30.
++ 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. Total investment return
does reflect brokerage commissions. Total investment returns for less than a
full year are not annualized. Past performance is not a guarantee of future
results.
# Annualized
The information above represents the unaudited operation performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has
been determined based upon financial information provided in the financial
statements and market value data for the Trust's common shares.
See Notes to Financial Statements
F-7
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization & Accounting Policies
The BlackRock California Municipal Income Trust (the "Trust") was organized
as a Delaware business trust on March 30, 2001 and is registered as a non-
diversified, closed-end management investment company under the Investment
Company Act of 1940. The Trust had no other transactions other than when it
sold 8,028 Common Shares for $115,001 ($14.325 per share) to BlackRock
Advisors, Inc., until investment operations commenced on July 27, 2001. The
Trust's investment objectives are to provide current income exempt from regular
Federal and California state income taxes and to invest in municipal bonds that
over time will perform better than the broader California municipal bond
market. The ability of issuers of debt securities held by the Trust to meet
their obligations may be affected by economic developments in the state, a
specific industry or region. No assurance can be given that the Trust's
investment objective will be achieved.
The following is a summary of significant accounting policies followed by
the Trust.
Securities Valuation: Municipal securities (including commitments to
purchase such securities on a "when-issued" basis) are valued on the basis of
prices provided by dealers or pricing services approved by the Trustees. In
determining the value of a particular security, pricing services may use
certain information with respect to transactions in such securities, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining values. Short-term investments
are valued at amortized cost. Any securities or other assets for which such
current market quotations are not readily available are valued at fair value as
determined in good faith under procedures established by and under the general
supervision and responsibility of the Trustees.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. The Trust also records interest income
on an accrual basis and amortizes premium and accretes discount, respectively,
to interest income on securities purchased using the interest method.
Federal Income Taxes: It is the Trust's intention to elect to be treated as
a regulated investment company under the Internal Revenue Code and to
distribute sufficient net income to shareholders. For this reason and because
substantially all of the Trust's gross income consists of Tax-exempt interest,
no Federal income tax provision is required.
Dividends and Distributions: The Trust declares and pays dividends and
distributions to common shareholders monthly from net investment income, net
realized short-term capital gains and other sources, if necessary. Net long-
term capital gains, if any, in excess of loss carry forwards may be distributed
annually. Dividends and distributions are recorded on the ex-dividend date.
Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Deferred Compensation Plan: Under a deferred compensation plan approved by
the Board of Trustees on February 24, 2000, non-interested Trustees may elect
to defer receipt of all or a portion of their annual compensation.
Deferred amounts earn a return as though equivalent dollar amounts had been
invested in common shares of other BlackRock funds selected by the Trustees.
This has the same economic effect as if the Trustees had invested the deferred
amounts in such other BlackRock funds.
F-8
The deferred compensation plan is not funded and obligations there under
represent general unsecured claims against the general assets of the Trust. The
Trust may, however, elect to invest in common shares of those funds selected by
the Trustees in order to match its deferred compensation obligations.
New Accounting Policies: Since inception, the Trust has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies, as
revised, and began amortizing market discount on debt securities. The Trust
amortizes premiums and original issue discount on debt securities. The
cumulative effect of this accounting policy had no impact on the total net
assets of the Trust. The impact of this accounting policy is anticipated to
have an immaterial effect on the financial statements and will result in an
increase to cost of securities and a corresponding decrease in net unrealized
appreciation, based on securities held as of August 31, 2001.
Note 2. Agreements
The Trust has an Investment Advisory Agreement with BlackRock Advisors, Inc.
(the "Advisor"), a wholly owned subsidiary of BlackRock, Inc., which in turn is
an indirect majority-owned subsidiary of PNC Financial Services Group, Inc. The
investment management agreement covers both investment advisory and
administration services.
The investment advisory fee paid to the Advisor is computed weekly and
payable monthly at an annual rate of 0.60% of the Trust's average weekly
Managed Assets. The Advisor has voluntarily agreed to waive receipt of a
portion of the investment management fee or other expenses of the Trust in the
amount of 0.25% of average weekly Managed Assets for the first 5 years of the
Trust's operations, 0.20% in year 6, 0.15% in year 7, 0.10% in year 8 and 0.05%
in year 9.
Pursuant to the agreements, the Advisor provides continuous supervision of
the investment portfolio, pays the compensation of officers of the Trust who
are affiliated persons of the Advisor and pays occupancy and certain clerical
and accounting costs. The Trust bears all other costs and expenses.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the period ended August 31, 2001 aggregated $189,873,502 and
$0, respectively.
The federal income tax basis of the Trust's investments at August 31, 2001
was $195,902,651, and accordingly, net unrealized appreciation was $2,763,618
(gross unrealized appreciation - $2,763,618, gross unrealized depreciation -
$0).
Note 4. Capital
There are an unlimited number of $.001 par value common shares of beneficial
interest authorized. Of the 13,008,028 common shares of beneficial interest
outstanding at August 31, 2001, the Advisor owned 8,028 shares.
Transactions in common shares of beneficial interest for the period July 27,
2001 (commencement of investment operations) to August 31, 2001 were as
follows:
Shares Issued in connection with initial public offering............. 13,008,028
----------
Net increase in shares outstanding................................... 13,008,028
==========
Offering costs of $375,000 incurred in connection with the Trust's offering
of common shares have been charged to paid-in capital in excess of par of the
common shares.
F-9
The Trust may classify or reclassify any unissued common shares of
beneficial interest into one or more series of preferred shares of beneficial
interest into one or more series of preferred shares of beneficial interest.
Note 5. Dividends
Subsequent to August 31, 2001, the Board of Trustees of the Trust declared a
dividend from undistributed earnings of $0.0725 per common share payable
October 4, 2001, to shareholders of record on October 1, 2001.
Note 6. Subsequent Event
The underwriters elected to exercise the over-allotment option. This
resulted in the issuance of 1,950,000 common shares of beneficial interest on
September 7, 2001.
F-10
BlackRock California Municipal Income Trust
Portfolio of Investments August 31, 2001 (Unaudited)
Principal
Amount Option Call Value (Note
Rating* (000) Description Provisions+ 1)
------- --------- -------------------------------- ------------- -----------
LONG-TERM INVESTMENTS--101.9%
California--85.4%
Anaheim Pub. Fin. Auth. Lease
Rev., Cap. App. Pub. Impvt.
Proj.
Ser. C, Zero Coupon, 9/01/31,
AAA $10,000 FSA No Opt.Call $ 2,083,400
Ser. C, Zero Coupon, 9/01/35,
AAA 21,450 FSA No Opt.Call 3,565,634
California Hlth. Fac. Fin. Auth.
Rev., Kaiser Ser. A, 5.40%,
A 4,890 5/01/28 7/06 @ 102 4,987,507
AAA 25,000 California Hsg. Fin. Agcy. Rev.,
Cap. App., Home Mtg., Ser. B,
Zero Coupon, 8/01/31, FSA 8/10 @ 31.194 4,765,250
East Bay California Mun. Util.
Dist. Wtr. Sys.Rev., 5.00%,
AA 9,060 6/01/38, MBIA 6/08 @ 101 9,086,183
AAA 6,000 El Monte California C.O.P., Sen.
Dept. Pub. Svcs. Fac. Phase II,
5.25%, 1/01/34, AMBAC 1/11 @ 100 6,152,220
BBB 4,000 Foothill / Eastern Trans.
Corridor Agcy., California Toll
Road Rev., 5.75%, 1/15/40 1/10 @ 101 4,122,120
Foothill / Eastern Transp.
Corridor Agcy., California Toll
Road Rev.,
BBB 5,000 Zero Coupon, 1/15/33 1/10 @ 25.781 773,650
BBB 5,000 Zero Coupon, 1/15/34 1/10 @ 24.228 726,800
BBB 13,445 Zero Coupon, 1/15/35 1/10 @ 22.819 1,839,814
BBB 1,000 Zero Coupon, 1/15/38 1/10 @ 19.014 113,600
AAA 4,000 Huntington Beach Pub. Fin. Auth.
Rev., Lease Cap. Impvt., Ser. A,
5.00%, 9/01/31, AMBAC 9/11 @ 100 4,029,400
NR 5,000 Irvine Mobile Home Park Rev.,
Meadows Mobile Home Park, Ser.
A, 5.70%, 3/01/28 3/08 @ 102 4,893,700
Los Angeles Dept. Wtr. & Pwr.
Waterworks, Rev.,
AA 25,960 Ser. A, 5.125%, 7/01/41 7/11 @ 100 26,195,197
AAA 2,975 Ser. A, 5.125%, 7/01/41, FGIC 7/11 @ 100 3,012,545
Metro. Wtr. Dist. So.
California, Waterworks Rev.,
AA 4,000 Ser. A, 5.00%, 7/01/37 1/08 @ 101 4,010,920
Monterey Cnty., C.O.P., Master
AAA 10,000 Plan Fin., 5.00%, 8/01/32, MBIA 8/11 @ 100 10,069,400
AAA 10,000 Rancho Cucamonga California
Redev. Agcy. Rancho Redev.
Proj., 5.125%, 9/01/30, MBIA 9/11 @ 100 10,164,200
Richmond Wastewater Rev., Cap.
AAA 1,905 App., Zero Coupon, 8/01/31, FGIC No Opt. Call 398,621
Sacramento City Fin. Auth., Cap.
Impvt., Ser. A, 5.00%, 12/01/32,
AAA 9,215 AMBAC 6/11 @ 100 9,280,611
San Francisco Bay Area Rapid
Transit Dist., Sales Tax Rev.,
AAA 8,725 5.00%, 7/01/26, AMBAC 7/11 @ 100 8,800,471
AAA 7,500 5.125%, 7/01/36, AMBAC 7/11 @ 100 7,597,050
AAA 6,500 San Francisco California City
And Cnty. Arpts., Comm. Int'l.
Airport Rev., 5.25%, 5/01/31,
MBIA 5/11 @ 100 6,644,690
NR 1,775 San Francisco California City
And Cnty. Redev. Agcy. Rev.,
Comm. Fac. Dist. Number 6-
Mission B, 6.125%, 8/01/31 8/09 @ 102 1,787,975
San Jose California Multifamily
Hsg. Rev.,
Lenzen Hsg., Ser. B,5.45%,
AAA 2,880 2/20/43, GNMA 8/11 @ 102 2,900,045
Villages Pkway. Sen. Apts.,
AAA 4,225 Ser. D, 5.50%, 4/01/34, FNMA 4/11 @ 100 4,265,518
Santa Clara Cnty. California
Hsg. Auth., Multifamily Hsg.
Rev.,
John Burns Gardens Apts. Proj.
A3 1,715 A, 5.85%, 8/01/31 2/12 @ 101 1,723,386
River Town Apts. Proj., Ser. A,
A3 1,235 6.00%, 8/01/41 2/12 @ 100 1,240,990
A1 14,345 Tobacco Securitization Auth. No.
California Tobacco, Settlement
Rev., Ser. A, 5.375%, 6/01/41 6/11 @ 100 14,450,292
AAA 2,000 Upland California Unified Sch.
Dist., Cap. App. Election of
2000, 5.125%, 8/01/25, FSA 8/13 @ 100 1,824,280
-----------
161,505,469
-----------
Delaware--5.8%
Charter Mac Equity Issuer Trust,
NR 7000++ Ser. A-2, 6.30%, 6/30/49 6/09 @ 100 7,000,000
NR 4000++ Ser. B-1, 6.80%, 11/30/50 11/10 @ 100 4,000,000
-----------
11,000,000
-----------
F-11
Principal
Amount Option Call Value
Rating* (000) Description Provisions+ (Note 1)
------- --------- ------------------------------- ----------- ------------
Puerto Rico--10.7%
Puerto Rico Pub. Fin. Corp.,
Comm. App., Ser. A, 5.00%,
AAA 20,000 8/01/31, MBIA 8/11 @ 100 20,160,800
------------
Total Long-Term Investments
(cost $189,902,651) 192,666,269
------------
SHORT-TERM INVESTMENTS**--3.2%
New York--3.2%
New York City Trans. Fin. Auth.
Rev., Subseries B-1, 2.55%,
A1+ 6,000 11/01/27, FRDD N/A 6,000,000
------------
Total Short-Term Investments
(cost $6,000,000) 6,000,000
------------
Total Investments--105.1% (cost
$195,902,651) 198,666,269
Liabilities in excess of other
assets--(5.1)% (9,583,579)
------------
Net Assets Applicable to Common
Shareholders--100% $189,082,690
============
--------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** For purposes of amortized cost valuation, the maturity dates of these
instruments is considered to be the earlier of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
+ Option call provisions: date (month/year) and price of the earliest
optional call or redemption. There may be other call provisions at varying
prices at later dates.
++ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
KEY TO ABBREVIATIONS:
AMBAC--American Municipal Bond FRDD--Floating Rate Daily Demand
Assurance Corporation FSA--Financial Security Assurance
C.O.P.--Certificate of Participation GNMA--Government National
FGIC--Financial Guaranty Insurance Company Mortgage Association
FNMA--Federal National Mortgage Association MBIA--Municipal Bond Insurance
Association
F-12
APPENDIX A
FORM OF
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF PREFERENCES OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("PREFERRED SHARES")
TABLE OF CONTENTS
Definitions............................................................. AA-3
Part I.................................................................. AA-14
1. Number of Authorized shares.......................................... AA-14
2. Dividends............................................................ AA-14
3. Gross-up Payments.................................................... AA-17
4. Designation of Special Rate Periods.................................. AA-18
5. Voting Rights........................................................ AA-19
6. Investment Company Act Preferred Shares Asset Coverage............... AA-23
7. Preferred Shares Basic Maintenance Amount............................ AA-23
8. Reserved............................................................. AA-25
9. Restrictions on Dividends and Other Distributions.................... AA-25
10. Rating Agency Restrictions.......................................... AA-26
11. Redemption.......................................................... AA-26
12. Liquidation Rights.................................................. AA-30
13. Miscellaneous....................................................... AA-30
Part II................................................................. AA-31
1. Orders............................................................... AA-31
2. Submission of Orders by Broker-Dealers to Auction Agent.............. AA-32
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate...................................................... AA-34
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares............................................. AA-35
5. Notification of Allocations.......................................... AA-37
6. Auction Agent........................................................ AA-37
7. Transfer of Preferred Shares......................................... AA-38
8. Global Certificate................................................... AA-38
Appendix A.............................................................. AA-39
Appendix B.............................................................. BB-1
Appendix C.............................................................. CC-1
AA-2
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST, a Delaware business trust (the
"Trust"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees
of the Trust by Article VI of the Trust's Agreement and Declaration of
Trust, as amended and restated (which, as hereafter restated or amended
from time to time is, together with this Statement, herein called the
"Declaration"), the Board of Trustees has, by resolution, authorized the
issuance of shares of the Trust's authorized Preferred Shares, liquidation
preference $25,000 per share, having such designation or designations as to
series as is set forth in Section 1 of Appendix A hereto and such number of
shares per such series as is set forth in Section 2 of Appendix A hereto.
Second: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
shares of each series of Preferred Shares now or hereafter described in
Section 1 of Appendix A hereto are as follows (each such series being
referred to herein as a series of Preferred Shares, and shares of all such
series being referred to herein individually as a Preferred Share and
collectively as Preferred Shares).
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Appendix A hereto,
as used in Parts I and II of this Statement, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
(1) "AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate
Period of shares of a series of Preferred Shares, shall mean (i) (A) in the
case of any Minimum Rate Period or any Special Rate Period of fewer than 49
Rate Period Days, the interest equivalent of the 30-day rate; provided,
however, that if such Rate Period is a Minimum Rate Period and the "AA"
Composite Commercial Paper Rate is being used to determine the Applicable
Rate for shares of such series when all of the Outstanding shares of such
series are subject to Submitted Hold Orders, then the interest equivalent
of the seven-day rate, and (B) in the case of any Special Rate Period of
(1) 49 or more but fewer than 70 Rate Period Days, the interest equivalent
of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period Days, the
arithmetic average of the interest equivalent of the 60-day and 90-day
rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest
equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate
Period Days, the arithmetic average of the interest equivalent of the 90-
day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period Days,
the interest equivalent of the 120-day rate; (6) 141 or more but fewer than
162 Rate Period Days, the arithmetic average of the 120-day and 180-day
rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or
the equivalent of such rating by S&P or another rating agency, as made
available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day next preceding such date; or (ii) in the
event that the Federal Reserve Bank of New York does not make available any
such rate, then the arithmetic average of such rates, as quoted on a
discount basis or otherwise, by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day next preceding such
date. If any Commercial Paper Dealer does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate shall be determined on the basis of the quotation or
quotations furnished by the remaining Commercial Paper Dealer or Commercial
Paper Dealers and any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Trust does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers,
by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For
purposes of this definition, the "interest equivalent" of a rate stated on
a discount basis (a "discount rate") for commercial paper of a given days'
maturity shall be equal to the quotient (rounded upwards to the next higher
one-thousandth (.001) of 1%) of (A) the discount rate
AA-3
divided by (B) the difference between (x) 1.00 and (y) a fraction, the
numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator
of which shall be 360.
(2) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(3) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by,
in control of or under common control with the Trust; provided, however,
that no Broker-Dealer controlled by, in control of or under common control
with the Trust shall be deemed to be an Affiliate nor shall any corporation
or any Person controlled by, in control of or under common control with
such corporation one of the trustees, directors or executive officers of
which is a trustee of the Trust be deemed to be an Affiliate solely because
such trustee, director or executive officer is also a trustee of the Trust.
(4) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(5) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RANs), Tax and Revenue Anticipation Notes
(TRANs), Grant Anticipation Notes (GANs) that are rated by S&P and Bond
Anticipation Notes (BANs) that are rated by S&P.
(6) "APPLICABLE RATE" shall have the meaning specified in subparagraph
(e) (i) of Section 2 of Part I of this Statement.
(7) "AUCTION" shall mean each periodic implementation of the Auction
Procedures
(8) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Trust and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for shares of a series of Preferred Shares
so long as the Applicable Rate for shares of such series is to be based on
the results of an Auction.
(9) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees or the Executive Committee of the Board
of Trustees in accordance with Section 6 of Part II of this Statement.
(10) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(11) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.
(12) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(13) "BENCHMARK RATE" shall have the meaning specified in Section 12 of
Appendix A hereto.
(14) "BENEFICIAL OWNER," with respect to shares of a series of Preferred
Shares, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of
shares of such series.
(15) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(16) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement; provided,
however, that neither the Trust nor any affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer that
is an affiliate of the Trust may be a Bidder in an Auction, but only if the
Orders placed by such Broker-Dealer are not for its own account.
AA-4
(17) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Trust
or any duly authorized committee thereof.
(18) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of this Statement, that is a member of, or a
participant in, the Securities Depository or is an affiliate of such member
or participant, has been selected by the Trust and has entered into a
Broker-Dealer Agreement that remains effective.
(19) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Trust,
the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of this Statement.
(20) "BUSINESS DAY" shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday, Sunday nor
any other day on which banks in The City of New York, New York, are
authorized by law to close.
(21) "CODE" means the Internal Revenue Code of 1986, as amended.
(22) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any other commercial paper dealer selected by the Trust as
to which Moody's, S&P or any substitute rating agency then rating the
Preferred Shares shall not have objected or, in lieu of any thereof, their
respective affiliates or successors, if such entity is a commercial paper
dealer.
(23) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.001 per share, of the Trust.
(24) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or the Investment Company Act Cure Date, as the case may be.
(25) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of
Preferred Shares, shall mean the date on which the Trust initially issued
such shares.
(26) "DECLARATION" shall have the meaning specified on the first page of
this Statement.
(27) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least P-1, MIG-1 or VMIG-1 by Moody's, or A-1+ or SP-1+ by S&P.
(28) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i)(a)
with respect to a Moody's Eligible Asset that is not currently callable as
of such Valuation Date at the option of the issuer thereof, the quotient of
the Market Value thereof divided by the applicable Moody's Discount Factor,
or (b) with respect to a Moody's Eligible Asset that is currently callable
as of such Valuation Date at the option of the issuer thereof, the quotient
of (1) the lesser of the Market Value or call price thereof, including any
call premium, divided by (2) the applicable Moody's Discount Factor, and
(ii) with respect to a S&P Eligible Asset, the quotient of the Market Value
thereof divided by the applicable S&P Discount Factor.
(29) RESERVED.
(30) RESERVED.
(31) "DIVIDEND PAYMENT DATE," with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph (d) of
Section 2 of Part I of this Statement.
(32) "DIVIDEND PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date
for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series.
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(33) "EXISTING HOLDER," with respect to shares of a series of Preferred
Shares, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent
as a holder of shares of such series.
(34) "FAILURE TO DEPOSIT," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Trust to pay to the Auction
Agent, not later than 12:00 noon, New York City time, (A) on the Business
Day next preceding any Dividend Payment Date for shares of such series, in
funds available on such Dividend Payment Date in The City of New York, New
York, the full amount of any dividend (whether or not earned or declared)
to be paid on such Dividend Payment Date on any share of such series or (B)
on the Business Day next preceding any redemption date in funds available
on such redemption date for shares of such series in The City of New York,
New York, the Redemption Price to be paid on such redemption date for any
share of such series after notice of redemption is mailed pursuant to
paragraph (c) of Section 11 of Part I of this Statement; provided, however,
that the foregoing clause (B) shall not apply to the Trust's failure to pay
the Redemption Price in respect of Preferred Shares when the related Notice
of Redemption provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
(35) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
(36) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4 of
Appendix A hereto.
(37) "HOLDER," with respect to shares of a series of Preferred Shares,
shall mean the registered holder of such shares as the same appears on the
record books of the Trust.
(38) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(39) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Trust an
independent public accountant or firm of independent public accountants
under the Securities Act of 1933, as amended from time to time.
(40) "INITIAL RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall have the meaning specified with respect to shares
of such series in Section 5 of Appendix A hereto.
(41) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
(42) "INVESTMENT COMPANY ACT" shall mean the Investment Company Act of
1940, as amended from time to time.
(43) "INVESTMENT COMPANY ACT CURE DATE," with respect to the failure by
the Trust to maintain the Investment Company Act Preferred Shares Asset
Coverage (as required by Section 6 of Part I of this Statement) as of the
last Business Day of each month, shall mean the last Business Day of the
following month.
(44) "INVESTMENT COMPANY ACT PREFERRED SHARES ASSET COVERAGE" shall mean
asset coverage, as defined in Section 18(h) of the Investment Company Act,
of at least 200% with respect to all outstanding senior securities of the
Trust which are shares of beneficial interest including all outstanding
Preferred Shares (or such other asset coverage as may in the future be
specified in or under the Investment Company Act as the minimum asset
coverage for senior securities which are shares or stock of a closed-end
investment company as a condition of declaring dividends on its common
shares or stock).
(45) RESERVED.
(46) "KENNY INDEX" shall have the meaning specified in the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
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(47) "LATE CHARGE" shall have the meaning specified in subparagraph (e)
(1) (B) of Section 2 of Part I of this Statement.
(48) "LIQUIDATION PREFERENCE," with respect to a given number of
Preferred shares, means $25,000 times that number.
(49) "MARKET VALUE" of any asset of the Trust shall be the market value
thereof determined by Kenny S&P Evaluation services or any other pricing
service or services designated by the Board of Trustees of the Trust,
provided that the Trust obtains written assurance from Moody's and S&P, if
Moody's and S&P are then rating the Preferred Shares, and from any
substitute rating agency then rating the Preferred Shares that such
designation will not impair the rating then assigned by Moody's, S&P or
such substitute rating agency to the Preferred Shares (the "Pricing
Service"). Market Value of any asset shall include any interest accrued
thereon. The Pricing Service shall value portfolio securities at the lower
of the quoted bid price or the mean between the quoted bid and ask price or
the yield equivalent when quotations are not readily available. Securities
for which quotations are not readily available shall be valued at fair
value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal obligations of comparable
quality, type of issue, coupon, maturity and rating; indications as to
value from dealers; and general market conditions. The Pricing Service may
employ electronic data processing techniques and/or a matrix system to
determine valuations. If the Pricing Service fails to provide the Market
Value of any Municipal Obligation, such Municipal Obligation shall be
valued at the lower of two bid quotations (one of which shall be in
writing) obtained by the Trust from two dealers who are members of the
National Association of Securities Dealers, Inc. and are making a market in
such Municipal Obligations. Futures contracts and options are valued at
closing prices for such instruments established by the exchange or board of
trade on which they are traded, or if market quotations are not readily
available, are valued at fair value as determined by the Pricing Service or
if the Pricing Service is not able to value such instruments they shall be
valued at fair value on a consistent basis using methods determined in good
faith by the Board of Trustees.
(50) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be
due if the Trust were to make Taxable Allocations, with respect to any
taxable year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by
the Trust, as of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Gross-up Payments are fully taxable.
(51) "MAXIMUM RATE," for shares of a series of Preferred Shares on any
Auction Date for shares of such series, shall mean:
(1) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this
Statement, the product of (A) the Reference Rate on such Auction Date
for the next Rate Period of shares of such series and (B) the Rate
Multiple on such Auction Date, unless shares of such series have or had
a Special Rate Period (other than a Special Rate Period of 28 Rate
Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period of shares of
such series after such Special Rate Period, in which case the higher
of:
(1) the dividend rate on shares of such series for the then-
ending Rate Period; and
(2) the product of (1) the higher of (x) the Reference Rate on
such Auction Date for a Rate Period equal in length to the then-
ending Rate Period of shares of such series, if such then-ending
Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-
ending Rate Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series, if such
Special Rate Period was 364 Rate Period Days or fewer,
AA-7
or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to such Special Rate Period, if such Special Rate
Period was more than 364 Rate Period Days and (2) the Rate Multiple
on such Auction Date; or
(2) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this
Statement, the product of (A) the highest of (1) the Reference Rate on
such Auction Date for a Rate Period equal in length to the then-ending
Rate Period of shares of such series, if such then-ending Rate Period
was 364 Rate Period Days or fewer, or the Treasury Note Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was
more than 364 Rate Period Days, (2) the Reference Rate on such Auction
Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is 364 Rate Period Days or fewer or the
Treasury Note Rate on such Auction Date for the Special Rate Period for
which the Auction is being held if such Special Rate Period is more than
364 Rate Period Days, and (3) the Reference Rate on such Auction Date
for Minimum Rate Periods and (B) the Rate Multiple on such Auction Date.
(52) RESERVED.
(53) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days.
(54) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(55) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(56) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(57) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
(58) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date,
(i) in the case of any Minimum Rate Period, any Special Rate Period of 28
Rate Period Days or fewer, or any Special Rate Period of 57 Rate Period
Days or more, a multiplicative factor equal to 275%, except as otherwise
provided in the last sentence of this definition; (ii) in the case of any
Special Rate Period of more than 28 but fewer than 36 Rate Period Days, a
multiplicative factor equal to 203%; (iii) in the case of any Special Rate
Period of more than 35 but fewer than 43 Rate Period Days, a multiplicative
factor equal to 217%; (iv) in the case of any Special Rate Period of more
than 42 but fewer than 50 Rate Period Days, a multiplicative factor equal
to 226%; and (v) in the case of any Special Rate Period of more than 49 but
fewer than 57 Rate Period Days, a multiplicative factor equal to 235%. If,
as a result of the enactment of changes to the Code, the greater of the
maximum marginal Federal individual income tax rate applicable to ordinary
income and the maximum marginal Federal corporate income tax rate
applicable to ordinary income will increase, such increase being rounded up
to the next five percentage points (the "Federal Tax Rate Increase"), until
the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead
shall be determined by reference to the following table:
Federal Tax Rate Increase Volatility Factor
------------------------- -----------------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
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(59) "MUNICIPAL OBLIGATIONS" shall mean any and all instruments that pay
interest or make other distributions that are exempt from regular Federal
income tax and in which the Trust may invest consistent with the investment
policies and restrictions contained in its registration statement on Form
N-2 (333-86589), ("Registration Statement"), as the same may be amended
from time to time.
(60) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of Preferred Shares pursuant to paragraph (c) of Section 11 of
Part I of this Statement.
(61) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect
to a Special Rate Period of Preferred Shares pursuant to subparagraph
(d)(i) of Section 4 of Part I of this Statement.
(62) "ORDER" and "ORDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
(63) RESERVED.
(64) RESERVED.
(65) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of Preferred Shares, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares
of such series theretofore cancelled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and
(iii) any shares of such series represented by any certificate in lieu of
which a new certificate has been executed and delivered by the Trust.
(66) RESERVED.
(67) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision
thereof.
(68) RESERVED.
(69) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series of
Preferred Shares, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase
shares of such series, or that is a Beneficial Owner of shares of such
series that wishes to purchase additional shares of such series.
(70) "POTENTIAL HOLDER," with respect to shares of a series of Preferred
Shares, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such
series or that is an Existing Holder of shares of such series that wishes
to become the Existing Holder of additional shares of such series.
(71) "PREFERRED SHARES" shall have the meaning set forth on the first
page of this Statement.
(72) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product
of the number of Preferred Shares outstanding on such date multiplied by
$25,000 (plus the product of the number of shares of any other series of
preferred shares outstanding on such date multiplied by the liquidation
preference of such shares), plus any redemption premium applicable to the
Preferred Shares (or other preferred shares) then subject to redemption;
(B) the aggregate amount of dividends that will have accumulated at the
respective Applicable Rates (whether or not earned or declared) to (but not
including) the first respective Dividend Payment Dates for the Preferred
Shares outstanding that follow such Valuation Date (plus the aggregate
amount of dividends, whether or not earned or declared, that will have
accumulated in respect of other outstanding preferred shares to, but not
including, the first respective dividend payment dates for such other
shares that follow such Valuation Date); (C) the aggregate amount of
dividends that would accumulate on shares of
AA-9
each series of the Preferred Shares outstanding from such first respective
Dividend Payment Date therefor through the 56th day after such Valuation
Date, at the Maximum Rate (calculated as if such Valuation Date were the
Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such
Dividend Payment Date, assuming, solely for purposes of the foregoing, that
if on such Valuation Date the Trust shall have delivered a Notice of
Special Rate Period to the Auction Agent pursuant to Section 4(d)(i) of
this Part I with respect to shares of such series, such Maximum Rate shall
be the higher of (a) the Maximum Rate for the Special Rate Period of shares
of such series to commence on such Dividend Payment Date and (b) the
Maximum Rate for a Minimum Rate Period of shares of such series to commence
on such Dividend Payment Date, multiplied by the Volatility Factor
applicable to a Minimum Rate Period, or, in the event the Trust shall have
delivered a Notice of Special Rate Period to the Auction Agent pursuant to
section 4(d)(i) of this Part I with respect to shares of such series
designating a Special Rate Period consisting of 56 Rate Period Days or
more, the Volatility Factor applicable to a special Rate Period of that
length (plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other preferred shares outstanding
from such respective dividend payment dates through the 56th day after such
Valuation Date, as established by or pursuant to the respective statements
establishing and fixing the rights and preferences of such other preferred
shares) (except that (1) if such Valuation Date occurs at a time when a
Failure to Deposit (or, in the case of preferred shares other than the
Preferred Shares, a failure similar to a Failure to Deposit) has occurred
that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in
respect of which such failure has occurred and (2) for those days during
the period described in this subparagraph (C) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date
will remain in effect (or, in the case of preferred shares other than the
Preferred Shares, in respect of which the dividend rate or rates in effect
immediately prior to such respective dividend payment dates will remain in
effect), the dividend for purposes of calculation would accumulate at such
Applicable Rate (or other rate or rates, as the case may be) in respect of
those days); (D) the amount of anticipated expenses of the Trust for the 90
days subsequent to such Valuation Date; (E) the amount of the Trust's
Maximum Potential Gross-up Payment Liability in respect of Preferred Shares
(and similar amounts payable in respect of other preferred shares pursuant
to provisions similar to those contained in Section 3 of Part I of this
Statement) as of such Valuation Date; (F) the amount of any indebtedness or
obligations of the Trust senior in right of payment to the Preferred
Shares; and (G) any current liabilities as of such Valuation Date to the
extent not reflected in any of (i)(A) through (i)(F) (including, without
limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the value (i.e., for purposes of current
Moody's guidelines, the face value of cash, short-term Municipal
Obligations rated MIG-1, VMIG-1 or P-1, and short-term securities that are
the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i) (A)
through (i) (G) become payable, otherwise the Moody's Discounted Value)
(i.e., for the purposes of the current S&P guidelines, the face value of
cash, short-term Municipal Obligations rate SP-1 or A-1 or Municipal
Obligations rated A, provided in each case that such securities mature on
or prior to the date upon which any of (i)(A) through (i)(G) becomes
payable, otherwise the S&P Discounted value) of any of the Trust's assets
irrevocably deposited by the Trust for the payment of any of (i)(A) through
(i)(G).
(73) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Trust to satisfy the Preferred Shares Basic Maintenance
Amount (as required by paragraph (a) of Section 7 of Part I of this
Statement) as of a given Valuation Date, shall mean the seventh Business
Day following such Valuation Date.
(74) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer or any Senior Vice President or Vice
President of the Trust which sets forth, as of the related Valuation Date,
the assets of the Trust, the Market Value and the Discounted Value thereof
(seriatim and in aggregate), and the Preferred Shares Basic Maintenance
Amount.
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(75) "QUARTERLY VALUATION DATE" shall mean the last Business Day of each
January, April, July and October of each year, commencing on the date set
forth in Section 6 of Appendix A hereto.
(76) "RATE MULTIPLE" shall have the meaning specified in Section 4 of
Appendix A hereto.
(77) "RATE PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the Initial Rate Period of shares of such series and any
Subsequent Rate Period, including any Special Rate Period, of shares of
such series.
(78) "RATE PERIOD DAYS," for any Rate Period or Dividend Period, means
the number of days that would constitute such Rate Period or Dividend
Period but for the application of paragraph (d) of Section 2 of Part I of
this Statement or paragraph (b) of Section 4 of Part I of this Statement.
(79) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A) for
purposes of calculation of Moody's Eligible Assets as of any Valuation
Date, no more than the aggregate of the following: (i) the book value of
receivables for Municipal Obligations sold as of or prior to such Valuation
Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with
counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of Municipal Obligations sold as of or
prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do
not comply with either of the conditions specified in (i) above, and (B)
for purposes of calculation of S&P Eligible Assets as of any Valuation Date
the book value of receivables for Municipal Obligations sold as of or prior
to such Valuation Date if such receivables are due within five business
days of such Valuation Date.
(80) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this
Statement.
(81) "REFERENCE RATE" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period
Days but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate
in the case of Special Rate Periods of more than 182 Rate Period Days but
fewer than 365 Rate Period Days.
(82) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(83) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
(84) "S&P DISCOUNT FACTOR" shall have the meaning specified in Section 4
of Appendix A hereto.
(85) "S&P ELIGIBLE ASSET" shall have the meaning specified in Section 4
of Appendix A hereto.
(86) "S&P EXPOSURE PERIOD" shall mean the maximum period of time
following a Valuation Date that the Fund has under this Statement to cure
any failure to maintain, as of such Valuation Date, the Discounted Value
for its portfolio at least equal to the Preferred Shares Basic Maintenance
Amount (as described in paragraph (a) of Section 7 of Part I of this
Statement).
(87) "S&P VOLATILITY FACTOR" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate
Period or any Special Rate Period of 28 Rate Period Days or fewer, (ii)
268% in the case of any Special Rate Period of more than 28 Rate Period
Days but fewer than 183 Rate Period Days; and (iii) 204% in the case of any
Special Rate Period of more than 182 Rate Period Days.
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(88) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by
the Trust which agrees to follow the procedures required to be followed by
such securities depository in connection with the Preferred Shares.
(89) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(90) "SPECIAL RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall have the meaning specified in paragraph (a) of
Section 4 of Part I of this Statement.
(91) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of this Statement.
(92) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York city time, on
any Auction Date or such other time on any Auction Date by which Broker-
Dealers are required to submit Orders to the Auction Agent as specified by
the Auction Agent from time to time.
(93) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(94) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(95) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(96) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(97) "SUBSEQUENT RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding
the next Dividend Payment Date for shares of such series and any period
thereafter from and including one Dividend Payment Date for shares of such
series to but excluding the next succeeding Dividend Payment Date for
shares of such series; provided, however, that if any Subsequent Rate
Period is also a Special Rate Period, such term shall mean the period
commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof.
(98) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean The First Boston
Company or Morgan Stanley & Co., Incorporated or their respective
affiliates or successors, if such entity is a commercial paper dealer;
provided, however, that none of such entities shall be a Commercial Paper
Dealer.
(99) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean The First
Boston Company or Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S.
Government securities dealer; provided, however, that none of such entities
shall be a U.S. Government Securities Dealer.
(100) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(101) "TAXABLE ALLOCATION" shall have the meaning specified in Section 3
of Part I of this Statement.
(102) "TAXABLE INCOME" shall have the meaning specified in Section 12 of
Appendix A hereto.
(103) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE," on any
date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the
AA-12
Kenny S&P 30 day High Grade Index or any successor index (the "Kenny
Index") (provided, however, that any such successor index must be approved
by Moody's (if Moody's is then rating the Preferred Shares)), made
available for the Business Day immediately preceding such date but in any
event not later than 8:30 A.M., New York City time, on such date by Kenny
S&P Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds the interest on which is excludable
for regular Federal income tax purposes under the Code of "high grade"
component issuers selected by Kenny S&P Evaluation Services or any such
successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds, but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57 (a)(5) of the Code, or successor provisions,
for purposes of the "alternative minimum tax," divided by (B) 1.00 minus
the maximum marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal corporate income
tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater; provided, however, that if the Kenny Index
is not made so available by 8:30 A.M., New York City time, on such date by
Kenny S&P Evaluation Services or any successor, the Taxable Equivalent of
the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income (in
each case expressed as a decimal), whichever is greater.
(104) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
(105) "TREASURY BILL RATE," on any date for any Rate Period, shall mean
(i) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recently auctioned Treasury
Bill with a remaining maturity closest to the length of such Rate Period,
as quoted in The Wall Street Journal on such date for the Business Day next
preceding such date; or (ii) in the event that any such rate is not
published in The Wall Street Journal, then the bond equivalent yield,
calculated in accordance with prevailing industry convention, as calculated
by reference to the arithmetic average of the bid price quotations of the
most recently auctioned Treasury Bill with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent.
(106) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less
but more than 364 days.
(107) "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 from the U.S.
Government Securities Dealers to the Auction Agent. If any U.S. Government
Securities Dealer does not quote a rate required to determine the Treasury
Bill Rate or the Treasury Note Rate, the Treasury Bill Rate or the Treasury
Note Rate shall be determined on the basis of the quotation or quotations
furnished by the remaining U.S. Government Securities Dealer or U.S.
Government Securities Dealers and any substitute U.S. Government Securities
Dealers selected by the Trust to provide such rate or rates not being
supplied by any U.S. Governmental Securities Dealer or U.S. Government
Securities Dealers, as the case may be, or, if the Trust does not select
any such Substitute U.S. Government Securities Dealer or Substitute U.S.
Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.
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(108) "TRUST" shall mean the entity named on the first page of this
statement, which is the issuer of the Preferred Shares.
(109) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc.,
Morgan Guaranty Trust Company of New York and any other U.S. Government
Securities dealer selected by the Trust as to which Moody's shall not have
objected or their respective affiliates or successors, if such entity is a
U.S. Government securities dealer.
(110) "VALUATION DATE" shall mean, for purposes of determining whether
the Trust is maintaining the Preferred Shares Basic Maintenance Amount,
each Business Day.
(111) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
Moody's Volatility Factor and the S&P Volatility Factor.
(112) "VOTING PERIOD" shall have the meaning specified in paragraph (b)
of Section 5 of Part I of this Statement.
(113) "WINNING BID RATE" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 8 of Appendix A
hereto shall be incorporated herein and made part hereof by reference thereto.
PART I.
1. Number of Authorized Shares.
The number of authorized shares constituting a series of the Preferred
Shares shall be as set forth with respect to such series in Section 2 of
Appendix A hereto.
2. Dividends.
(a) Ranking. The shares of a series of the Preferred Shares shall rank on a
parity with each other, with shares of any other series of the Preferred Shares
and with shares of any other series of preferred shares as to the payment of
dividends by the Trust.
(b) Cumulative Cash Dividends. The Holders of any series of Preferred Shares
shall be entitled to receive, when, as and if declared by the Board of
Trustees, out of funds legally available therefor in accordance with the
Declaration and applicable law, cumulative cash dividends at the Applicable
Rate for shares of such series, determined as set forth in paragraph (e) of
this Section 2, and no more (except to the extent set forth in Section 3 of
this Part I), payable on the Dividend Payment Dates with respect to shares of
such series determined pursuant to paragraph (d) of this Section 2. Holders of
Preferred Shares shall not be entitled to any dividend, whether payable in
cash, property or shares, in excess of full cumulative dividends, as herein
provided, on Preferred Shares. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
Preferred Shares which may be in arrears, and, except to the extent set forth
in subparagraph (e)(i) of this Section 2, no additional sum of money shall be
payable in respect of any such arrearage.
(c) Dividends Cumulative from Date of Original Issue. Dividends on any
series of Preferred Shares shall accumulate at the Applicable Rate for shares
of such series from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustment Thereof. The Dividend Payment
Dates with respect to shares of a series of Preferred Shares shall be as set
forth with respect to shares of such series in Section 9 of Appendix A hereto;
provided, however, that:
AA-14
(i) if the day on which dividends would otherwise be payable on shares
of such series is not a Business Day, then such dividends shall be payable
on such shares on the first Business Day that falls after such day; and
(ii) notwithstanding Section 9 of Appendix A hereto, the Trust in its
discretion may establish the Dividend Payment Dates in respect of any
Special Rate Period of shares of a series of Preferred Shares consisting of
more than 28 Rate Period Days; provided, however, that such dates shall be
set forth in the Notice of Special Rate Period relating to such Special
Rate Period, as delivered to the Auction Agent, which Notice of Special
Rate Period shall be filed with the Secretary of the Trust; and further
provided that (1) any such Dividend Payment Date shall be a Business Day
and (2) the last Dividend Payment in respect of such Special Rate Period
shall be the Business Day immediately following the last day thereof, as
such last day is determined in accordance with paragraph (b) of Section 4
of this Part I.
(e) Dividend Rates and Calculation Of Dividends.
(i) Dividend Rates. The dividend rate on Preferred Shares of any series
during the period from and after the Date of Original Issue of shares of such
series to and including the last day of the Initial Rate Period of shares of
such series shall be equal to the rate per annum set forth with respect to
shares of such series under "Designation" in Section 1 of Appendix A hereto.
For each Subsequent Rate Period of shares of such series thereafter, the
dividend rate on shares of such series shall be equal to the rate per annum
that results from an Auction for shares of such series on the Auction Date next
preceding such Subsequent Rate Period; provided, however, that if:
(A) an Auction for any such Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such
series for such Subsequent Rate Period will be the Maximum Rate for shares
of such series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate
Period consisting of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
but, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with paragraph (f)
of this Section 2 and the Trust shall have paid to the Auction Agent a late
charge ("Late Charge") equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the full amount
of dividends with respect to any Dividend Period of the shares of such
series, an amount computed by multiplying (x) 200% of the Reference Rate
for the Rate Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a fraction, the
numerator of which shall be the number of days for which such Failure to
Deposit has not been cured in accordance with paragraph (f) of this Section
2 (including the day such Failure to Deposit occurs and excluding the day
such Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of such series and (2) if such Failure
to Deposit consisted of the failure timely to pay to the Auction Agent the
Redemption Price of the shares, if any, of such series for which Notice of
Redemption has been mailed by the Trust pursuant to paragraph (c) of
Section 11 of this Part I, an amount computed by multiplying (x) 200% of
the Reference Rate for the Rate Period during which such Failure to Deposit
occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured
in accordance with paragraph (f) of this Section 2 (including the day such
Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the outstanding
shares of such series to be redeemed, no Auction will be held in respect of
shares of such series for the Subsequent Rate Period thereof and the
dividend rate for shares of such series for such Subsequent Rate Period
will be the Maximum Rate for shares of such series on the Auction Date for
such Subsequent Rate Period;
AA-15
(C) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate
Period consisting of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
and, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with paragraph
(f) of this Section 2 or the Trust shall not have paid the applicable Late
Charge to the Auction Agent, no Auction will be held in respect of shares
of such series for the first Subsequent Rate Period thereof thereafter (or
for any Rate Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Trust pays the applicable Late
Charge to the Auction Agent (the condition set forth in this clause (2) to
apply only in the event Moody's is rating such shares at the time the Trust
cures such Failure to Deposit), in each case no later than 12:00 Noon, New
York City time, on the fourth Business Day prior to the end of such Rate
Period), and the dividend rate for shares of such series for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
for shares of such series on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
"ba3"/BB"); or
(D) any Failure to Deposit shall have occurred with respect to shares of
such series during a Special Rate Period thereof consisting of more than
364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured, and, prior to
12:00 Noon, New York City time, on the fourth Business Day preceding the
Auction Date for the Rate Period subsequent to such Rate Period, such
Failure to Deposit shall not have been cured in accordance with paragraph
(f) of this Section 2 or, in the event Moody's is then rating such shares,
the Trust shall not have paid the applicable Late Charge to the Auction
Agent (such Late Charge, for purposes of this subparagraph (D), to be
calculated by using, as the Reference Rate, the Reference Rate applicable
to a Rate Period (x) consisting of more than 182 Rate Period Days but fewer
than 365 Rate Period Days and (y) commencing on the date on which the Rate
Period during which Failure to Deposit occurs commenced), no Auction will
be held in respect of shares of such series for such Subsequent Rate Period
(or for any Rate Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Trust pays the applicable Late
Charge to the Auction Agent (the condition set forth in this clause (2) to
apply only in the event Moody's is rating such shares at the time the Trust
cures such Failure to Deposit), in each case no later than 12:00 Noon, New
York City time, on the fourth Business Day prior to the end of such Rate
Period), and the dividend rate for shares of such series for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
for shares of such series on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
"ba3"/BB") (the rate per annum at which dividends are payable on shares of
a series of Preferred Shares for any Rate Period thereof being herein
referred to as the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per share payable on
shares of a series of Preferred Shares on any date on which dividends shall be
payable on shares of such series shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall
be 365 if such Dividend Period consists of 7 Rate Period Days and 360 for all
other Dividend Periods, and applying the rate obtained against $25,000.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to shares
of a series of Preferred Shares shall have been cured (if such Failure to
Deposit is not solely due to the willful failure of the Trust to make the
required payment to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Trust shall have paid
AA-16
to the Auction Agent (A) all accumulated and unpaid dividends on shares of such
series and (B) without duplication, the Redemption Price for shares, if any, of
such series for which Notice of Redemption has been mailed by the Trust
pursuant to paragraph (c) of Section 11 of Part I of this Statement; provided,
however, that the foregoing clause (B) shall not apply to the Trust's failure
to pay the Redemption Price in respect of Preferred Shares when the related
Redemption Notice provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to the
Auction Agent, not later than 12:00 Noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for shares of a series of
Preferred Shares, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted
by law, be repaid to the Trust at the end of 90 days from the date on which
such moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on Preferred Shares shall be
paid on the Dividend Payment Date therefor to the Holders thereof as their
names appear on the record books of the Trust on the Business Day next
preceding such Dividend Payment Date.
(j) Dividends Credited Against Earliest Accumulated but Unpaid
Dividends. Any dividend payment made on Preferred Shares shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the Holders as their names appear on the record books of the
Trust on such date, not exceeding 15 days preceding the payment date thereof,
as may be fixed by the Board of Trustees.
(k) Dividends Designated as Exempt-Interest Dividends. Dividends on
Preferred Shares shall be designated as exempt-interest dividends up to the
amount of tax-exempt income of the Trust, to the extent permitted by, and for
purposes of, section 852 of the Code.
3. Gross-Up Payments.
Holders of Preferred Shares shall be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor in
accordance with the Declaration and applicable law, dividends in an amount
equal to the aggregate Gross-up Payments as follows:
(a) Taxable Allocation without Notice. If, but only 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 given
advance notice thereof to the Auction Agent as provided in Section 5 of
Part II of this Statement (such allocation being referred to herein as a
"Taxable Allocation"), whether or not by reason of the fact that such
allocation is made retroactively as a result of the redemption of all or a
portion of the outstanding Preferred Shares or the liquidation of the
Trust, the Trust shall, during the Trust's fiscal year in which the Taxable
Allocation was made or within 90 days after the end of such fiscal year,
provide notice thereof to the Auction Agent and direct the Trust's dividend
disbursing agent to send such notice and a Gross-up Payment to each Holder
of such shares that was entitled to such dividend payment during such
fiscal year at such Holder's address as the same appears or last appeared
on the record books of the Trust.
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(b) Reserved.
(c) No Gross-Up Payments in the Event of a Reallocation. The Trust shall
not be required to make Gross-up Payments with respect to any net capital
gains or other taxable income determined by the Internal Revenue Service to
be allocable in a manner different from that allocated by the Trust.
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Trust, at its
option, may designate any succeeding Subsequent Rate Period of shares of a
series of Preferred Shares as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820,
subject to adjustment as provided in paragraph (b) of this Section 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with paragraph (c) and subparagraph
(d)(i) of this Section 4, (B) an Auction for shares of such series shall have
been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction, and (C) if any Notice of Redemption
shall have been mailed by the Trust pursuant to paragraph (c) of Section 11 of
this Part I with respect to any shares of such series, the Redemption Price
with respect to such shares shall have been deposited with the Auction Agent.
In the event the Trust wishes to designate any succeeding Subsequent Rate
Period for shares of a series of Preferred Shares as a Special Rate Period
consisting of more than 28 Rate Period Days, the Trust shall notify Moody's (if
Moody's is then rating such series) and S&P (if S&P is then rating such series)
in advance of the commencement of such Subsequent Rate Period that the Trust
wishes to designate such Subsequent Rate Period as a Special Rate Period and
shall provide Moody's (if Moody's is then rating such series) and S&P (if S&P
is then rating such series) with such documents as it may request.
(b) Adjustment of Length of Special Rate Period. With respect to the Series
T7 Preferred Shares, if the Trust wishes to designate a Subsequent Rate Period
as a Special Rate Period, but the day following what would otherwise be the
last day of such Special Rate Period is not a Wednesday that is a Business Day
in the case of a series of Preferred Shares designated as "Series T7 Preferred
Shares" in Section 1 of Appendix A hereto, then the Trust shall designate such
Subsequent Rate Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately preceding Rate
Period and ending on the first Tuesday that is followed by a Thursday that is a
Business Day preceding what would otherwise be such last day, in the case of
Series T7 Preferred Shares.
With respect to the Series R7 Preferred Shares, if the Trust wishes to
designate a Subsequent Rate Period as a Special Rate Period, but the day
following what would otherwise be the last day of such Special Rate Period is
not a Friday that is a Business Day in the case of a series of Preferred Shares
designated as "Series R7 Preferred Shares" in Section 1 of Appendix A hereto,
then the Trust shall designate such Subsequent Rate Period as a Special Rate
Period consisting of the period commencing on the first day following the end
of the immediately preceding Rate Period and ending on the first Thursday that
is followed by a Friday that is a Business Day preceding what would otherwise
be such last day, in the case of Series R7 Preferred Shares.
(c) Notice of Proposed Special Rate Period. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Preferred Shares as a Special Rate Period pursuant to paragraph (a) of this
Section 4, not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the date
the Trust proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum
Rate Period), notice shall be (i) published or caused to be published by the
Trust in a newspaper of general circulation to the financial community in The
City of New York, New York, which carries financial news, and (ii) mailed by
the Trust by first-class mail, postage prepaid, to the Holders of shares of
such series. Each such notice shall state (A) that the Trust may exercise its
option to designate a succeeding Subsequent Rate Period of shares of such
series as a Special Rate Period, specifying the first day thereof and (B) that
the Trust will, by 11:00 A.M., New York City time, on the second Business Day
next preceding such date (or by such later time
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or date, or both, as may be agreed to by the Auction Agent) notify the Auction
Agent of either (x) its determination, subject to certain conditions, to
exercise such option, in which case the Trust shall specify the Special Rate
Period designated, or (y) its determination not to exercise such option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York City
time, on the second Business Day next preceding the first day of any proposed
Special Rate Period of shares of a series of Preferred Shares as to which
notice has been given as set forth in paragraph (c) of this Section 4 (or such
later time or date, or both, as may be agreed to by the Auction Agent), the
Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate Period of shares
of such series as a Special Rate Period, specifying the same and the first
day thereof, (B) the Auction Date immediately prior to the first day of
such Special Rate Period, (C) that such Special Rate Period shall not
commence if (1) an Auction for shares of such series shall not be held on
such Auction Date for any reason or (2) an Auction for shares of such
series shall be held on such Auction Date but Sufficient Clearing Bids for
shares of such series shall not exist in such Auction, (D) the scheduled
Dividend Payment Dates for shares of such series during such Special Rate
Period and (E) the Special Redemption Provisions, if any, applicable to
shares of such series in respect of such Special Rate Period, such notice
to be accompanied by a Preferred Shares Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P (if S&P is then rating such series) each have an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount as of such Business Day (assuming for purposes of the foregoing
calculation that (a) the Maximum Rate is the Maximum Rate on such Business
Day as if such Business Day were the Auction Date for the proposed Special
Rate Period, and (b) the Moody's Discount Factors applicable to Moody's
Eligible Assets are determined by reference to the first Exposure Period
longer than the Exposure Period then applicable to the Trust, as described
in the definition of Moody's Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to exercise its
option to designate a Special Rate Period of shares of such series and that
the next succeeding Rate Period of shares of such series shall be a Minimum
Rate Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Trust fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect
set forth in such subparagraph (if either Moody's or S&P is then rating the
series in question)) with respect to any designation of any proposed Special
Rate Period to the Auction Agent by 11:00 A.M., New York City time, on the
second Business Day next preceding the first day of such proposed Special Rate
Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this Section 4. In the event the Trust delivers to
the Auction Agent a notice described in subparagraph (d)(i) of this Section 4,
it shall file a copy of such notice with the Secretary of the Trust, and the
contents of such notice shall be binding on the Trust. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of
this Section 4, the Trust will provide Moody's (if Moody's is then rating the
series in question) and S&P (if S&P is then rating the series in question) a
copy of such notice.
5. Voting Rights.
(a) One Vote per Share of Preferred Shares. Except as otherwise provided in
the Declaration or as otherwise required by law, (i) each Holder of Preferred
Shares shall be entitled to one vote for each share of Preferred Shares held by
such Holder on each matter submitted to a vote of shareholders of the Trust,
and (ii) the holders of outstanding preferred shares, including each share of
the Preferred Shares, and of Common Shares shall vote together as a single
class; provided, however, that, at any meeting of the shareholders of the Trust
held for the election of trustees, the holders of outstanding preferred shares,
including the Preferred
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Shares, represented in person or by proxy at said meeting, shall be entitled,
as a class, to the exclusion of the holders of all other securities and classes
of shares of beneficial interest of the Trust, to elect two trustees of the
Trust, each Preferred Share entitling the holder thereof to one vote. Subject
to paragraph (b) of this Section 5, the holders of outstanding Common Shares
and Preferred Shares voting together as a single class, shall elect the balance
of the trustees.
(b) Voting for Additional Trustees.
(i) Voting Period. Except as otherwise provided in the Declaration or as
otherwise required by law, during any period in which any one or more of
the conditions described in subparagraphs (A) or (B) of this subparagraph
(b)(i) shall exist (such period being referred to herein as a "Voting
Period"), the number of trustees constituting the Board of Trustees shall
be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of preferred shares,
including the Preferred Shares, would constitute a majority of the Board of
Trustees as so increased by such smallest number, and the holders of
preferred shares, including the Preferred Shares, shall be entitled, voting
as a class on a one-vote-per-share basis (to the exclusion of the holders
of all other securities and classes of shares of beneficial interest of the
Trust), to elect such smallest number of additional trustees, together with
the two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any dividend payment date
accumulated dividends (whether or not earned or declared) on any
outstanding Preferred Shares, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(B) if at any time holders of preferred shares, including the
Preferred Shares, are entitled under the Investment Company Act to
elect a majority of the trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the accrual
of any right of the holders of preferred shares, including the Preferred
Shares, to elect additional trustees as described in subparagraph (b)(i) of
this Section 5, the Trust shall notify the Auction Agent and the Auction
Agent shall call a special meeting of such holders, by mailing a notice of
such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the
Trust fails to send such notice to the Auction Agent or if the Auction
Agent does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled
to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice
is mailed. At any such special meeting and at each meeting of holders of
preferred shares, including the Preferred Shares, held during a Voting
Period at which trustees are to be elected, such holders, voting together
as a class (to the exclusion of the holders of all other securities and
classes of shares of beneficial interest of the Trust), shall be entitled
to elect the number of trustees prescribed in subparagraph (b)(i) of this
Section 5 on a one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office of all
persons who are trustees of the Trust at the time of a special meeting of
Holders and holders of other preferred shares to elect trustees shall
continue, notwithstanding the election at such meeting by the Holders and
such other holders of the number of trustees that they are entitled to
elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent trustees elected by the Holders and such
other holders of preferred shares and the remaining incumbent trustees
elected by the holders of the Common Shares and Preferred Shares, shall
constitute the duly elected trustees of the Trust.
(iv) Terms of Office of Certain Trustees to Terminate upon Termination
of Voting Period. Simultaneously with the termination of a Voting Period,
the terms of office of the additional trustees elected by the Holders and
holders of other Preferred Shares pursuant to subparagraph (b)(i) of
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this Section 5 shall terminate, the remaining trustees shall constitute the
trustees of the Trust and the voting rights of the Holders and such other
holders to elect additional trustees pursuant to subparagraph (b)(i) of
this Section 5 shall cease, subject to the provisions of the last sentence
of subparagraph (b)(i) of this Section 5.
(c) Holders of Preferred Shares to Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any Preferred Shares are
outstanding, the Trust shall not, without the affirmative vote or consent
of the Holders of at least a majority 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: (a) authorize, create or issue any class or
series of shares ranking prior to or on a parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, or
authorize, create or issue additional shares of any series of Preferred
Shares (except that, notwithstanding the foregoing, but subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of
Trustees, without the vote or consent of the Holders of Preferred Shares,
may from time to time authorize and create, and the Trust may from time to
time issue, additional shares of any series of Preferred Shares or classes
or series of other preferred shares ranking on a parity with 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; provided, however, that if Moody's or S&P is not then rating the
Preferred Shares, the aggregate liquidation preference of all preferred
shares of the Trust outstanding after any such issuance, exclusive of
accumulated and unpaid dividends, may not exceed the amount set forth in
Section 10 of Appendix A hereto) or (b) amend, alter or repeal the
provisions of the Declaration or this Statement, whether by merger,
consolidation or otherwise, so as to adversely affect any preference, right
or power of such Preferred Shares or the Holders thereof; provided,
however, that (i) none of the actions permitted by the exception to (a)
above will be deemed to affect such preferences, rights or powers, (ii) a
division of Preferred Shares will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the
Holders of Preferred Shares and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to the Preferred
Shares with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Trust, will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating the Preferred Shares and such issuance would,
at the time thereof, cause the Trust not to satisfy the Investment Company
Act Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount. 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. If any action
set forth above would adversely affect the rights of one or more series
(the "Affected Series") of Preferred Shares in a manner different from any
other series of Preferred Shares, the Trust will not approve any such
action without the affirmative vote or consent of the Holders of at least a
majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each such
Affected Series Voting as a separate class).
(ii) Investment Company Act Matters. Unless a higher percent-age is
provided for in the Declaration, (A) the affirmative vote of the Holders of
at least a majority of the Preferred Shares outstanding at the time, voting
as a separate class, shall be required to approve any conversion of the
Trust from a closed-end to an open-end investment company and (B) the
affirmative vote of the Holders of a "majority of the outstanding Preferred
Shares," voting as a separate class, shall be required to approve any plan
of reorganization (as such term is used in the Investment Company Act)
adversely affecting such shares. The affirmative vote of the holders of a
"majority of the outstanding Preferred Shares," voting as a separate class,
shall be required to approve any action not described in the first sentence
of this Section 5(c)(ii) requiring a vote of security holders of the Trust
under section 13(a) of the Investment Company Act. For purposes of the
foregoing, "majority of the outstanding Preferred Shares" means (i) 67% or
more of such shares present at a meeting, if
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the Holders of more than 50% of such shares are present or represented by
proxy, or (ii) more than 50% of such shares, whichever is less. In the
event a vote of Holders of Preferred Shares is required pursuant to the
provisions of section 13(a) of the Investment Company Act, the Trust shall,
not later than ten Business Days prior to the date on which such vote is to
be taken, notify Moody's (if Moody's is then rating the Preferred Shares)
and S&P (if S&P is then rating the Preferred Shares) that such vote is to
be taken and the nature of the action with respect to which such vote is to
be taken. The Trust shall, not later than ten Business Days after the date
on which such vote is taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and S&P (if S&P is then rating the Preferred Shares of
the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The Board
of Trustees, without the vote or consent of the shareholders of the Fund, may
from time to time amend, alter or repeal any or all of the definitions of the
terms listed below, or any provision of this Statement viewed by Moody's or S&P
as a predicate for any such definition, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of
Preferred Shares or the Holders thereof; provided, however, that the Board of
Trustees receives written confirmation from Moody's (such confirmation being
required to be obtained only in the event Moody's is rating the Preferred
Shares and in no event being required to be obtained in the case of the
definitions of (x) Deposit Securities, Discounted Value and Receivables for
Municipal Obligations Sold as such terms apply to S&P Eligible Assets and (y)
S&P Discount Factor, S&P Eligible Asset, S&P Exposure Period and S&P Volatility
Factor) and S&P (such confirmation being required to be obtained only in the
event S&P is rating the Preferred Shares and in no event being required to be
obtained in the case of the definitions of (x) Discounted Value and Receivables
for Municipal Obligations Sold as such terms apply to Moody's Eligible Assets,
and (y) Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure
Period and Moody's Volatility Factor) that any such amendment, alteration or
repeal would not impair the ratings then assigned by Moody's or S&P, as the
case may be, to the Preferred Shares:
Deposit Securities Preferred Shares Basic Maintenance Amount
------------------ -----------------------------------------
Discounted Value Preferred Shares Basic Maintenance Cure Date
Escrowed Bonds Preferred Shares Basic Maintenance Report
Market Value Quarterly Valuation Date
Maximum Potential Gross-up
Payment Liability Receivables for Municipal Obligations Sold
Moody's Discount Factor S&P Discount Factor
Moody's Eligible Asset S&P Eligible Asset
Moody's Exposure Period S&P Exposure Period
Moody's Volatility Factor S&P Volatility Factor
1940 Act Cure Date Valuation Date
1940 Act Preferred Asset Coverage Volatility Factor
(e) Voting Rights Set Forth Herein are Sole Voting Rights. Unless otherwise
required by law, the Holders of Preferred Shares shall not have any relative
rights or preferences or other special rights other than those specifically set
forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of Preferred
Shares shall have no preemptive rights or rights to cumulative voting.
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay Dividends. In
the event that the Trust fails to pay any dividends on the Preferred Shares,
the exclusive remedy of the Holders shall be the right to vote for trustees
pursuant to the provisions of this Section 5.
(h) Holders Entitled to Vote. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this Statement,
by the other provisions of the Declaration, by statute or otherwise, no Holder
shall be entitled to vote any Preferred Share and no Preferred Share shall be
deemed to be "outstanding" for the purpose of voting or determining the number
of shares required to constitute a quorum if, prior to or concurrently with the
time of determination of shares entitled to vote or shares deemed outstanding
AA-22
for quorum purposes, as the case may be, the requisite Notice of Redemption
with respect to such shares shall have been mailed as provided in paragraph (c)
of Section 11 of this Part I and the Redemption Price for the redemption of
such shares shall have been deposited in trust with the Auction Agent for that
purpose. No Preferred Share held by the Trust or any affiliate of the Trust
(except for shares held by a Broker-Dealer that is an affiliate of the Trust
for the account of its customers) shall have any voting rights or be deemed to
be outstanding for voting or other purposes.
6. Investment Company Act Preferred Shares Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in which
any Preferred Shares are outstanding, the Investment Company Act Preferred
Shares Asset Coverage.
7. Preferred Shares Basic Maintenance Amount.
(a) So long as Preferred Shares are outstanding, the Trust shall maintain,
on each Valuation Date, and shall verify to its satisfaction that it is
maintaining on such Valuation Date (i) Moody's Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Moody's is then rating the Preferred Shares) and S&P
Eligible Assets having an aggregate Discounted Value equal to or greater than
the Preferred Shares Basic Maintenance Amount (if S&P is then rating the
Preferred Shares).
(b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the
Trust shall complete and deliver to Moody's (if Moody's is then rating the
Preferred Shares), S&P (if S&P is then rating the Preferred Shares) and the
Auction Agent (if either Moody's or S&P is then rating the Preferred Shares) a
Preferred Shares Basic Maintenance Report as of the date of such failure or
such Preferred Shares Basic Maintenance Cure Date, as the case may be, which
will be deemed to have been delivered to the Auction Agent if the Auction Agent
receives a copy or telecopy, telex or other electronic transcription thereof
and on the same day the Trust mails to the Auction Agent for delivery on the
next Business Day the full Preferred Shares Basic Maintenance Report. The Trust
shall also deliver a Preferred Shares Basic Maintenance Report to (i) the
Auction Agent (if either Moody's or S&P is then rating the Preferred Shares) as
of (A) the fifteenth day of each month (or, if such day is not a Business Day,
the next succeeding Business Day) and (B) the last Business Day of each month,
(ii) Moody's (if Moody's is then rating the Preferred Shares) and S&P (if S&P
is than rating the Preferred Shares) as of any Quarterly Valuation Date, in
each case on or before the third Business Day after such day, and S&P, if and
when requested for any Valuation Date, on or before the third Business Day
after such request. A failure by the Trust to deliver a Preferred Shares Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Preferred Shares Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Preferred Shares
Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to Moody's (if Moody's is then
rating the Preferred Shares), S&P (if S&P is then rating the Preferred Shares)
and the Auction Agent (if either Moody's or S&P is then rating the Preferred
Shares) (i) the mathematical accuracy of the calculations reflected in such
Report (and in any other Preferred Shares Basic Maintenance Report, randomly
selected by the Independent Accountant, that was prepared by the Trust during
the quarter ending on such Quarterly Valuation Date), (ii) that, in such Report
(and in such randomly selected Report), the Trust determined in accordance with
this Statement whether the Trust had, at such Quarterly Valuation Date (and at
the Valuation Date addressed in such randomly selected Report), Moody's
Eligible Assets (if Moody's is then rating the Preferred Shares) and S&P
Eligible Assets (if S&P is then rating the Preferred Shares) of an aggregate
Discounted Value at least equal to the Preferred Shares
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Basic Maintenance Amount (such confirmation being herein called the
"Accountant's Confirmation"), (iii) that, in such Report (and in such randomly
selected Report), the Trust determined whether the Trust had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such randomly selected
Report) in accordance with this Statement, Moody's Eligible Assets of an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and S&P Eligible Assets of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount, (iv) with respect
to the S&P ratings on Municipal Obligations, the issuer name, issue size and
coupon rate listed in such Report, that the Independent Accountant has sought
to verify by reference to Bloomberg Financial Services or another independent
source approved in writing by S&P, and the Independent Accountant shall provide
a listing in its letter of any differences, (v) with respect to the Moody's
ratings on Municipal Obligations, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has sought to verify by
reference to Bloomberg Financial Services or another independent source
approved in writing by Moody's, and the Independent Accountant shall provide a
listing in its letter of any differences, (vi) with respect to the bid or mean
price (or such alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Trust's assets to the Trust for
purposes of valuing securities in the Trust's portfolio, the Independent
Accountant has traced the price used in such Report to the bid or mean price
listed in such Report as provided to the Trust and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such
differences) and (vii) with respect to such confirmation to Moody's and S&P,
that the Trust has satisfied the requirements of Section 13 of Appendix A to
this Statement (such information is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to any Valuation Date on which the Trust failed to satisfy
the Preferred Shares Basic Maintenance Amount, and relating to the Preferred
Shares Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Trust shall cause the
Independent Accountant to provide to Moody's (if Moody's is then rating the
Preferred Shares), S&P (if S&P is then rating the Preferred Shares) and the
Auction Agent (if either Moody's or S&P is then rating the Preferred Shares) an
Accountant's Confirmation as to such Preferred Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 7 shows that an error was made in the Preferred Shares
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) or S&P Eligible Assets (if S&P is
then rating the Preferred Shares), as the case may be, of the Trust was
determined by the Independent Accountant, the calculation or determination made
by such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver the
Preferred Shares Basic Maintenance Report to Moody's (if Moody's is then rating
the Preferred Shares), S&P (if S&P is then rating the Preferred Shares) and the
Auction Agent (if either Moody's or S&P is then rating the Preferred Shares)
promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any Preferred Shares, the Trust shall
complete and deliver to Moody's (if Moody's is then rating the Preferred
Shares) and S&P (if S&P is then rating the Preferred Shares) a Preferred Shares
Basic Maintenance Report as of the close of business on such Date of Original
Issue. Within five Business Days of such Date of Original Issue, the Trust
shall cause the Independent Accountant to confirm in writing to S&P (if S&P is
then rating the Preferred Shares) (i) the mathematical accuracy of the
calculations reflected in such Report and (ii) that the Discounted Value of S&P
Eligible Assets reflected thereon equals or exceeds the Preferred Shares Basic
Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the ratio
of the Discounted Value of Moody's Eligible Assets or the
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S&P Eligible Assets to the Preferred Shares Basic Maintenance Amount is less
than or equal to 105%, or (iii) whenever requested by Moody's or S&P, the Trust
shall complete and deliver to Moody's (if Moody's is then rating the Preferred
Shares) or S&P (if S&P is then rating the Preferred Shares), as the case may
be, a Preferred Shares Basic Maintenance Report as of the date of such event.
8. Reserved.
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Shares Other Than the Preferred Shares. Except as set forth
in the next sentence, no dividends shall be declared or paid or set apart for
payment on the shares of any class or series of shares of beneficial interest
of the Trust ranking, as to the payment of dividends, on a parity with the
Preferred Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of the
Preferred Shares through its most recent Dividend Payment Date. When dividends
are not paid in full upon the shares of each series of the Preferred Shares
through its most recent Dividend Payment Date or upon the shares of any other
class or series of shares of beneficial interest of the Trust ranking on a
parity as to the payment of dividends with the Preferred Shares through their
most recent respective dividend payment dates, all dividends declared upon the
Preferred Shares and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with Preferred
Shares shall be declared pro rata so that the amount of dividends declared per
share on Preferred Shares and such other class or series of shares of
beneficial interest shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Trust and such other class or series of
shares of beneficial interest bear to each other (for purposes of this
sentence, the amount of dividends declared per share of Preferred Shares shall
be based on the Applicable Rate for such share for the Dividend Periods during
which dividends were not paid in full).
(b) Dividends and Other Distributions with Respect to Common Shares Under
the Investment Company Act. The Board of Trustees shall not declare any
dividend (except a dividend payable in Common Shares), or declare any other
distribution, upon the Common Shares, or purchase Common Shares, unless in
every such case the Preferred Shares have, at the time of any such declaration
or purchase, an asset coverage (as defined in and determined pursuant to the
Investment Company Act) of at least 200% (or such other asset coverage as may
in the future be specified in or under the Investment Company Act as the
minimum asset coverage for senior securities which are shares or stock of a
closed-end investment company as a condition of declaring dividends on its
common shares or stock) after deducting the amount of such dividend,
distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long as
any Preferred Shares are outstanding, and except as set forth in paragraph (a)
of this Section 9 and paragraph (c) of Section 12 of this Part I, (A) the Trust
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to the Preferred Shares as to the payment
of dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of the Common Shares or any other shares of the Trust
ranking junior to or on a parity with the Preferred Shares as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to the
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), or any such parity shares (except
by conversion into or exchange for shares of the Trust ranking junior to or on
a parity with Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless (i)
full cumulative dividends on shares of each series of Preferred Shares through
its most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
Auction Agent and (ii) the Trust has redeemed the full number of Preferred
Shares required to be redeemed by any provision for mandatory redemption
pertaining thereto, and (B) the Trust shall not declare, pay or set apart for
payment any dividend or other distribution (other than a
AA-25
dividend or distribution paid in shares of, or in options, warrants or rights
to subscribe for or purchase, Common Shares or other shares, if any, ranking
junior to Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up) in respect of Common
Shares or any other shares of the Trust ranking junior to Preferred Shares as
to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Trust ranking
junior to Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), unless immediately
after such transaction the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) and S&P Eligible Assets (if S&P is
then rating the Preferred Shares) would at least equal the Preferred Shares
Basic Maintenance Amount.
10. Rating Agency Restrictions.
For so long as any Preferred Shares are outstanding and Moody's or S&P or
both is rating such shares, the Trust will not, unless it has received written
confirmation from Moody's or S&P, or both, as applicable, that any such action
would not impair the rating then assigned by such rating agency to such shares,
engage in any one or more of the following transactions:
(a) buy or sell futures or write put or call options;
(b) borrow money, except that the Trust may, without obtaining the
written confirmation described above, borrow money for the purpose of
clearing securities transactions if (i) the Preferred Shares Basic
Maintenance Amount would continue to be satisfied after giving effect to
such borrowing and (ii) such borrowing (A) is privately arranged with a
bank or other person and is evidenced by a promissory note or other
evidence of indebtedness that is not intended to be publicly distributed or
(B) is for "temporary purposes," is evidenced by a promissory note or other
evidence of indebtedness and is in an amount not exceeding 5 per centum of
the value of the total assets of the Trust at the time of the borrowing;
for purposes of the foregoing, "temporary purpose" means that the borrowing
is to be repaid within sixty days and is not to be extended or renewed;
(c) issue additional shares of any series of Preferred Shares or any
class or series of shares ranking prior to or on a parity with Preferred
Shares with respect to the payment of dividends or the distribution of
assets upon dissolutions, liquidation or winding up of the Trust, or
reissue any Preferred Shares previously purchased or redeemed by the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently Muller Data Corporation)
referred to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
In the event any Preferred Shares are outstanding and another rating agency
is rating such shares in addition to or in lieu of Moody's or S&P, the Trust
shall comply with any restrictions imposed by such rating agency, which
restrictions may be more restrictive than those imposed by Moody's or S&P.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this paragraph (a),
Preferred Shares of any series may be redeemed, at the option of the Trust,
as a whole or from time to time in part, on the second
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Business Day preceding any Dividend Payment Date for shares of such series,
out of funds legally available therefor, at a redemption price per share
equal to the sum of $25,000 plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (1)
shares of a series of Preferred Shares may not be redeemed in part if after
such partial redemption fewer than 300 shares of such series remain
outstanding; (2) unless otherwise provided in Section 11 of Appendix A
hereto, shares of a series of Preferred Shares are redeemable by the Trust
during the Initial Rate Period thereof only on the second Business Day next
preceding the last Dividend Payment Date for such Initial Rate Period; and
(3) subject to subparagraph (ii) of this paragraph (a), the Notice of
Special Rate Period relating to a Special Rate Period of shares of a series
of Preferred Shares, as delivered to the Auction Agent and filed with the
Secretary of the Trust, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except
as provided in subparagraph (iv) of this paragraph (a)) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein ("Special Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series of
Preferred Shares for a Special Rate Period thereof may contain Special
Redemption Provisions only if the Trust's Board of Trustees, after
consultation with the Broker-Dealer or Broker-Dealers for such Special Rate
Period of shares of such series, determines that such Special Redemption
Provisions are in the best interest of the Trust.
(iii) If fewer than all of the outstanding shares of a series of
Preferred Shares are to be redeemed pursuant to subparagraph (i) of this
paragraph (a), the number of shares of such series to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro
rata from the Holders of shares of such series in proportion to the number
of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this paragraph
(a), shares of any series of Preferred Shares may be redeemed, at the
option of the Trust, as a whole but not in part, out of funds legally
available therefor, on the first day following any Dividend Period thereof
included in a Rate Period consisting of more than 364 Rate Period Days if,
on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equaled or exceeded on
such date of determination the Treasury Note Rate for such Rate Period, at
a redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption pursuant
to paragraph (c) of this Section 11 in respect of a redemption contemplated
to be effected pursuant to this paragraph (a) unless on such date (a) the
Trust has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable premium) due to
Holders of Preferred Shares by reason of the redemption of such shares on
such redemption date and (b) the Discounted Value of Moody's Eligible
Assets (if Moody's is then rating the Preferred Shares) and S&P Eligible
Assets (if S&P is then rating the Preferred Shares) each at least equals
the Preferred Shares Basic Maintenance Amount, and would at least equal the
Preferred Shares Basic Maintenance Amount immediately subsequent to such
redemption if such redemption were to occur on such date. For purposes of
determining in clause (b) of the preceding sentence whether the Discounted
Value of Moody's Eligible Assets at least equals the Preferred Shares Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein.
(b) Mandatory Redemption. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by
the Board of Trustees for redemption, certain of the Preferred Shares, if the
Trust fails to have either Moody's Eligible Assets or S&P Eligible Assets with
a Discounted Value greater than or equal to the Preferred Shares Basic
Maintenance Amount or fails to maintain the Investment Company Act Preferred
Shares
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Asset Coverage, in accordance with the requirements of the rating agency or
agencies then rating the Preferred Shares, and such failure is not cured on or
before the Preferred Shares Basic Maintenance Cure Date or the Investment
Company Act Cure Date, as the case may be. The number of Preferred Shares to be
redeemed shall be equal to the lesser of (i) the minimum number of Preferred
Shares, together with all other preferred shares subject to redemption or
retirement, the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the Cure Date, would have resulted in the
Trust's having Moody's Eligible Assets and S&P Eligible Assets with a
Discounted Value greater than or equal to the Preferred Shares Basic
Maintenance Amount or maintaining the Investment Company Act Preferred Shares
Asset Coverage, as the case may be, on such Cure Date (provided, however, that
if there is no such minimum number of Preferred Shares and other preferred
shares the redemption or retirement of which would have had such result, all
Preferred Shares and other Preferred Shares then outstanding shall be
redeemed), and (ii) the maximum number of Preferred Shares, together with all
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor in accordance
with the Declaration and applicable law. In determining the Preferred Shares
required to be redeemed in accordance with the foregoing, the Trust shall
allocate the number required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount or the Investment Company Act Preferred Shares Asset
Coverage, as the case may be, pro rata among Preferred Shares and other
preferred shares (and, then, pro rata among each series of Preferred Shares)
subject to redemption or retirement. The Trust shall effect such redemption on
the date fixed by the Trust therefor, which date shall not be earlier than 20
days nor later than 40 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the required
number of the Preferred Shares and other preferred shares which are subject to
redemption or retirement or the Trust otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Trust shall redeem
those Preferred Shares and other preferred shares which it was unable to redeem
on the earliest practicable date on which it is able to effect such redemption.
If fewer than all of the outstanding shares of a series of Preferred Shares are
to be redeemed pursuant to this paragraph (b), the number of shares of such
series to be redeemed shall be redeemed pro rata from the Holders of shares of
such series in proportion to the number of shares of such series held by such
Holders.
(c) Notice of Redemption. If the Trust shall determine or be required to
redeem shares of a series of Preferred Shares pursuant to paragraph (a) or (b)
of this Section 11, it shall mail a Notice of Redemption with respect to such
redemption by first-class mail, postage prepaid, to each Holder of the shares
of such series to be redeemed, at such Holder's address as the same appears on
the record books of the Trust on the record date established by the Board of
Trustees. Such Notice of Redemption shall be so mailed not less than 20 nor
more than 45 days prior to the date fixed for redemption. Each such Notice of
Redemption shall state: (i) the redemption date; (ii) the number of Preferred
Shares to be redeemed and the series thereof; (iii) the CUSIP number for shares
of such series; (iv) the Redemption Price; (v) the place or places where the
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of Preferred Shares
held by any Holder are to be redeemed, the Notice of Redemption mailed to such
Holder shall also specify the number of shares of such series to be redeemed
from such Holder. The Trust may provide in any Notice of Redemption relating to
a redemption contemplated to be effected pursuant to paragraph (a) of this
Section 11 that such redemption is subject to one or more conditions precedent
and that the Trust shall not be required to effect such redemption unless each
such condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) No Redemption under Certain Circumstances. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of Preferred Shares (whether or not earned or declared) are
in arrears, no shares of such series shall be redeemed unless all outstanding
shares of such series are simultaneously redeemed, and the Trust shall not
purchase or otherwise acquire any shares of such series; provided, however,
that the foregoing shall not prevent the purchase or acquisition of all
outstanding shares of
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such series pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all outstanding shares of such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem
Preferred Shares shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Trust shall have failed, for
any reason whatsoever, to deposit in trust with the Auction Agent the
Redemption Price with respect to any shares for which such Notice of Redemption
has been mailed; provided, however, that the foregoing shall not apply in the
case of the Trust's failure to deposit in trust with the Auction Agent the
Redemption Price with respect to any shares where (1) the Notice of Redemption
relating to such redemption provided that such redemption was subject to one or
more conditions precedent and (2) any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption. Notwithstanding the fact that the Trust may not have redeemed
Preferred Shares for which a Notice of Redemption has been mailed, dividends
may be declared and paid on Preferred Shares and shall include those Preferred
Shares for which a Notice of Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All moneys
paid to the Auction Agent for payment of the Redemption Price of Preferred
Shares called for redemption shall be held in trust by the Auction Agent for
the benefit of Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given are No Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the Preferred Shares that are the subject of such notice,
dividends on such shares shall cease to accumulate and such shares shall no
longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holders to receive the Redemption Price, but without
any interest or other additional amount, except as provided in subparagraph
(e)(i) of Section 2 of this Part I and in Section 3 of this Part I. Upon
surrender in accordance with the Notice of Redemption of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Trustees shall so require and the Notice of Redemption shall so
state), the Redemption Price shall be paid by the Auction Agent to the Holders
of Preferred Shares subject to redemption. In the case that fewer than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued, representing the unredeemed shares, without cost to the Holder
thereof. The Trust shall be entitled to receive from the Auction Agent,
promptly after the date fixed for redemption, any cash deposited with the
Auction Agent in excess of (i) the aggregate Redemption Price of the Preferred
Shares called for redemption on such date and (ii) all other amounts to which
Holders of Preferred Shares called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of 90 days from such redemption date
shall, to the extent permitted by law, be repaid to the Trust, after which time
the Holders of Preferred Shares so called for redemption may look only to the
Trust for payment of the Redemption Price and all other amounts to which they
may be entitled. The Trust shall be entitled to receive, from time to time
after the date fixed for redemption, any interest on the funds so deposited.
(h) Compliance with Applicable Law. In effecting any redemption pursuant to
this Section 11, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the
Investment Company Act and any applicable Delaware law, but shall effect no
redemption except in accordance with the Investment Company Act and any
applicable Delaware law.
(i) Only Whole Preferred Shares may be Redeemed. In the case of any
redemption pursuant to this Section 11, only whole Preferred Shares shall be
redeemed, and in the event that any provision of the Declaration would require
redemption of a fractional share, the Auction Agent shall be authorized to
round up so that only whole shares are redeemed.
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12. Liquidation Rights.
(a) Ranking. The shares of a series of Preferred Shares shall rank on a
parity with each other, with shares of any other series of preferred shares and
with shares of any other series of Preferred Shares as to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust.
(b) Distributions upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of Preferred Shares then outstanding shall be entitled to receive and
to be paid out of the assets of the Trust available for distribution to its
shareholders, before any payment or distribution shall be made on the Common
Shares or on any other class of shares of the Trust ranking junior to the
Preferred Shares upon dissolution, liquidation or winding up, an amount equal
to the Liquidation Preference with respect to such shares plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same day funds,
together with any payments required to be made pursuant to Section 3 of this
Part I in connection with the liquidation of the Trust. After the payment to
the Holders of the Preferred Shares of the full preferential amounts provided
for in this paragraph (b), the Holders of Preferred Shares as such shall have
no right or claim to any of the remaining assets of the Trust.
(c) Pro Rata Distributions. In the event the assets of the Trust available
for distribution to the Holders of Preferred Shares upon any dissolution,
liquidation, or winding up of the affairs of the Trust, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
Holders are entitled pursuant to paragraph (b) of this Section 12, no such
distribution shall be made on account of any shares of any other class or
series of preferred shares ranking on a parity with the Preferred Shares with
respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account
of the Preferred Shares, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the
Preferred Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, after payment shall have
been made in full to the Holders of the Preferred Shares as provided in
paragraph (b) of this Section 12, but not prior thereto, any other series or
class or classes of shares ranking junior to the Preferred Shares with respect
to the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust shall, subject to the respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
(e) Certain Events not Constituting Liquidation. Neither the sale of all or
substantially all the property or business of the Trust, nor the merger or
consolidation of the Trust into or with any business trust or corporation nor
the merger or consolidation of any business trust or corporation into or with
the Trust shall be a dissolution, liquidation or winding up, whether voluntary
or involuntary, for the purposes of this Section 12.
13. Miscellaneous.
(a) Amendment of Appendix A To Add Additional Series. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of Trustees
may, by resolution duly adopted, without shareholder approval (except as
otherwise provided by this Statement or required by applicable law), amend
Appendix A hereto to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of Preferred Shares or
additional shares of a series of Preferred Shares (and terms relating thereto)
to the series and Preferred Shares theretofore described thereon. Each such
additional series and all such additional shares shall be governed by the terms
of this statement.
(b) Appendix A Incorporated by Reference. Appendix A hereto is incorporated
in and made a part of this Statement by reference thereto.
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(c) No Fractional Shares. No fractional shares of Preferred Shares shall be
issued.
(d) Status of Preferred Shares Redeemed, Exchanged or Other Wise Acquired
by the Trust. Preferred Shares which are redeemed, exchanged or otherwise
acquired by the Trust shall return to the status of authorized and unissued
preferred shares without designation as to series.
(e) Board may Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of Preferred
Shares prior to the issuance of shares of such series.
(f) Headings not Determinative. The headings contained in this Statement
are for convenience of reference only and shall not affect the meaning or
interpretation of this statement.
(g) Notices. All notices or communications, unless otherwise specified in
the By-Laws of the Trust or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage
prepaid.
PART II.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of such series for
the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall not be less than the
rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i) (B), (i) (C)
or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such Broker-Dealer
placing an order with the Auction Agent, is hereinafter referred to as a
"Bidder" and collectively as "Bidders"; an Order containing the information
referred to in clause (i)(A) of this paragraph (a)
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is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders";
an Order containing the information referred to in clause (i)(B) or (ii) of
this paragraph (a) is hereinafter referred to as a "Bid" and collectively as
"Bids"; and an Order containing the information referred to in clause (i)(C) of
this paragraph (a) is hereinafter referred to as a "Sell Order" and
collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined on
such Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iv) of paragraph (a) of
Section 4 of this Part II if the Applicable Rate for shares of such
series determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the Maximum
Rate for shares of such series, or such number or a lesser number of
Outstanding shares of such series to be determined as set forth in
clause (iii) of paragraph (b) of Section 4 of this Part II if the rate
specified therein shall be higher than the Maximum Rate for shares of
such series and Sufficient Clearing Bids for shares of such series do
not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares
of a series of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in clause (iii) of paragraph (b) of Section 4 of
this Part II if Sufficient Clearing Bids for shares of such series do
not exist; provided, however, that a Broker-Dealer that is an Existing
Holder with respect to shares of a series of Preferred Shares shall not
be liable to any Person for failing to sell such shares pursuant to a
Sell Order described in the proviso to paragraph (c) of Section 2 of
this Part II if (1) such shares were transferred by the Beneficial
Owner thereof without compliance by such Beneficial Owner or its
transferee Broker- Dealer (or other transferee person, if permitted by
the Trust) with the provisions of Section 7 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of
its Broker-Dealer Agreement that, according to such Broker-Dealer's
records, such Broker-Dealer believes it is not the Existing Holder of
such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of Preferred Shares subject to an Auction on any Auction
Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined on
such Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in clause (v) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series determined on
such Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of Preferred Shares other than whole shares
shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for Preferred shares of
a series subject to an Auction on such Auction Date obtained by such Broker-
Dealer, designating itself (unless otherwise permitted by the Trust) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as
AA-32
a Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order for
such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the subject
of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series:
(A) the number of shares, if any, of such series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid
of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent shall round such rate up to the
next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding Preferred Shares
of a series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to
have been submitted by or on behalf of such Existing Holder covering the number
of Outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent; provided, however, that if an
Order or Orders covering all of the Outstanding shares of such series held by
any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline for an Auction relating to a Special Rate Period consisting
of more than 28 Rate Period Days, the Auction Agent shall deem a Sell order to
have been submitted by or on behalf of such Existing Holder covering the number
of outstanding shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding
shares of such series held by such Existing Holder, and if the number of
shares of such series subject to such Hold Orders exceeds the number of
Outstanding shares of such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro rata to
cover the number of Outstanding shares of such series held by such Existing
Holder;
(ii) (A) any Bid for shares of such series shall be considered valid up
to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such
series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of such series
subject to such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such excess, and the
number of shares of such series subject to each Bid with the same rate
shall be reduced pro rata to cover the number of shares of such series
equal to such excess;
AA-33
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the
amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as
the subject of a Bid for shares of such series by or on behalf of a
Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Preferred
Shares is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and
number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal
to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for
shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling
AA-34
such Existing Holders to continue to hold the shares of such series
that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available Preferred Shares of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a) of this Section 3, the Auction Agent shall advise the Trust of
the Maximum Rate for shares of the series of Preferred Shares for which an
Auction is being held on the Auction Date and, based on such determination the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that
the Applicable Rate for all shares of such series for the next Succeeding
Rate Period thereof shall be equal to the Winning Bid Rate for shares of
such series so determined;
(ii) if sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), that the Applicable Rate for all shares
of such series for the next succeeding Rate Period thereof shall be equal
to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be as set forth in
Section 12 of Appendix A hereto.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and
the Auction Agent shall take such other action as set forth below:
(a) If sufficient Clearing Bids for shares of a series of Preferred Shares
have been made, all Submitted Sell Orders with respect to shares of such series
shall be accepted and, subject to the provisions of paragraphs (d) and (e) of
this section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of
such series shall be accepted, thus requiring each such Existing Holder to
sell the Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be rejected, thus entitling each such Existing Holder to
continue to hold the Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bid, unless the
number of Outstanding Preferred Shares subject to all such Submitted Bids
shall be greater than the number of Preferred Shares
AA-35
("remaining shares") in the excess of the Available Preferred Shares of
such series over the number of Preferred Shares subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder shall be rejected in part, and
such Existing Holder shall be entitled to continue to hold Preferred Shares
subject to such Submitted Bid, but only in an amount equal to the number of
Preferred Shares of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the number
of Outstanding Preferred Shares held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding Preferred Shares subject to such Submitted Bids made
by all such Existing Holders that specified a rate equal to the Winning Bid
Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the
excess of the Available Preferred Shares of such series over the number of
Preferred Shares subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator of which
shall be the number of Outstanding Preferred Shares subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred Shares
have not been made (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the Preferred Shares subject to such Submitted
Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each
Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of such series subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an amount
equal to the number of shares of such series obtained by multiplying the
number of shares of such series subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the aggregate number of Outstanding
shares of such series subject to all such Submitted Bids and Submitted Sell
Orders.
(c) If all of the Outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, all Submitted Bids for shares of such series
shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of
Preferred Shares on any Auction Date, the Auction Agent shall, in such manner
as it shall determine in its sole discretion, round up or down the number of
Preferred Shares of such series to be purchased or sold by any Existing Holder
or Potential Holder on such Auction Date as a result of such procedures so that
the number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole Preferred Shares.
AA-36
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of Preferred Shares on any Auction
Date, the Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate Preferred Shares of such series for purchase among
Potential Holders so that only whole shares of Preferred Shares of such series
are purchased on such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing Preferred Shares of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of Preferred
Shares, the Auction Agent shall determine the aggregate number of shares of
such series to be purchased and the aggregate number of shares of such series
to be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, Preferred Shares of such series.
Notwithstanding any provision of the Auction Procedures to the contrary, in the
event an Existing Holder or Beneficial Owner of a series of Preferred Shares
with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for
such shares that was accepted in whole or in part, or submitted or is deemed to
have submitted a Sell Order for such shares that was accepted in whole or in
part, fails to instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of Preferred Shares that have been made in respect
of Potential Holders' or Potential Beneficial Owners' submitted Bids for shares
of such series that have been accepted in whole or in part shall constitute
good delivery to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver Preferred Shares of any series
or to pay for Preferred Shares of any series sold or purchased pursuant to the
Auction Procedures or otherwise.
5. Notification of Allocations.
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, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
Preferred Shares believed by it to be interested in submitting an Order in the
Auction to be held on such Auction Date.
6. Auction Agent.
For so long as any Preferred Shares are outstanding, the Auction Agent, duly
appointed by the Trust to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Trust and its
affiliates (which however may engage or have engaged in business transactions
with the Trust or its affiliates) and at no time shall the Trust or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Board of
Trustees shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent. The Auction Agent's registry of Existing Holders of a series of
Preferred Shares shall be conclusive and binding on the Broker-Dealers. A
Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the
Business Day preceding an Auction for a series of Preferred Shares and 9:30
a.m. on the Auction Date for such Auction to ascertain the number of shares of
such series in respect of which the Auction
AA-37
Agent has determined such Broker-Dealer to be an Existing Holder. If such
Broker-Dealer believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-Dealer's
inquiry, such Broker-Dealer may so inform the Auction Agent of that belief.
Such Broker-Dealer shall not, in its capacity as Existing Holder of shares of
such series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. Transfer of Preferred Shares.
Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of Preferred Shares only in
whole shares and only pursuant to a Bid or Sell Order placed with the Auction
Agent in accordance with the procedures described in this Part II or to a
Broker-Dealer; provided, however, that (a) 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 for purposes of this Section
7 if such Broker-Dealer remains the Existing Holder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) 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 shall advise the Auction Agent of such transfer.
8. Global Certificate.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of Preferred Shares outstanding from time to time shall be represented
by one global certificate registered in the name of the Securities Depository
or its nominee and (ii) no registration of transfer of shares of a series of
Preferred Shares shall be made on the books of the Trust to any Person other
than the Securities Depository or its nominee.
IN WITNESS WHEREOF, BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST, has caused
these presents to be signed on , 2001 in its name and on its behalf by its
President and attested by its Secretary. Said officers of the Trust have
executed this Statement as officers and not individually, and the obligations
and rights set forth in this Statement are not binding upon any such officers,
or the trustees or shareholders of the Trust, individually, but are binding
only upon the assets and property of the Trust.
Blackrock California
Municipal Income Trust
__________________________________
By:
Name:
Title:
ATTEST: _____________________________
Name:
Title:
[ ], 2001
AA-38
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
APPENDIX A
SECTION 1
Designation as to Series.
SERIES T7: A series of [ ] Preferred Shares, par value $.001 per share,
liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series T7." Each of the [ ] shares
of Series T7 Preferred Shares issued on [ ], 2001 shall, for purposes hereof,
be deemed to have a Date of Original Issue of [ ], 2001; have an Applicable
Rate for its Initial Rate Period equal to [ ]% per annum; have an initial
Dividend Payment Date of [ ], 2001; and have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Agreement and Declaration of Trust, as
amended and restated, applicable to Preferred Shares of the Trust, as set forth
in Part I and Part II of this Statement. Any shares of Series T7 Preferred
Shares issued thereafter shall be issued on the first day of a Rate Period of
the then outstanding shares of Series T7 Preferred Shares, shall have, for such
Rate Period, an Applicable Rate equal to the Applicable Rate for shares of such
series established in the first Auction for shares of such series preceding the
date of such issuance; and shall have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Agreement and Declaration of Trust applicable to Preferred Shares
of the Trust, as set forth in Part I and Part II of this Statement. The Series
T7 Preferred Shares shall constitute a separate series of Preferred Shares of
the Trust, and each share of Series T7 Preferred Shares shall be identical
except as provided in Section 11 of Part I of this statement.
SERIES R7: A series of [ ] Preferred Shares, par value $.001 per share,
liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series R7." Each of the [ ] shares
of Series R7 Preferred Shares issued on [ ], 2001 shall, for purposes hereof,
be deemed to have a Date of Original Issue of [ ], 2001; have an Applicable
Rate for its Initial Rate Period equal to [ ]% per annum; have an initial
Dividend Payment Date of [ ], 2001; and have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Agreement and Declaration of Trust, as
amended and restated, applicable to Preferred Shares of the Trust, as set forth
in Part I and Part II of this Statement. Any shares of Series R7 Preferred
Shares issued thereafter shall be issued on the first day of a Rate Period of
the then outstanding shares of Series R7 Preferred Shares, shall have, for such
Rate Period, an Applicable Rate equal to the Applicable Rate for shares of such
series established in the first Auction for shares of such series preceding the
date of such issuance; and shall have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Agreement and Declaration of Trust applicable to Preferred Shares
of the Trust, as set forth in Part I and Part II of this Statement. The Series
R7 Preferred Shares shall constitute a separate series of Preferred Shares of
the Trust, and each share of Series R7 Preferred Shares shall be identical
except as provided in Section 11 of Part I of this statement.
SECTION 2
Number of Authorized Shares per Series.
The number of authorized shares constituting Series T7 Preferred Shares is
[ ].
The number of authorized shares constituting Series R7 Preferred Shares is
[ ].
SECTION 3
Exceptions to Certain Definitions.
Notwithstanding the definitions contained under the heading "Definitions" in
this Statement, the following terms shall have the following meanings for
purposes of this Statement:
Not applicable.
AA-39
SECTION 4
Certain Definitions.
For purposes of this Statement, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"ESCROWED BONDS" shall mean Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating.
"GROSS-UP PAYMENT" means payment to a Holder of Preferred Shares of an
amount which, when taken together with the aggregate amount of Taxable
Allocations made to such Holder to which such Gross-up Payment relates, would
cause such Holder's dividends in dollars (after Federal income tax
consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be at least equal to the dollar amount of the dividends
which would have been received by such Holder if the amount of such aggregate
Taxable Allocations had been excludable from the gross income of such Holder.
Such Gross-up Payment shall be calculated (i) without consideration being given
to the time value of money; (ii) assuming that no Holder of Preferred Shares is
subject to the Federal alternative minimum tax with respect to dividends
received from the Trust; and (iii) assuming that each Taxable Allocation and
each Gross-up Payment (except to the extent such Gross-up Payment is designated
as an exempt-interest dividend under Section 852(b)(5) of the Code or successor
provisions) would be taxable in the hands of each Holder of Preferred Shares at
the maximum marginal regular Federal individual income tax rate applicable to
ordinary income or net capital gain, as applicable, or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income or net
capital gain, as applicable, which ever is greater, in effect at the time such
Gross-up Payment is made.
"INVERSE FLOATER" shall mean trust certificates or other instruments
evidencing interests in one or more Municipal Obligations that qualify as S&P
Eligible Assets, the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating instruments have only one reset remaining until
maturity.
"MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set
forth opposite such rating that is the same length as or is longer than the
Moody's Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
Exposure Period Aaa Aa* A* Baa* Other** (V)MIG-1*** SP-1+**** UNRATED*****
--------------- --- --- --- ---- ------- ----------- --------- ------------
7 weeks................. 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than seven
weeks.................. 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight
weeks.................. 156 163 170 177 192 138 150 240
--------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have
a demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which
do not mature or have a demand feature at par exercisable in 30 days and
which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB by
S&P or not rated by Moody's or S&P.
AA-40
Notwithstanding the foregoing, (i) the Moody's Discount Factor for short-
term Municipal Obligations will be 115%, so long as such Municipal Obligations
are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature or have a demand
feature at par exercisable in 30 days or less or 125% as long as such Municipal
Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a
demand feature at par exercisable in 30 days or less and (ii) no Moody's
Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $10,000,000.
Municipal Obligations issued by any one issuer and rated BBB or lower by S&P,
Ba or B by Moody's or not rated by S&P and Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such other
Securities, if any, together with any Municipal Obligations issued by the same
issuer and rated Baa by Moody's or A by S&P, may comprise no more than 6% of
total Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more than 10% of
total Moody's Eligible Assets; and such Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated Aa by Moody's or AAA by S&P, may comprise no more than 20% of
total Moody's Eligible Assets. For purposes of the foregoing sentence any
Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Obligation. Other Securities issued by issuers located within a
single state or territory may comprise no more than 12% of total Moody's
Eligible Assets; such Other Securities, if any, together with any Municipal
Obligations issued by issuers located within the same state or territory and
rated Baa by Moody's or A by S&P, may comprise no more than 20% of total
Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets; and such Other
Securities, Baa, A and AA-rated Municipal Obligations, if any, together with
any Municipal Obligations issued by issuers located within the same state or
territory and rated Aa by Moody's or AAA by S&P, may comprise no more than 60%
of total Moody's Eligible Assets. For purposes of applying the foregoing
requirements, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB-, BBB or BBB+ by S&P, Moody's Eligible Assets shall be calculated
without including cash, and Municipal Obligations rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, shall be
considered to have a long-term rating of A. When the Trust sells a Municipal
Obligation and agrees to repurchase such Municipal Obligation at a future date,
such Municipal Obligation shall be valued at its Discounted Value for purposes
of determining Moody's Eligible Assets, and the amount of the repurchase price
of such Municipal Obligation shall be included as a liability for purposes of
calculating the Preferred Basic Maintenance Amount. When the Trust purchases a
Moody's Eligible Asset and agrees to sell it at a future date, such Eligible
Asset shall be valued at the amount of cash to be received by the Trust upon
such future date, provided that the counterparty to the transaction has a long-
term debt rating of at least A2 from Moody's and the transaction has a term of
no more than 30 days, otherwise, such Eligible Asset shall be valued at the
Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for
taxes that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by BlackRock Advisors, Inc., BlackRock Financial Management, Inc.,
State Street Bank and Trust or the Auction Agent and (d) Liens by virtue of any
repurchase agreement; or (iii) deposited irrevocably for the payment of any
liabilities for purposes of determining the Preferred Shares Basic Maintenance
Amount.
AA-41
"RATE MULTIPLE," for shares of a series of Preferred Shares on any Auction
Date for shares of such series, shall mean the percentage, determined as set
forth in the columns below (depending on whether the trust has notified the
Auction Agent of its intent to allocate income taxable for Federal income tax
purposes to shares of such series prior to the Auction establishing the
Applicable Rate for shares of such series as provided in this statement) based
on the prevailing rating of shares of such series in effect at the close of
business on the Business Day next preceding such Auction Date:
Applicable Applicable
Percentage Percentage
Prevailing Rating No Notification Notification
----------------- --------------- ------------
"aa3"/AA- or higher......................... 110% 150%
"a3"/A-..................................... 125% 160%
"baa3"/BBB-................................. 150% 250%
"ba3"/BB-................................... 200% 275%
Below "ba3"/BB-............................. 250% 300%
For purposes of this definition, the "prevailing rating" of shares of a
series of Preferred Shares shall be (i) "aa3"/AA- or higher if such shares have
a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA- or higher or a3/A- then "baa3"/BBB- if such
shares have a rating of "baa3" or better by Moody's and BBB- or better by S&P
or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected as provided below, (iv) if not
"aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if such shares have
a rating of "ba3" or better by Moody's and BB- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, and (v) if not "aa3"/AA-
or higher, "a3"/A-, "baa3"/BBB-, or "ba3"/BB-, then Below "ba3"/BB-; provided,
however, that if such shares are rated by only one rating agency, the
prevailing rating will be determined without reference to the rating of any
other rating agency. The Trust shall take all reasonable action necessary to
enable either S&P or Moody's to provide a rating for the Preferred Shares. If
neither S&P nor Moody's shall make such a rating available, the party set forth
in Section 7 of Appendix A or its successor shall select one nationally
recognized statistical rating organization (as that term is used in the rules
and regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time, to time) to act as a substitute
rating agency in respect of shares of the series of Preferred Shares set forth
opposite such party's name in Section 7 of Appendix A and the Trust shall take
all reasonable action to enable such rating agency to provide a rating for such
shares.
"S&P DISCOUNT FACTOR" shall mean, for purposes of determining the Discounted
Value of any S&P Eligible Asset, the percentage determined by reference to the
rating on such asset and the shortest Exposure Period set forth opposite such
rating that is the same length as or is longer than the S&P Exposure Period, in
accordance with the table set forth below:
RATING CATEGORY
--------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* HIGH YIELD
--------------- ---- --- --- ---- ----------
45 Business Days.............................. 210% 215% 230% 270% 240%
25 Business Days.............................. 190 195 210 250 240
10 Business Days.............................. 175 180 195 235 240
7 Business Days............................... 170 175 190 230 240
3 Business Days............................... 150 155 170 210 240
--------
* S&P rating.
AA-42
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, or 120% so long as such Municipal Obligations are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days
or less or 125% if such Municipal Obligations are not rated by S&P but are
rated equivalent to A-1+ or SP-1+ by another nationally recognized statistical
rating organization, on a case by case basis; provided, however, that any such
non-S&P rated short-term Municipal Obligations which have demand features
exercisable within 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution with
a short-term rating of at least A-1+ from S&P; and further provided that such
non-S&P rated short-term Municipal Obligations may comprise no more than 50% of
short-term Municipal Obligations that qualify as S&P Eligible Assets; provided,
however, that Municipal Obligations not rated by S&P but rated equivalent to
BBB or lower by another nationally recognized statistical rating organization,
rated BB+ or lower by S&P or non-rated (such Municipal Obligations are
hereinafter referred to as "High Yield Securities") may comprise no more than
20% of the short-term Municipal Obligations that qualify as S&P Eligible
Assets; (ii) the S&P Discount Factor for Receivables for Municipal Obligations
Sold that are due in more than five Business Days from such Valuation Date will
be the S&P Discount Factor applicable to the Municipal Obligations sold; (iii)
no S&P Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold if such receivables are due within five Business Days of such
Valuation Date; and (iv) except as set forth in clause (i) above, in the case
of any Municipal Obligation that is not rated by S&P but qualifies as an S&P
Eligible Asset pursuant to clause (iii) of that definition, such Municipal
Obligation will be deemed to have an S&P rating one full rating category lower
than the S&P rating category that is the equivalent of the rating category in
which such Municipal Obligation is placed by a nationally recognized
statistical rating organization. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Obligations sold as of or prior to
such Valuation Date. The Trust may adopt S&P Discount Factors for Municipal
Obligations other than Municipal Obligations provided that S&P advises the
Trust in writing that such action will not adversely affect its then current
rating on the Preferred Shares. For purposes of the foregoing, Anticipation
Notes rated SP-1+ or, if not rated by S&P, equivalent to A-1+ or SP-1+ by
another nationally recognized statistical rating organization, on a case by
case basis, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating, shall be considered to be
short-term Municipal Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Preferred Shares Basic Maintenance Amount), Receivables for Municipal
Obligations Sold or a Municipal Obligation owned by the Trust that (i) is
interest bearing and pays interest at least semi-annually; (ii) is payable with
respect to principal and interest in U.S. Dollars; (iii) is publicly rated BBB
or higher by S&P or, if not rated by S&P but rated equivalent or higher to an A
by another nationally recognized statistical rating organization, on a case by
case basis; (iv) is not subject to a covered call or put option written by the
Trust; (v) except for Inverse Floaters, is not part of a private placement of
Municipal Obligations; and (vi) except for Inverse Floaters, is part of an
issue of Municipal Obligations with an original issue size of at least $10
million or, if of an issue with an original issue size below $10 million (but
in no event below $5 million), is issued by an issuer with a total of at least
$50 million of securities outstanding. Solely for purposes of this definition,
the term "Municipal Obligation" means any obligation the interest on which is
exempt from regular Federal income taxation and which is issued by any of the
fifty United States, the District of Columbia or any of the territories of the
United States, their subdivisions, counties, cities, towns, villages, school
districts and agencies (including authorities and special districts created by
the states), and federally sponsored agencies such as local housing
authorities. Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) shall be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal Obligations
(including short-term Municipal Obligations) does not exceed 10% of the
aggregate Market Value of S&P Eligible Assets, provided that 2% is added to
the applicable S&P Discount Factor for every 1% by which the Market Value
of such Municipal Obligations exceeds 5% of the aggregate
AA-43
Market Value of S&P Eligible Assets. High Yield Securities of any one
issuer shall be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Obligations does not exceed 5% of the
aggregate Market Value of S&P Eligible Assets;
(2) Municipal Obligations not rated by S&P shall be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets; provided, however, that High Yield Securities shall be
considered S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 20% of the aggregate Market Value of
S&P Eligible Assets; and
(3) Out of State Bonds shall be considered S&P Eligible Assets only to
the extent that the Market Value of such Municipal Obligations does not
exceed 20% of the aggregate Market Value of S&P Eligible Assets.
SECTION 5
Initial Rate Periods.
The Initial Rate Period for shares of Series T7 Preferred Shares shall be
the period from and including the Date of Original Issue thereof to but
excluding [ ], 2001. The Initial Rate Period for shares of Series R7
Preferred Shares shall be the period from and including the Date of Original
Issue thereof to but excluding [ ], 2001.
SECTION 6
Date for Purposes of the Definition of "Quarterly Valuation Date" Contained
under the Heading "Definitions" in this Statement.
[ ], 2001
SECTION 7
Party Named for Purposes of the Definition of "Rate Multiple" in this
Statement.
Series of
Preferred
Party: Shares
------ ---------
[ ] Series T7
[ ] Series R7
SECTION 8
Additional Definitions.
Not applicable.
SECTION 9
Dividend Payment Dates.
Except as otherwise provided in paragraph (d) of Section 2 of Part I of this
Statement, dividends shall be payable on shares of: Series T7 Preferred Shares,
for the Initial Rate Period on October 17, 2001, and on each Wednesday
thereafter, and Series R7 Preferred Shares, for the Initial Rate Period on
October 19, 2001, and on each Friday thereafter.
AA-44
SECTION 10
Amount for Purposes of Subparagraph (c) (i) of Section 5 of Part I of this
Statement.
$[ ]
SECTION 11
Redemption Provisions Applicable to Initial Rate Periods.
Not applicable.
SECTION 12
Applicable Rate for Purposes of Subparagraph (b) (iii) of Section 3 of Part II
of this Statement.
For purposes of subparagraph (b)(iii) of Section 3 of Part II of this
Statement, the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall be equal to the lesser of
the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period
Days) or the product of (A) (I) the "AA" Composite Commercial Paper Rate on
such Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (II) the Treasury Bill Rate on such Auction Date for
such Rate Period, if such Rate Period consists of more than 182 but fewer than
365 Rate Period Days; or (III) the Treasury Note Rate on such Auction Date for
such Rate Period, if such Rate Period is more than 364 Rate Period Days (the
rate described in the foregoing clause (A)(I), (II) or (III), as applicable,
being referred to herein as the "Benchmark Rate") and (B) 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Trust has notified the Auction Agent of its intent to allocate to shares of
such series in such Rate Period any net capital gains or other income taxable
for Federal income tax purposes ("Taxable Income"), the Applicable Rate for
shares of such series for such Rate Period will be (i) if the Taxable Yield
Rate (as defined below) is greater than the Bench mark 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 lesser of the Kenny Index (if
such Rate Period consists of fewer than 183 Rate Period Days) or the product of
the Benchmark Rate multiplied by the factor set forth in the preceding clause
(B) 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 applicable to ordinary income, whichever is
greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing,
Taxable Yield Rate means the rate determined by (a) dividing the amount of
Taxable Income available for distribution per such Preferred Shares by the
number of days in the Dividend Period in respect of which such Taxable Income
is contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360
(in the case of any other Dividend Period), and (c) dividing the amount
determined in (b) above by $25,000.
SECTION 13
Certain Other Restrictions and Requirements
(a) For so long as any Preferred Shares are rated by Moody's, the Trust will
not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it
receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the Preferred Shares by Moody's,
except that the Trust may purchase or sell exchange-traded futures contracts
based on the Bond Buyer Municipal Bond Index (the "Municipal Index") or United
States Treasury Bonds or Notes
AA-45
("Treasury Bonds"), and purchase, write or sell exchange-traded Put options on
such futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Trust will not engage in any Moody's Hedging Transaction based
on the Municipal Index (other than transactions which terminate a futures
contract or option held by the Trust by the Trust's taking an opposite
position thereto ("Closing Transactions")) which would cause the Trust at
the time of such transaction to own or have sold (A) outstanding futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded futures contracts based on the Municipal
Index in the 30 days preceding the time of effecting such transaction as
reported by the Wall Street Journal or (B) outstanding futures contracts
based on the Municipal Index having a Market Value exceeding 50% of the
Market Value of all Municipal Bonds constituting Moody's Eligible Assets
owned by the Trust (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold (A) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 20% of the aggregate Market Value of Moody's Eligible Assets
owned by the Trust and rated Aa by Moody's (or, if not rated by Moody's but
rated by S&P, rated AAA by S&P) or (B) outstanding futures contracts based
on Treasury Bonds having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Municipal Bonds constituting Moody's Eligible
Assets owned by the Trust (other than Moody's Eligible Assets already
subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by S&P (for
purpose of the foregoing clauses (i) and (ii), the Trust shall be deemed to
own the number of futures contracts that underlie any outstanding options
written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal
is less than 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contracts expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such option
expires;
(v) the Trust will engage in Moody's Hedging Transaction only with
respect to futures contracts or options thereon having the next settlement
date of the settlement date immediately thereafter;
(vi) the Trust will not engage in options and futures transactions for
leveraging or speculative purposes and will not write any call options or
sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Trust will not enter into an option of futures transaction
unless, after giving effect thereto, the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the Trust is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Trust which are either exchange-traded and "readily reversible"
or which expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (a) Discounted Value and (b) the exercise
price of the call option written by the Trust; (ii) assets subject to call
options written by the Trust not meeting the requirements of clause (i) of this
sentence shall have no value; (iii) assets subject to put options written by
the Trust shall be valued at the lesser of (A) the exercise price and (B) the
Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject
AA-46
security, provided that, if a contract matures within 49 days after the date as
of which such valuation is made, where the Trust is the seller the contract may
be valued at the settlement price and where the Trust is the buyer the contract
may be valued at the Discounted Value of the subject securities; and (v) where
delivery may be made to the Trust with any security of a class of securities,
the Trust shall assume that it will take delivery of the security with the
lowest Discounted Value.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Trust:
(i) 10% of the exercise price of a written call option; (ii) the exercise price
of any written put option; (iii) where the Trust is the seller under a futures
contract, 10% of the settlement price of the futures contract; (iv) where the
Trust is the purchaser under a futures contract, the settlement price of assets
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Trust writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does not own the
underlying contract.
(b) For so long as any Preferred Shares are rated by Moody's, the Trust will
not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under Section 13(b)
of this Statement), except that the Trust may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitation:
(i) the Trust will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated P-1,
MTG-1 or MIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the amount of the
Trust's obligations under any Forward Commitments to which it is from time
to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Trust's obligations under
any Forward Commitment to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless, after
giving effect thereto, the Trust would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Trust is a party and of all securities deliverable to the Trust
pursuant to such Forward Commitments shall be zero.
(c) For so long as any Preferred Shares are rated by S&P, the Trust will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not
impair the ratings then assigned to the Preferred Shares by S&P, except that
the Fund may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures
contract or option held by the fund by the Trust's taking an opposite
position thereto ("Closing Transactions")), which would cause the Trust at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Trust's total assets
divided by $1,000 or (C) outstanding
AA-47
futures contracts based on the Municipal Index exceeding in number 10% of
the average number of daily traded futures contracts based on the Municipal
Index in the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Trust's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal.
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Trust is required to pay Variation
Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated A
or better by S&P), fixed-income securities in a segregated account with the
Trust's custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on behalf of
the Trust's broker with respect to such futures contract or option equals
the Market Value of the futures contract or option, or, in the event the
Trust writes a futures contract or option thereon which requires delivery
of an underlying security, it shall hold such underlying security in its
portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets with a
Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (ii)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Fund.
AA-48
APPENDIX B
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-1
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.
BB-2
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.
CThis rating is as signed to short-term debt obligations with a doubtful
capacity for payment.
BB-3
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.
BB-4
Con(...) Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
category from Aa to B in the public finance sectors. The modifier 1
indicates that the issuer is in the higher end of its letter rating
category; the modifier 2 indicates a mid-range ranking; the modifier 3
indicates that the issuer is in the lower end of the letter ranking
category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
BB-5
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, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A "CC' rating
indicates that default of some kind appears probable. "C' ratings
signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
"DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest.
BB-6
"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. The notes 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.
BB-7
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING 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 Additional
Investment Management Techniques. The Trust will engage in such activities in
the Advisor's or Sub-Advisor's discretion, and may not necessarily be engaging
in such activities when movements in interest rates that could affect the value
of the assets of the Trust occur. The Trust's ability to pursue certain of
these strategies may be limited by applicable regulations of the CFTC. Certain
Additional Investment Management Techniques may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on bond
indices ("index options"). Index options are similar to options on securities
except that, rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index option gives the holder the
right to receive cash upon exercise of the option if the level of the bond
index upon which the option is based is greater, in the case of a call, or
less, in the case of a put, than the exercise price of the option. The purchase
of a put option on a debt security could protect the Trust's holdings in a
security or a number of securities against a substantial decline in the market
value. A call option gives the purchaser of the option the right to buy and the
seller the obligation to sell the underlying security or index at the exercise
price during the option period or for a specified period prior to a fixed date.
The purchase of a call option on a security could protect the Trust against an
increase in the price of a security that it intended to purchase in the future.
In the case of either put or call options that it has purchased, if the option
expires without being sold or exercised, the Trust will experience a loss in
the amount of the option premium plus any related commissions. When the Trust
sells put and call options, it receives a premium as the seller of the option.
The premium that the Trust receives for selling the option will serve as a
partial hedge, in the amount of the option premium, against changes in the
value of the securities in its portfolio. During the term of the option,
however, a covered call seller has, in return for the premium on the option,
given up the opportunity for capital appreciation above the exercise price of
the option if the value of the underlying security increases, but has retained
the risk of loss should the price of the underlying security decline.
Conversely, a secured put seller retains the risk of loss should the market
value of the underlying security decline be low the exercise price of the
option, less the premium received on the sale of the option. The Trust is
authorized to purchase and sell exchange-listed options and over-the-counter
options ("OTC Options") which are privately negotiated with the counterparty.
Listed options are issued by the Options Clearing Corporation ("OCC") which
guarantees the performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Trust. With
OTC Options, such variables as expiration date, exercise price and premium will
be agreed upon between the Trust and the counterparty,
CC-1
without the intermediation of a third party such as the OCC. If the
counterparty fails to make or take delivery of the securities underlying an
option it has written, or otherwise settle the transaction in accordance with
the terms of that option as written, the Trust would lose the premium paid for
the option as well as any anticipated benefit of the transaction. As the Trust
must rely on the credit quality of the counterparty rather than the guarantee
of the OCC, it will only enter into OTC Options with counterparties with the
highest long-term credit ratings, and with primary United States government
securities dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or purchase
put and call options on such futures as a hedge against anticipated interest
rate changes or other market movements. The sale of a futures contract creates
an obligation by the Trust, as seller, to deliver the specific type of
financial instrument called for in the contract at a specified future time for
a specified price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
(a long position if the option is a call and a short position if the option is
a put).
Margin Requirements. At the time a futures contract is purchased or sold,
the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Trust will pay may
range from approximately 1% to approximately 5% of the value of the securities
or commodities underlying the contract. In certain circumstances, however, such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily and the payment in case of
"variation margin" may be required, a process known as "marking to the market."
Transactions in listed options and futures are usually settled by entering into
an offsetting transaction, and are subject to the risk that the position may
not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use of
futures and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the
CFTC. Under such regulations the Trust currently may enter into such
transactions without limit for bona fide hedging purposes, including risk
management and duration management and other portfolio strategies. The Trust
may also engage in transactions in futures contracts or related options for
non-hedging purposes to enhance income or gain provided that the Trust will not
enter into a futures contract or related option (except for closing
transactions) for purposes other than bona fide hedging, or risk management
including duration management if, immediately thereafter, the sum of the amount
of its initial deposits and premiums on open contracts and options would exceed
5% of the Trust's liquidation value, i.e., net assets (taken at current value);
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. Also, when required, a segregated account of cash
equivalents will be maintained and marked to market on a daily basis in an
amount equal to the market value of the contract. The Trust reserves the right
to comply with such different standard as may be established from time to time
by CFTC rules and regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, short sales, reverse repurchase agreements and dollar
rolls, and listed or OTC Options on securities, indices and futures contracts
sold by the Trust are generally subject to segregation and coverage
requirements of either the
CC-2
CFTC or the SEC, with the result that, if the Trust does not hold the security
or futures contract underlying the instrument, the Trust will be required to
segregate on an ongoing basis with its custodian, cash, U.S. government
securities, or other liquid high grade debt obligations in an amount at least
equal to the Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation requirement
can result in the Trust maintaining securities positions it would otherwise
liquidate, segregating assets at a time when it might be disadvantageous to do
so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged create the possibility that losses on the hedge may be
greater than gains in the value of the Trust's position. The same is true for
such instruments entered into for income or gain. In addition, certain
instruments and markets may not be liquid in all circumstances. As a result, in
volatile markets, the Trust may not be able to close out a transaction without
incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments predominantly for hedging should tend to
minimize the risk of loss due to a decline in the value of the position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Trust to
successfully utilize Additional Investment Management Techniques will depend on
the Advisor's and the Sub-Advisor's ability to predict pertinent market
movements and sufficient correlations, which cannot be assured. Finally, the
daily deposit requirements in futures contracts that the Trust has sold create
an on going greater potential financial risk than do options transactions,
where the exposure is limited to the cost of the initial premium. Losses due to
the use of Additional Investment Management Techniques will reduce net asset
value.
CC-3
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./2/
(b) By-Laws./1/
(c) Inapplicable.
(d) Statement of Preferences of Municipal Auction Rate Cumulative
Preferred Shares.*
(e) Dividend Reinvestment Plan./1/
(f) Inapplicable.
(g)(1) Investment Management Agreement./3/
(g)(2) Waiver Reliance Letter./3/
(g)(3) Sub-Investment Advisory Agreement./3/
(h) Form of Underwriting Agreement./4/
(i) Deferred Compensation Plan for Independent Trustees./3/
(j) Custodian Agreement./3/
(k)(1) Transfer Agency Agreement./3/
(k)(2) Auction Agency Agreement.*
(k)(3) Broker-Dealer Agreement.*
(k)(4) Form of DTC Agreement./4/
(l) Opinion and Consent of Counsel to the Trust.*
(m) Inapplicable.
(n) Consent of Independent Public Accountants./4/
(o) Inapplicable.
(p) Initial Subscription Agreement./3/
(q) Inapplicable.
(r)(1) Code of Ethics of Trust./1/
(r)(2) Code of Ethics of Advisor and Sub-Advisor./1/
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons./3/
(s) Powers of Attorney/4/
C-1
--------
/1/Previously filed in the initial filing on April 3, 2001
/2/Previously filed with Pre-Effective Amendment No. 1 to the Registration
Statement of the Common Shares on July 25, 2001.
/3/Previously filed with the initial filing of the Registration Statement of
the Preferred Shares on August 21, 2001.
/4/Filed herewith.
* To be filed by amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the Registrant's
shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this registration statement:
Registration fees.................................................... $ *
New York Stock Exchange listing fee.................................. 0
Printing (other than certificates)................................... *
Engraving and printing certificates.................................. *
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)......................................... *
Accounting fees and expenses......................................... *
Legal fees and expenses.............................................. *
NASD fee............................................................. *
Miscellaneous........................................................ 0
Total.............................................................. $ *
--------
* To be furnished by amendment.
Item 27. Persons Controlled by or under Common Control with the Registrant
None.
Item 28. Number of Holders of Shares
Number of
Title of Class Record Holders
-------------- --------------
Common Shares of Beneficial Interest........................
Preferred Shares............................................ 0
Item 29. Indemnification
Article V of the Registrant's Amended and Restated Agreement and Declaration
of Trust, as amended and restated, provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of
the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a private
corporation for profit incorporated under the Delaware General Corporation Law.
No Trustee or officer of the Trust shall be subject in such capacity to any
personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only liability to the Trust or its Shareholders arising from bad faith,
willful
C-2
misfeasance, gross negligence (negligence in the case of those Trustees or
officers who are directors, officers or employees of the Trust's investment
advisor ("Affiliated Indemnitees")) or reckless disregard for his duty to such
Person; and, subject to the foregoing exception, all such Persons shall look
solely to the Trust Property for satisfaction of claims of any nature arising
in connection with the affairs of the Trust. If any Shareholder, Trustee or
officer, as such, of the Trust, is made a party to any suit or proceeding to
enforce any such liability, subject to the foregoing exception, he shall not,
on account thereof, be held to any personal liability. Any repeal or
modification of this Section 5.1 shall not adversely affect any right or
protection of a Trustee or officer of the Trust existing at the time of such
repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to indemnify each
person who at any time serves as a Trustee or officer of the Trust (each such
person being an "indemnitee") against any liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and reasonable counsel fees reasonably incurred by such indemnitee
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
investigative body in which he may be or may have been involved as a party or
otherwise or with which he may be or may have been threatened, while acting in
any capacity set forth in this Article V by reason of his having acted in any
such capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to which
he shall have had reasonable cause to believe that the conduct was unlawful,
provided, however, that no indemnitee shall be indemnified hereunder against
any liability to any person or any expense of such indemnitee arising by reason
of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence (negligence
in the case of Affiliated Indemnitees), or (iv) reckless disregard of the
duties involved in the conduct of his position (the conduct referred to in such
clauses (i) through (iv) being sometimes referred to herein as "disabling
conduct"). Notwithstanding the foregoing, with respect to any action, suit or
other proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action, suit
or other proceeding by such indemnitee (1) was authorized by a majority of the
Trustees or (2) was instituted by the indemnitee to enforce his or her rights
to indemnification hereunder in a case in which the indemnitee is found to be
entitled to such indemnification. The rights to indemnification set forth in
this Declaration shall continue as to a person who has ceased to be a Trustee
or officer of the Trust and shall inure to the benefit of his or her heirs,
executors and personal and legal representatives. No amendment or restatement
of this Declaration or repeal of any of its provisions shall limit or eliminate
any of the benefits provided to any person who at any time is or was a Trustee
or officer of the Trust or otherwise entitled to indemnification hereunder in
respect of any act or omission that occurred prior to such amendment,
restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on the
merits by a court or other body of competent jurisdiction before whom the issue
of entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (ii) in the absence of such a
decision, by (1) a majority vote of a quorum of those Trustees who are neither
"interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940
Act) nor parties to the proceeding ("Disinterested Non-Party Trustees"), that
the indemnitee is entitled to indemnification hereunder, or (2) if such quorum
is not obtainable or even if obtainable, if such majority so directs,
independent legal counsel in a written opinion concludes that the indemnitee
should be entitled to indemnification hereunder. All determinations to make
advance payments in connection with the expense of defending any proceeding
shall be authorized and made in accordance with the immediately succeeding
paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of
defending any action with respect to which indemnification might be sought
hereunder if the Trust receives a written affirmation by the indemnitee of the
indemnitee's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Trust
unless it is subsequently determined that the
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indemnitee is entitled to such indemnification and if a majority of the
Trustees determine that the applicable standards of conduct necessary for
indemnification appear to have been met. In addition, at least one of the
following conditions must be met: (i) the indemnitee shall provide adequate
security for his undertaking, (ii) the Trust shall be insured against losses
arising by reason of any lawful advances, or (iii) a majority of a quorum of
the Disinterested Non-Party Trustees, or if a majority vote of such quorum so
direct, independent legal counsel in a written opinion, shall conclude, based
on a review of readily available facts (as opposed to a full trial-type
inquiry), that there is substantial reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not
exclude any other right which any person may have or hereafter acquire under
this Declaration, the By-Laws of the Trust, any statute, agreement, vote of
stockholders or Trustees who are "disinterested persons" (as defined in Section
2(a)(19) of the 1940 Act) or any other right to which he or she may be lawfully
entitled.
(e) Subject to any limitations provided by the 1940 Act and this
Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification has
been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated to
give any bond or other security for the performance of any of his duties
hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees or
with any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, undertaking, instrument, certificate, Share, other security of the
Trust made or issued by the Trustees or by any officers, employees or agents of
the Trust in their capacity as such, shall contain an appropriate recital to
the effect that the Shareholders, Trustees, officers, employees or agents of
the Trust shall not personally be bound by or liable thereunder, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim thereunder, and appropriate references shall be made therein to this
Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, Shareholders, officers, employees or
agents of the Trust. The Trustees may maintain insurance for the protection of
the Trust Property, its Shareholders, Trustees, officers, employees and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability, and such other insurance as the Trustees in their sole judgment
shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the
Trust shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
the Trust's officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
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5.6 Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be held personally liable solely by reason of its being or
having been a Shareholder and not because of its acts or omissions or for
some other reason, the Shareholder or former Shareholder (or its heirs,
executors, administrators or other legal representatives or in the case of any
entity, its general successor) shall be entitled out of the assets belonging to
the Trust to be held harmless from and indemnified to the maximum extent
permitted by law against all loss and expense arising from such liability. The
Trust shall, upon request by such Shareholder, assume the defense of any claim
made against such Shareholder for any act or obligation of the Trust and
satisfy any judgment thereon from the assets of the Trust.
Insofar as indemnification for liabilities arising under the Act, may be
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 8 of the
underwriting agreement to be attached as Exhibit (h).
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently located
at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100 Bellevue
Parkway, Wilmington, Delaware 19809 and at the offices of State Street Bank and
Trust Company, the Registrant's Custodian, and EquiServe Trust Company, N.A.,
the Registrant's Transfer Agent and Dividend Disbursing Agent.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its units
until it amends its prospectus if (a) subsequent to the effective date of its
registration statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted form the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497 (h) under the
Securities Act of 1933 shall be deemed to be part of the Registration Statement
as of the time it was declared effective. (b) For the
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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.
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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 26th
day of September, 2001.
/s/ Ralph L. Schlosstein
By: _________________________________
Ralph L. Schlosstein
President, Chief Executive
Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on the 26th day of September, 2001.
Name Title
---- -----
/s/ Ralph L. Schlosstein Trustee, President, Chief
______________________________________ Executive Officer and
Ralph L. Schlosstein Chief Financial Officer
* Treasurer
______________________________________
Henry Gabbay
* Trustee
______________________________________
Andrew F. Brimmer
* Trustee
______________________________________
Richard E. Cavanagh
* Trustee
______________________________________
Kent Dixon
* Trustee
______________________________________
Frank J. Fabozzi
* Trustee
______________________________________
Laurence D. Fink
* Trustee
______________________________________
James Clayburn La Force, Jr.
* Trustee
______________________________________
Walter F. Mondale
/s/ Ralph L. Schlosstein
By: ________________________
Ralph L. Schlosstein
Attorney-in-fact
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INDEX TO EXHIBITS
(h) Form of Underwriting Agreement
(k)(4) Form of DTC Agreement
(n) Consent of Independent Public Accountants
(s) Power of attorney