<PAGE>
As filed with the Securities and Exchange Commission on August 24, 1999
File Nos. 333-81331
811-09401
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------------
FORM N-2
----------------
[X]REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]Pre-Effective Amendment No. 3
[_]Post-Effective Amendment No.
and
[X]REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]Amendment No. 3
----------------
The BlackRock Strategic Municipal Trust
(Exact name of Registrant as specified in charter)
----------------
c/o BlackRock Financial Management, Inc.
345 Park Avenue
New York, New York 10154
(Address of principal executive offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
The BlackRock Strategic Municipal Trust
345 Park Avenue
New York, New York 10154
(Name and address of Agent for Service)
with a copy to:
Thomas A. DeCapo Gary S. Schpero
Skadden, Arps, Slate, Meagher & Flom Simpson Thacher & Bartlett
LLP 425 Lexington Avenue
One Beacon Street New York, New York 10017
Boston, Massachusetts 02108-3194
----------------
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement. If any securities on this form
are to be offered on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered in connection
with a dividend reinvestment plan, check the following box [_]
[_] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is 33- .
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Securities Being Offering Price Offering Registration
Being Registered Registered Per Share Price(1) Fee(1)(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.001 par
value................... 8,000,000 $15.00 $120,000,000 $33,360
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $16,680 which was 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
THE BLACKROCK STRATEGIC MUNICIPAL TRUST
CROSS REFERENCE SHEET
Part A--Prospectus
<TABLE>
<CAPTION>
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
<C> <C> <S>
Item 1. Outside Front Cover............ Cover Page
Item 2. Inside Front and Cover Page.... Outside Back Cover Page
Item 3. Fee Table and Synopsis......... Prospectus Summary; Summary of Trust
Expenses
Item 4. Financial Highlights........... Not Applicable
Item 5. Plan of Distribution........... Cover Page; Prospectus Summary;
Underwriting
Item 6. Selling Shareholders........... Not Applicable
Item 7. Use of Proceeds................ Use of Proceeds; The Trust's
Investments
Item 8. General Description of the
Registrant.................... The Trust; The Trust's Investments;
Risks; Description of Shares;
Certain Provisions in the
Declaration of Trust
Item 9. Management..................... Management of the Trust; Custodian
and Transfer and Dividend Disbursing
Agent
Item 10. Capital Stock, Long-Term Debt,
and Other Securities.......... Description of Shares;
Distributions; Dividend Reinvestment
Plan; Certain Provisions in the
Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior
Securities.................... Not Applicable
Item 12. Legal Proceedings.............. Legal Opinions
Item 13. Table of Contents of the
Statement of Additional Table of Contents for the Statement
Information................... of Additional Information
Part B--Statement of Additional Information
Item 14. Cover Page..................... Cover Page
Item 15. Table of Contents.............. Cover Page
Item 16. General Information and Not Applicable
History.......................
Item 17. Investment Objective and
Policies...................... Investment Objectives and Policies;
Investment Policies and Techniques;
Portfolio Transactions
Item 18. Management..................... Management of the Trust; Portfolio
Transactions
Item 19. Control Persons and Principal
Holders of Securities......... Management of the Trust
Item 20. Investment Advisory and Other
Services...................... Management of the Trust; Experts
Item 21. Brokerage Allocation and Other
Practices..................... Portfolio Transactions
Item 22. Tax Status..................... Tax Matters; Distributions
Item 23. Financial Statements........... Report of Independent Auditors
</TABLE>
Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 24, 1999
4,000,000 Shares
The BlackRock Strategic Municipal Trust
Common Shares
$15.00 per share
---------
Investment Objectives. The Trust is a newly organized, closed-end,
diversified management investment company. The Trust's investment objectives
are:
. to provide current income exempt from regular Federal income tax; and
. to invest in municipal bonds that over time will perform better than the
broader municipal bond market.
Portfolio Contents. The Trust will invest primarily in municipal bonds that
pay interest that is exempt from regular Federal income tax. Under normal
market conditions, the Trust expects to be fully invested in tax-exempt
securities. The Trust will invest at least 80% of its total assets in
investment grade quality securities.
(continued on following page)
---------
Investing in the common shares involves certain risks. See "Risks" beginning
on page 16.
No Prior History. The common shares have no history of public trading. Shares
of closed-end investment companies frequently trade at a discount from their
net asset value. This creates a risk of loss for investors purchasing common
shares in the initial public offering. The minimum investment in the offering
is $1,500.
Neither the Securities and Exchange Commission 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.
---------
<TABLE>
<CAPTION>
Per Share Total
----------- ----------
<S> <C> <C>
Public Offering Price $15.00 $
Sales Load $ 0.675 $
Proceeds to the Trust $14.325 $
</TABLE>
The underwriters are offering the common shares subject to various
conditions. The underwriters expect to deliver the common shares to purchasers
on or about August , 1999.
---------
Salomon Smith Barney Prudential Securities
Book Running Manager Co-Lead Manager
A.G. Edwards & Sons, Inc. EVEREN Securities, Inc.
Fahnestock & Co. Inc. Gruntal & Co.
J.J.B. Hilliard, W.L. Lyons, Inc. Morgan Keegan & Company, Inc.
Raymond James & Associates, Inc. The Robinson-Humphrey Company
August , 1999
<PAGE>
(continued from previous page)
Investment grade quality securities are those rated by national rating
agencies within the four highest grades (Baa or BBB or better), or securities
that are unrated but judged to be of comparable quality by the Trust's
investment adviser. The Trust may invest up to 20% of its total assets in
securities that are rated Ba/BB or B or that are unrated but judged to be of
comparable quality by the Trust's investment adviser. Bonds that are 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. See "The Trust's
Investments." The Trust cannot assure you that it will achieve its investment
objectives. While exempt-interest dividends are excluded from gross income for
Federal income tax purposes, they may be subject to Federal alternative
minimum tax in certain circumstances. Shareholders will be taxed on the
distribution of any capital gain or other taxable income to shareholders. See
"Tax Matters."
The common shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the trading or "ticker" symbol
"BSD."
Preferred Shares. The Trust intends to offer preferred shares. The Trust
expects that its Preferred Shares will represent about 38% of the Trust's
capital. The issuance of Preferred Shares will leverage your common shares,
meaning that the issuance of the Preferred Shares may cause you to receive a
larger return or loss on your common shares than you would have received
without the issuance of the Preferred Shares. Leverage involves greater risks,
but also affords an opportunity for greater return. The Trust's leveraging
strategy may not be successful. See "Preferred Shares and Leverage" and
"Description of Shares--Preferred Shares."
The underwriters named in this prospectus may purchase up to additional
common shares from the Trust under certain circumstances.
This prospectus contains important information about the Trust. You should
read the prospectus before deciding whether to invest and retain it for future
reference. A statement of additional information, dated August , 1999,
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 can review the table of contents of the
statement of additional information on page 34 of this prospectus. You may
request a free copy of the statement of additional information by calling
(888) 825-2257. You may also obtain the statement of additional information
and other information regarding the Trust on the Securities and Exchange
Commission web site (http://www.sec.gov).
The Trust's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution. The Trust's common shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency.
<PAGE>
You should rely only on the information contained in this prospectus. The
Trust has not authorized anyone to provide you with different information. The
Trust is not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Summary of Trust Expenses.................................................. 9
The Trust.................................................................. 10
Use of Proceeds............................................................ 10
The Trust's Investments.................................................... 11
Preferred Shares and Leverage.............................................. 14
Risks...................................................................... 16
Management of the Trust.................................................... 19
Net Asset Value............................................................ 22
Distributions.............................................................. 22
Dividend Reinvestment Plan................................................. 23
Description of Shares...................................................... 24
Certain Provisions in the Agreement and Declaration of Trust............... 27
Closed-End Trust Structure................................................. 28
Conversion to Open-End Trust............................................... 28
Repurchase of Shares....................................................... 29
Tax Matters................................................................ 29
Underwriting............................................................... 31
Custodian and Transfer and Dividend Disbursing Agent....................... 33
Legal Opinions............................................................. 33
Table of Contents for the Statement of Additional Information.............. 34
</TABLE>
----------------
Until , 1999, all dealers that buy, sell or trade the common shares,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in our common shares. You should
review the more detailed information contained in this prospectus and in the
statement of additional information.
The BlackRock Strategic Municipal Trust is a newly
The Trust.............. organized, closed-end, diversified management
investment company. Throughout the prospectus, we
refer to The BlackRock Strategic Municipal Trust
simply as the "Trust" or as "we," "us" or "our." See
"The Trust."
The Offering........... The Trust is offering common shares of beneficial
interest at $15.00 per share through a group of
underwriters led by Salomon Smith Barney Inc. and
Prudential Securities. The common shares of
beneficial interest are called "common shares" in
the rest of this prospectus. You must purchase at
least 100 common shares ($1,500). The underwriters
have an option to purchase up to additional
common shares to cover orders in excess of
common shares. See "Underwriting."
Investment
Objectives............. The Trust's investment objectives are to provide
current income exempt from regular Federal income
tax and to invest in municipal bonds that over time
will perform better than the broader municipal bond
market. The Trust will invest primarily in municipal
bonds that pay interest that is exempt from regular
Federal income tax. The Trust will invest in
municipal bonds that, in BlackRock Financial
Management, Inc.'s opinion, are underrated or
undervalued. Underrated municipal bonds are those
whose ratings do not, in BlackRock Financial's
opinion, reflect their true higher creditworthiness.
Undervalued municipal bonds are bonds that, in
BlackRock Financial'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 securities that pay interest that
is or make other distributions that are exempt from
regular Federal income tax. The Trust will invest at
least 80% of its total assets in securities that at
the time of investment are investment grade quality.
Investment grade quality securities are securities
rated within the four highest grades (Baa or BBB or
better by Moody's Investor Service, Inc.
("Moody's"), Standard & Poors Corporation ("S&P") or
Fitch IBCA, Inc. ("Fitch")), or securities that are
unrated but judged to be of comparable quality by
BlackRock Financial. The Trust may invest up to 20%
of its total assets in securities 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 BlackRock Financial. 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 may not attain its
investment objectives. See "The Trust's
Investments."
3
<PAGE>
Special Tax While exempt-interest dividends are excluded from
Considerations......... gross income for Federal income tax purposes, they
may be subject to Federal alternative minimum tax in
certain circumstances. Distributions of any capital
gain or other taxable income will be taxable to
shareholders. The Trust may not be a suitable
investment for investors subject to the Federal
alternative minimum tax. See "Tax Matters."
Proposed Offering of
Preferred Shares.......
Approximately one to three months after completion of
this offering of the common shares (subject to
market conditions), the Trust intends to offer
preferred shares of beneficial interest that will
represent approximately 38% of the Trust's capital
after their issuance. The issuance of Preferred
Shares will leverage your shares. Leverage involves
greater risks. The Trust's leveraging strategy may
not be successful. See "Risks--Leverage Risk." The
Trust will invest the money it obtains by selling
the Preferred Shares in long-term municipal bonds
that will generally pay fixed rates of interest over
the life of the bond. The Preferred Shares will pay
adjustable rate dividends based on shorter-term
interest rates. The adjustment period could be as
short as a day or as long as a year or more. If the
rate of return, after the payment of applicable
expenses of the Trust, on the long-term bonds
purchased by the Trust is greater than the dividends
paid by the Trust on the Preferred Shares, the Trust
will generate more income by investing the proceeds
of the Preferred Shares than it will need to pay
dividends on the Preferred Shares. If so, the excess
income will be used to pay higher dividends to
holders of common shares. However, the Trust cannot
assure you that the issuance of Preferred Shares
will result in a higher yield on your common shares.
Once the Trust issues Preferred Shares, the net
asset value and market price of the common shares
and the yield to holders of common shares will be
more volatile. See "Preferred Shares and Leverage"
and "Description of Shares--Preferred Shares."
Investment Adviser..... BlackRock Advisors, Inc. will be the Trust's
investment adviser, and BlackRock Advisors'
affiliate, BlackRock Financial, will act as the
Trust's sub-adviser and handle day-to-day investment
management of the Trust. BlackRock Advisors will
receive an annual fee, payable monthly, in a maximum
amount equal to .60% of the average weekly value of
the Trust's Managed Assets. Managed Assets are the
total assets of the Trust (including assets
attributable to any preferred shares that may be
outstanding) minus the sum of accrued liabilities
(other than debt representing financial leverage).
The liquidation preference of the Preferred Shares
is not a liability. BlackRock Advisors has
voluntarily agreed to waive receipt of a portion of
the investment management fee or other expenses of
the Trust in the amount of .25% of the average
weekly value of the Trust's Managed Assets for the
first five years of the Trust's operations (through
December 31, 2004), and for a declining amount for
4
<PAGE>
an additional four years (through December 31, 2008).
BlackRock Advisors (not the Trust) will pay BlackRock
Financial a fee for its services as sub-adviser.
BlackRock Advisors is an indirect subsidiary of PNC
Bank, N.A. See "Management of the Trust."
Distributions......... The Trust will distribute to holders of its common
shares monthly dividends of all or a portion of its
tax-exempt interest income after payment of dividends
on any Preferred Shares of the Trust which may be
outstanding. If the Trust realizes capital gain or
other taxable income, it will be required to allocate
such income between the common shares and the
Preferred Shares in proportion to the total
distributions paid to each class for the year in
which the income is realized. See "Distributions" and
"Preferred Shares and Leverage."
We expect to declare the initial monthly dividend on
the Trust's common shares approximately 45 days after
completion of this offering and to pay that initial
monthly dividend approximately 60 to 90 days after
completion of this offering. Unless you elect to
receive dividends in cash, all dividends and
distributions on your common shares will be
automatically reinvested in common shares of the
Trust issued by the Trust or purchased in the open
market pursuant to the Trust's Dividend Reinvestment
Plan. See "Dividend Reinvestment Plan."
Listing............... The common shares have been approved for listing on
the New York Stock Exchange, subject to notice of
issuance, under the trading or "ticker" symbol "BSD."
See "Description of Shares--Common Shares."
Custodian and
Transfer and Dividend
Disbursing Agent...... State Street Bank and Trust Company will serve as the
Trust's Custodian, Transfer Agent and Dividend
Disbursing Agent. See "Custodian and Transfer and
Dividend Disbursing Agent."
Market Price of
Shares................ Shares of closed-end investment companies frequently
trade at prices lower than their net asset value.
Shares of closed-end investment companies like the
Trust that invest predominately in investment grade
municipal bonds have during some periods traded at
prices higher than their net asset value and during
other periods traded at prices lower than their net
asset value. The Trust cannot assure you that its
common shares will trade at a price higher than net
asset value. The Trust's net asset value will be
reduced immediately following this offering by the
sales load and the amount of the organization and
offering expenses paid by the Trust. See "Use of
Proceeds." In addition to net asset value, the market
price of the Trust's common shares may be affected by
such factors as dividend levels, which are in turn
affected by expenses; call protection for portfolio
securities; dividend stability; portfolio credit
quality; and liquidity and market supply
5
<PAGE>
and demand. See "Preferred Shares and Leverage,"
"Risks," "Description of Shares" and the section of
the statement of additional information with the
heading "Repurchase of Common Shares." The common
shares are designed primarily for long-term
investors, and you should not purchase common shares
of the Trust if you intend to sell them shortly after
purchase.
Special Risk No Operating History. The Trust is a newly organized,
Considerations........ closed-end investment company with no history of
operations.
Interest Rate Risk. Generally, when market interest
rates fall, bond prices rise, and vice versa.
Interest rate risk is the risk that the municipal
bonds in the Trust's portfolio will decline in value
because of increases in market interest rates. The
prices of longer-term bonds fluctuate more than
prices of shorter-term bonds as interest rates
change. Because the Trust will invest primarily in
long-term bonds, net asset value and market price per
share of the common shares will fluctuate more in
response to changes in market interest rates than if
the Trust invested primarily in shorter-term bonds.
The Trust's use of leverage, as described below, will
tend to increase common share interest rate risk.
Credit Risk. Credit risk is the risk that one or more
municipal bonds in the Trust's portfolio will decline
in price, or fail to pay interest or principal when
due, because the issuer of the bond experiences a
decline in its financial status. The Trust may invest
up to 20% (measured at the time of investment) of its
total assets in municipal bonds that are rated Ba/BB
or B or that are unrated but judged to be of
comparable quality by BlackRock Financial. The prices
of these lower grade bonds are more sensitive to
negative developments, such as a decline in the
issuer's revenues or a general economic downturn,
than are the prices of higher grade securities.
Municipal bonds of below investment grade quality are
predominately speculative with respect to the
issuer's capacity to pay interest and repay principal
when due, and therefore involve a greater risk of
default.
Economic Sector and Geographic Risk. The Trust may
invest 25% or more of its total assets in municipal
obligations of issuers located in the same state (or
U.S. territory) and of issuers in the same economic
sector, such as hospitals, life-care facilities and
transportation-related issuers. This may make the
Trust more susceptible to adverse economic, political
or regulatory occurrences affecting a particular
state, territory or economic sector.
Leverage Risk. The use of leverage through the
issuance of Preferred Shares creates an opportunity
for increased common share net income, but also
creates greater risks for the holders of common
shares. The Trust's leveraging strategy may not be
successful. We anticipate that Preferred
6
<PAGE>
Shares will pay adjustable rate dividends based on
shorter-term interest rates that would be reset
periodically. The Trust will invest the proceeds of
the Preferred Shares offering in long-term, typically
fixed rate, municipal bonds. So long as the Trust's
municipal bond portfolio provides a higher rate of
return, net of Trust expenses, than the Preferred
Share dividend rate, as reset periodically, the
leverage will cause the holders of common shares to
receive a higher current rate of return than if the
Trust were not leveraged. If, however, long- and/or
short-term rates rise, the Preferred Share dividend
rate could exceed the rate of return on long-term
bonds held by the Trust that were acquired during
periods of generally lower interest rates, reducing
return to the holders of common shares. Leverage
creates two major types of risks for the holders of
common shares:
. the likelihood of greater volatility of net
asset value and market price of the common
shares, because changes in the value of the
Trust's bond portfolio, including bonds bought
with the proceeds of the Preferred Shares
offering, are borne entirely by the holders of
common shares; and
. the possibility either that common share income
will fall if the Preferred Share dividend rate
rises, or that common share income will
fluctuate because the Preferred Share dividend
rate varies.
Municipal Bond Market Risk. There is generally less
public information available about the municipal
bonds in the Trust's portfolio than is available for
corporate equities or bonds, and the investment
performance of the Trust may therefore be more
dependent on the analytical abilities of BlackRock
Financial than would be a stock fund or taxable bond
fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in
which the Trust may invest, also tends to be less
well-developed or liquid than many other securities
markets, which may adversely affect the Trust's
ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely
payments of interest and principal may be diminished
during 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
securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of a municipal
security 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
7
<PAGE>
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.
Anti-takeover Provisions. The Trust's Agreement and
Declaration of Trust includes provisions that could
limit the ability of other entities or persons to
acquire control of the Trust or convert the Trust to
open-end status. These provisions could deprive the
holders of common shares of opportunities to sell
their common shares at a premium over the then
current market price of the common shares.
8
<PAGE>
SUMMARY OF TRUST EXPENSES
The following table assumes that the Trust has issued Preferred Shares in an
amount equal to 38% of the Trust's capital (after their issuance), and shows
Trust expenses as a percentage of net assets attributable to common shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering
price).............................................. 4.50%
Dividend Reinvestment Plan Fees...................... None *
<CAPTION>
Percentage of Net
Assets Attributable
to Common Shares**
-------------------
<S> <C>
Annual Expenses
Management Fees...................................... .97%
Fee and Expense Waiver Years 1-5..................... (.40)%***
---------
Net Management Fees.................................... .57%***
Other Expenses......................................... .24%
---------
Total Annual Expenses.................................. .81%***
=========
</TABLE>
- --------
* You will be charged a $2.50 service charge and pay brokerage charges if you
direct the Plan Agent to sell your common shares held in a dividend
reinvestment account.
** Amounts shown in the table are expressed as a percentage of assets
attributable to common shares. Expressed as a percentage of net assets
attributable to both common shares and preferred shares that the Trust
intends to issue, the percentages are as follows: Management Fees .60%; Fee
and Expense Waiver Years 1-5 (.25)%***; Net Management Fees .35%***; Other
Expenses .15%; Total Annual Expenses .50%***.
*** BlackRock Advisors has voluntarily agreed to waive receipt of a portion of
the investment management fee or other expenses of the Trust in the amount
of .25% of average weekly Managed Assets (includes net assets attributable
to both common shares and any preferred shares that may be outstanding)
for the first 5 years of the Trust's operations, .20% in year 6, .15% in
year 7, .10% in year 8 and .05% in year 9. Expressed as a percentage of
net assets attributable to common shares, these percentages are .40% for
the first five years of the Trust's operations, 32% in year six, 24% in
year 7, .16% in year 8 and .08% in year 9. Without the waiver, "Total
Annual Expenses" would be estimated to be .75% of total net assets and
1.21% of net assets attributable to common shares.
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Annual Expenses" are based on estimated amounts for the
Trust's first year of operations and assume that the Trust issues 4,000,000
common shares. See "Management of the Trust" and "Dividend Reinvestment Plan."
9
<PAGE>
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in common shares, assuming (1)
total annual expenses of .81% of net assets attributable to common shares in
years 1 through 5, increasing to 1.21% in year 10 and (2) a 5% annual return:
(/1/)
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years(/3/)
------ ------- ------- -------------
<S> <C> <C> <C> <C>
Expenses Based on a Percentage of Net
Assets Attributable to Common
Shares(/2/)......................... $53 $71 $90 $162
</TABLE>
- --------
(1) You should not consider this example as representative of the Trust's
future expenses. The example assumes that the estimated Other Expenses set
forth in the Annual Expenses table are accurate, that fees and expenses
increase as described in note 3 below and that all dividends and
distributions are reinvested at net asset value. Actual expenses may be
greater or less than those assumed. Moreover, the Trust's actual rate of
return may be greater or less than the hypothetical 5% return shown in the
example.
(2) Expressed as a percentage of net assets attributable to both common shares
and preferred shares that the Trust intends to issue, the amounts would be
as follows:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years(/3/)
------ ------- ------- -------------
<S> <C> <C> <C> <C>
$50 $61 $73 $118
</TABLE>
(3) Assumes waiver of fees and expenses of .20% of average weekly Managed
Assets in year 6, .15% in year 7, .10% in year 8 and .05% in year 9.
BlackRock Advisors has not agreed to waive any portion of its fees and
expenses beyond December 31, 2008.
THE TRUST
The Trust is a recently organized, closed-end, diversified management
investment company registered under the Investment Company Act of 1940. The
Trust was organized as a Delaware business trust on June 17, 1999, pursuant to
an Agreement and Declaration of Trust governed by the laws of the State of
Delaware. As a newly organized entity, the Trust has no operating history. The
Trust's principal office is located at 345 Park Avenue, New York, New York
10154, and its telephone number is (888) 825-2257.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be approximately $
($ if the underwriters exercise the over-allotment option in full) after
payment of the estimated organization and offering costs. BlackRock Advisors
has agreed to pay all organizational expenses and offering costs (other than
sales load) that exceed $0.03 per common share. The Trust will invest the net
proceeds of the offering in accordance with the Trust's investment objectives
and policies as stated below. We currently anticipate that the Trust will be
able to invest substantially all of the net proceeds in securities that meet
the Trust's investment objectives and policies within three months after the
completion of the offering. Pending such investment, it is anticipated that
the proceeds will be invested in short-term, high-quality tax-exempt or
taxable securities.
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<PAGE>
THE TRUST'S INVESTMENTS
Investment Objectives and Policies
The Trust's investment objectives are:
. to provide current income exempt from regular Federal income tax; and
. to invest in municipal bonds that over time will perform better than the
broader municipal bond market.
The Trust will invest primarily (under normal market conditions, at least
65% of its total assets) in municipal bonds that pay interest that is exempt
from regular Federal income tax. Under normal market conditions, the Trust
expects to be fully invested (at least 95% of its net assets) in securities
that pay interest that is or make other distributions that are exempt from
regular Federal income tax. The Trust will invest at least 80% of its total
assets in investment grade quality securities. Investment grade quality means
that such securities 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 Financial. The Trust may
invest up to 20% of its total assets in securities 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 Financial. 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 Financial
may consider such factors as BlackRock Financial's assessment of the credit
quality of the issuer of the security, the price at which the security could
be sold and the rating, if any, assigned to the security by other rating
agencies. Appendix A to the statement of additional information contains a
general description of Moody's, S&P's and Fitch's ratings of municipal bonds.
The Trust may also invest in securities of other open- or closed-end
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 that are exempt from regular Federal income tax. See "--Other
Investment Companies," "--Tax-Exempt Preferred Shares" and "--Initial
Portfolio Composition."
The Trust will invest in municipal bonds that, in BlackRock Financial's
opinion, are underrated or undervalued. Underrated municipal bonds are those
whose ratings do not, in the opinion of BlackRock Financial, reflect their
true higher creditworthiness. Undervalued municipal bonds are bonds that, in
the opinion of BlackRock Financial, are worth more than the value assigned to
them in the marketplace. BlackRock Financial may at times believe that bonds
associated with a particular municipal market sector (for example, electric
utilities), or issued by a particular municipal issuer, are undervalued.
BlackRock Financial may purchase those bonds for the Trust's portfolio because
they represent a market sector or issuer that BlackRock Financial 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 Financial's belief that their yield
is higher than that available on bonds bearing equivalent levels of interest
rate risk, credit risk and other
11
<PAGE>
forms of risk, and that their prices will ultimately rise, relative to the
market, to reflect their true value. The Trust attempts to invest in municipal
bonds that over time will perform better than the broader municipal bond market
by prudent selection of municipal bonds regardless of the direction the market
may move. Any capital appreciation realized by the Trust will generally result
in capital gain distributions subject to capital gain taxes.
The Trust may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements or escrow accounts. The credit quality of
companies which provide these credit enhancements will affect the value of
those securities. Although the insurance feature reduces certain financial
risks, the premiums for insurance and the higher market price paid for insured
obligations may reduce the Trust's income. Insurance generally will be obtained
from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P
or Fitch. The insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the common shares. The Trust may
purchase bonds with insurance purchased by the issuer or other third parties
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
short-term investments, including high quality, short-term securities that may
be either tax-exempt or taxable. The Trust intends to invest in taxable short-
term investments only if suitable tax-exempt short-term investments are not
available at reasonable prices and yields. If the Trust invests in taxable
short-term investments, a portion of your dividends would be subject to regular
Federal income taxes. See the statement of additional information.
The Trust cannot change its investment objectives without the approval of the
holders of a majority of the outstanding common shares and, once the Preferred
Shares are issued, the Preferred Shares voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as a
separate class. A majority of the outstanding means (1) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the outstanding
shares are present or represented by proxy, or (2) more than 50% of the
outstanding shares, whichever is less. See "Description of Shares--Preferred
Shares--Voting Rights" and the statement of additional information under
"Description of Shares--Preferred Shares" for additional information with
respect to the voting rights of holders of Preferred Shares.
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects, such as roads or public buildings, to
pay general operating expenses or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction or for privately owned industrial development
and pollution control projects. General obligation bonds are backed by the full
faith and credit, or taxing authority, of the issuer and may be repaid from any
revenue source. Revenue bonds may be repaid only from the revenues of a
specific facility or source. The Trust also may purchase municipal bonds that
represent lease obligations. These carry special risks because the issuer of
the bonds may not be obligated to appropriate money annually to make payments
under the lease. In order to reduce this risk, the Trust will only purchase
municipal bonds representing lease obligations where BlackRock Financial
believes the issuer has a strong incentive to continue making appropriations
until maturity.
Municipal securities pay interest or make other distributions that, in the
opinion of bond counsel to the issuer, or on the basis of another authority
believed by BlackRock Financial to be reliable, is exempt from
12
<PAGE>
regular Federal income tax. BlackRock Financial will not conduct its own
analysis of the tax status of the interest paid by municipal bonds held by the
Trust. The Trust treats as municipal bonds investment company shares, tax-
exempt preferred shares and other securities that pay interest or make other
distributions that are exempt from regular Federal income tax and in which the
Trust may invest as discussed in this prospectus, regardless of the security's
form as bonds, notes, stocks, shares or other interests and regardless of
whether the issuer is a government, governmental entity or private entity.
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The market value of municipal
bonds will vary with changes in interest rate levels and as a result of
changing evaluations of the ability of bond issuers to meet interest and
principal payments.
The Trust will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15 years or more, but the
dollar weighted average maturity of obligations held by the Trust may be
shortened, depending on market conditions.
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
involves risk because no interest accrues on the bonds prior to settlement
and, because bonds are subject to market fluctuations, the value of the bonds
at the time of delivery may be less or more than cost. A separate account of
the Trust will be established with its custodian consisting of cash, or other
liquid high grade debt securities having a market value at all times, at least
equal to the amount of the commitment.
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Trust may invest directly. The Trust generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Trust receives the proceeds of the offering of its common shares or Preferred
Shares, or during periods when there is a shortage of attractive, high-
yielding municipal bonds available in the market. As a shareholder in an
investment company, the Trust will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Trust's
advisory and other fees and expenses with respect to assets so invested.
Holders of common shares would therefore be subject to duplicative expenses to
the extent the Trust invests in other investment companies. BlackRock
Financial will take expenses into account when evaluating the investment
merits of an investment in an investment company relative to available
municipal bond investments. In addition, the securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks to which the Trust is subject. As described in this prospectus
in the sections entitled "Risks" and "Preferred Shares and Leverage," the net
asset value and market value of leveraged shares will be more volatile and the
yield to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. Investment companies may have investment policies that
differ from those of the Trust. In addition, to the extent that the Trust
invests in other investment companies, the Trust will be dependent upon the
investment and research abilities of persons other than
13
<PAGE>
BlackRock Financial. 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 15% of its total assets in preferred
interests of other investment funds that pay dividends that are exempt from
regular federal income tax. Such funds in turn invest in municipal bonds and
other assets that pay interest or make distributions that are exempt from
regular federal income tax, such as revenue bonds issued by state or local
agencies to fund the development of low-income, multi-family housing.
Investment in such tax-exempt preferred shares involves many of the same
issues as investing in other open- or closed-end investment companies as
discussed above. These investments also have additional risks, including
liquidity risk, the absence of regulation governing investment practices,
capital structure and leverage, affiliated transactions and other matters, and
concentration of investments in particular issuers or industries. Revenue
bonds issued by state or local agencies to finance the development of low-
income, multi-family housing involve special risks in addition to those
associated with municipal bonds generally, including that the underlying
properties may not generate sufficient income to pay expenses and interest
costs. Such bonds are generally non-recourse against the property owner, may
be junior to the rights of others with an interest in the properties, may pay
interest that changes based in part on the financial performance of the
property, may be prepayable without penalty and may be used to finance the
construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior
obligations may make it more difficult for issuers to meet payment obligations
on subordinated bonds. The Trust will treat investments in tax-exempt
preferred shares as investments in municipal bonds.
Initial Portfolio Composition
If current market conditions persist, the Trust expects that approximately
80% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades or
are unrated but judged to be of comparable quality by BlackRock Financial
(approximately 35% in Aaa/AAA; 25% in A; and 20% in Baa/BBB). BlackRock
Financial generally expects to select obligations that may not be redeemed at
the option of the issuer for approximately seven to nine years from the date
of purchase by the Trust. Subject to market availability, BlackRock Financial
currently expects to invest approximately 20% of the Trust's initial portfolio
in municipal bonds that are, at the time of investment, either rated below
investment grade or that are unrated but judged to be of comparable quality by
BlackRock Financial. See "--Investment Objectives and Policies."
PREFERRED SHARES AND LEVERAGE
Approximately one to three months after the completion of the offering of
the common shares, subject to market conditions, the Trust intends to offer
Preferred Shares representing approximately 38% of the Trust's capital
immediately after the issuance of the Preferred Shares. The Preferred Shares
will have complete priority upon distribution of assets over the common
shares. The issuance of Preferred Shares will leverage the common shares.
Leverage involves greater risks. The Trust's leveraging strategy may not be
successful. Although the Trust's board of trustees will determine the timing
and other terms of the offering of Preferred Shares and the terms of the
Preferred Shares, the Trust expects to invest the proceeds of the Preferred
Shares offering in long-term municipal bonds. The Preferred Shares will pay
adjustable rate dividends based on shorter-term interest rates, which would be
redetermined periodically by an auction process. The adjustment period for
Preferred
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<PAGE>
Share dividends could be as short as one day or as long as a year or more. So
long as the Trust's portfolio is invested in securities that provide a higher
rate of return than the dividend rate of the Preferred Shares, after taking
expenses into consideration, the leverage will cause you to receive a higher
current rate of return than if the Trust were not leveraged.
Changes in the value of the Trust's bond portfolio, including bonds bought
with the proceeds of the Preferred Shares offering, will be borne entirely by
the holders of common shares. If there is a net decrease, or increase, in the
value of the Trust's investment portfolio, the leverage will decrease, or
increase (as the case may be), the net asset value per common share to a
greater extent than if the Trust were not leveraged. During periods in which
the Trust is using leverage, the fees paid to BlackRock Advisors for advisory
services will be higher than if the Trust did not use leverage because the
fees paid will be calculated on the basis of the Trust's total net assets,
including the proceeds from the issuance of Preferred Shares.
For tax purposes, the Trust is currently required to allocate tax-exempt
interest income, net capital gain and other taxable income, if any, between
the common shares and Preferred Shares in proportion to total distributions
paid to each class for the year in which the tax-exempt interest income, net
capital gain or other taxable income is realized. If net capital gain or other
taxable income is allocated to Preferred Shares, instead of solely tax-exempt
income, the Trust will likely have to pay higher total dividends to Preferred
Shareholders or make special payments to Preferred Shareholders to compensate
them for the increased tax liability. This would reduce the total amount of
dividends paid to the holders of common shares, but would increase the portion
of the dividend that is tax-exempt. If the increase in dividend payments or
the special payments to Preferred Shareholders are not entirely offset by a
reduction in the tax liability of, and an increase in the tax-exempt dividends
received by, the holders of common shares, the advantage of the Trust's
leveraged structure to holders of common shares will be reduced.
Under the Investment Company Act, the Trust is not permitted to issue
preferred shares unless immediately after such issuance the value of the
Trust's total net assets is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., the liquidation value may not exceed 50%
of the Trust's total net assets). In addition, the Trust is not permitted to
declare any cash dividend or other distribution on its common shares unless,
at the time of such declaration, the value of the Trust's total net assets is
at least 200% of such liquidation value. If Preferred Shares are issued, the
Trust intends, to the extent possible, to purchase or redeem Preferred Shares
from time to time to the extent necessary in order to maintain coverage of any
Preferred Shares of at least 200%. In addition, as a condition to obtaining
ratings on the Preferred Shares, the terms of any Preferred Shares issued are
expected to include asset coverage maintenance provisions which will require
the redemption of the Preferred Shares in the event of non-compliance by the
Trust and may also prohibit dividends and other distributions on the common
shares in such circumstances. In order to meet redemption requirements, the
Trust may have to liquidate portfolio securities. Such liquidations and
redemptions would cause the Trust to incur related transaction costs and could
result in capital losses to the Trust. Prohibitions on dividends and other
distributions on the common shares could impair the Trust's ability to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended. If the Trust has Preferred Shares outstanding, two of the Trust's
trustees will be elected by the holders of Preferred Shares voting separately
as a class. The remaining trustees of the Trust will be elected by holders of
common shares and Preferred Shares voting together as a single class. In the
event the Trust failed to pay dividends on Preferred Shares for two years,
holders of Preferred Shares would be entitled to elect a majority of the
trustees of the Trust.
The Trust will be subject to certain restrictions imposed by guidelines of
one or more rating agencies that may issue ratings for Preferred Shares issued
by the Trust. These guidelines are expected to impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
on the Trust by the
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<PAGE>
Investment Company Act. It is not anticipated that these covenants or
guidelines will impede BlackRock Financial from managing the Trust's portfolio
in accordance with the Trust's investment objectives and policies.
The Trust may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Trust securities.
Assuming that the Preferred Shares will represent approximately 38% of the
Trust's capital and pay dividends at an annual average rate of 3.50%, the
income generated by the Trust's portfolio (net of estimated expenses) must
exceed 1.33% in order to cover the dividend payments and other expenses
specifically related to the Preferred Shares. Of course, these numbers are
merely estimates used for illustration. Actual Preferred Share dividend rates
will vary frequently and may be significantly higher or lower than the rate
estimated above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on common share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Trust's portfolio) of -10%, -5%, 0%, 5% and 10% and Preferred Share dividends
at an annual average rate of 3.50%. These assumed investment portfolio returns
are hypothetical figures and are not necessarily indicative of the investment
portfolio returns experienced or expected to be experienced by the Trust. See
"Risks."
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Total Return (Net
of Expenses)...................... (10)% (5)% 0% 5% 10%
Common Share Total Return.......... (18.27)% (10.21)% (2.15)% 5.92% 13.98%
</TABLE>
Unless and until Preferred Shares are issued, the common shares will not be
leveraged and this section will not apply.
RISKS
The net asset value of the common shares will fluctuate with and be affected
by, among other things, interest rate risk, credit risk, reinvestment risk and
leverage risk, and an investment in common shares will be subject to market
discount risk, inflation risk, municipal bond market risk and "Year 2000"
risk, each of which is more fully described below.
Newly Organized. The Trust is a newly organized, diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Interest Rate Risk. Interest rate risk is the risk that bonds, and the
Trust's net assets, will decline in value because of changes in interest
rates. Generally, municipal bonds will decrease in value when interest rates
rise and increase in value when interest rates decline. This means that the
net asset value of the common shares will fluctuate with interest rate changes
and the corresponding changes in the value of the Trust's municipal bond
holdings. The value of the longer-term bonds in which the Trust generally
invests fluctuates more in response to changes in interest rates than does the
value of shorter-term bonds. Because the Trust will invest primarily in long-
term bonds, the net asset value and market price per share of the common
shares will fluctuate more in
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<PAGE>
response to changes in market interest rates than if the Trust invested
primarily in shorter-term bonds. The Trust's use of leverage, as described
below, will tend to increase common share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond will
become unable to meet its obligation to make interest and principal payments.
In general, lower rated municipal bonds carry a greater degree of risk that
the issuer will lose its ability to make interest and principal payments,
which could have a negative impact on the Trust's net asset value or
dividends. The Trust may invest up to 20% of its total assets in municipal
bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated
but judged to be of comparable quality by BlackRock Financial. 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.
The Trust intends to invest substantially all of its assets in municipal
bonds issued by states, cities and local authorities and certain possessions
and territories of the United States. As a result, the Trust bears the
investment risk that economic, political or regulatory changes could hurt many
municipal bond issuers, which would likely reduce the value of the Trust's
bond portfolio and the investment in the Trust of a common shareholder.
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 Financial than
would be a stock fund or taxable bond fund. The secondary market for municipal
bonds, particularly the below-investment-grade bonds in which the Trust may
invest, also tends to be less well-developed or liquid than many other
securities markets, which may adversely affect the Trust's ability to sell its
bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during 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 securities 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 lower interest rates. A
decline in income could affect the common shares' market price or their
overall returns.
Leverage Risk. Leverage risk is the risk associated with the issuance of the
Preferred Shares to leverage the common shares. There is no assurance that the
Trust's leveraging strategy will be successful. Once the Preferred
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<PAGE>
Shares are issued, the net asset value and market value of the common shares
will be more volatile, and the yield to the holders of common shares will tend
to fluctuate with changes in the shorter-term dividend rates on the Preferred
Shares. If the dividend rate on the Preferred Shares approaches the net rate
of return on the Trust's investment portfolio, the benefit of leverage to the
holders of the common shares would be reduced. If the dividend rate on the
Preferred Shares exceeds the net rate of return on the Trust's portfolio, the
leverage will result in a lower rate of return to the holders of common shares
than if the Trust were not leveraged. Because the long-term bonds included in
the Trust's portfolio will typically pay fixed rates of interest while the
dividend rate on the Preferred Shares will be adjusted periodically, this
could occur even when both long-term and short-term municipal rates rise. In
addition, the Trust will pay (and the holders of common shares will bear) any
costs and expenses relating to the issuance and ongoing maintenance of the
Preferred Shares. Accordingly, the Trust cannot assure you that the issuance
of Preferred Shares will result in a higher yield or return to the holders of
the common shares.
Similarly, any decline in the net asset value of the Trust's investments
will be borne entirely by the holders of common shares. Therefore, if the
market value of the Trust's portfolio declines, the leverage will result in a
greater decrease in net asset value to the holders of common shares than if
the Trust were not leveraged. This greater net asset value decrease will also
tend to cause a greater decline in the market price for the common shares. The
Trust might be in danger of failing to maintain the required 200% asset
coverage or of losing its ratings on the Preferred Shares or, in an extreme
case, the Trust's current investment income might not be sufficient to meet
the dividend requirements on the Preferred Shares. In order to counteract such
an event, the Trust might need to liquidate investments in order to fund a
redemption of some or all of the Preferred Shares. Liquidation at times of low
municipal bond prices may result in capital loss and may reduce returns to the
holders of common shares.
While the Trust may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate
the increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Trust will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
holders of common shares. Changes in the future direction of interest rates
are very difficult to predict accurately. If the Trust were to reduce leverage
based on a prediction about future changes to interest rates, and that
prediction turns out to be incorrect, the reduction in leverage would likely
operate to reduce the income and/or total returns to holders of common shares
relative to the circumstance where the Trust had not reduced leverage. The
Trust may decide that this risk outweighs the likelihood of achieving the
desired reduction to volatility in income and share price if the prediction
were to turn out to be correct, and determine not to reduce leverage as
described above.
The Trust may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. This additional leverage may in certain market
conditions reduce the net asset value of the Trust's common shares and the
returns to the holders of common shares.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the common
shares and distributions on those shares can decline. In addition, during any
periods of rising inflation, Preferred Share dividend rates would likely
increase, which would tend to further reduce returns to the holders of common
shares.
Economic Sector and Geographic Risk. The Trust may invest 25% or more of its
total assets in municipal obligations of issuers located in the same state (or
U.S. territory) or in municipal obligations in the same
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<PAGE>
economic sector, including without limitation the following: lease rental
obligations of state and local authorities; obligations dependent on annual
appropriations by a state's legislature for payment; obligations of state and
local housing finance authorities, municipal utilities systems or public
housing authorities; obligations of hospitals or life care facilities; or
industrial development or pollution control bonds issued for electric utility
systems, steel companies, paper companies or other purposes. This may make the
Trust more susceptible to adverse economic, political, or regulatory
occurrences affecting a particular state or economic sector. For example,
health care related issuers are susceptible to Medicare, Medicaid and other
third party payor reimbursement policies, and national and state health care
legislation. As concentration increases, so does the potential for fluctuation
in the net asset value of the Trust's common shares.
"Year 2000" Risk. The Trust, like any business, could be affected if the
computer systems on which it relies do not properly process information
beginning on January 1, 2000. While Year 2000 issues could have a negative
effect on the Trust, BlackRock Advisors is currently working to avoid such
problems. BlackRock Advisors is also working with other systems providers and
vendors to determine their systems' ability to handle Year 2000 problems.
There is no guarantee, however, that systems will work properly on January 1,
2000. Year 2000 problems may also hurt issuers whose securities the Trust
holds or securities markets generally.
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of the
Trust, including supervision of the duties performed by BlackRock Advisors and
BlackRock Financial. There are eight trustees of the Trust. Two of the
trustees are "interested persons" (as defined in the Investment Company Act).
The names and business addresses of the trustees and officers of the Trust and
their principal occupations and other affiliations during the past five years
are set forth under "Management of the Trust" in the statement of additional
information.
Investment Adviser
BlackRock Advisors will act as the Trust's investment adviser. BlackRock
Advisors, together with its investment advisory subsidiaries, is a global
asset management firm with assets of approximately $142 billion under
management as of June 30, 1999. BlackRock Advisors has its principal office at
345 Park Avenue, New York, New York 10154. BlackRock Advisors and its
subsidiaries constitute the asset management arm of PNC Bank, N.A. and
together have over 630 employees. BlackRock Advisors has appointed BlackRock
Financial, one of its affiliates, to handle the day-to-day investment
management of the Trust. BlackRock Financial was founded in 1988 and provides
fixed income, liquidity, equity, alternative investment, and risk management
products for clients worldwide. As of June 30, 1999 BlackRock Financial
managed approximately $80 billion in various fixed income sectors, including
$8 billion in municipal securities. BlackRock Financial also manages
approximately $44 billion in cash or other short term, highly liquid
investments, including $4.4 billion in short term municipal securities.
BlackRock Advisors has $63 billion in mutual fund assets under management,
including two open-end mutual fund families, BlackRock FundsSM and Provident
Institutional Funds, 21 publicly traded closed-end funds and several short-
term investment funds. Among these products, BlackRock Financial manages 11
closed-end, six open-end and six money market municipal funds. In addition,
BlackRock Financial manages portfolios of municipal securities for large
insurance companies and high net worth individuals.
Investment Philosophy. BlackRock Financial'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.
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BlackRock Financial uses a relative value strategy that evaluates the trade-
off between risk and return to seek to achieve the Trust's investment
objectives. This strategy is combined with disciplined risk control techniques
and applied in sector, sub-sector and individual security selection decisions.
BlackRock Financial's extensive personnel and technology resources are the key
drivers of the investment philosophy.
BlackRock Financial's Municipal Bond Team. BlackRock Financial uses a team
approach to managing municipal portfolios. BlackRock Financial 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 Financial's municipal bond team includes two portfolio managers
and six credit research analysts. The team is lead by Kevin M. Klingert, a
managing director and portfolio manager at BlackRock Financial. Mr. Klingert
is a senior portfolio manager and head of municipal bonds at BlackRock
Financial, a position he has held since joining BlackRock Financial in 1991.
Mr. Klingert has over 15 years of experience in the municipal market. Prior to
joining BlackRock Financial, Mr. Klingert was an Assistant Vice President in
the Unit Investment Trust Department at Merrill Lynch, Pierce, Fenner & Smith,
which he joined in 1985. Mr. Klingert has primary responsibility for managing
client portfolios with a special emphasis on municipal securities. The
portfolio management team also includes Craig Kasap. Mr. Kasap has been a
portfolio manager at BlackRock Financial for over two years and is a member of
BlackRock Financial's Investment Strategy Group. Prior to joining BlackRock
Financial in 1997, Mr. Kasap spent three years as a municipal bond trader with
Keystone Investments in Boston where he was involved in formulating the firm's
municipal bond investment strategies.
BlackRock Financial's municipal bond portfolio managers are responsible for
25 municipal bond portfolios, valued as of June 30, 1999 at approximately $5.5
billion, plus approximately an additional $2.5 billion in municipal bonds held
across portfolios with broader investment mandates. The team is responsible
for portfolios with a variety of investment objectives and constraints,
including national funds and state-specific funds. As of June 30, 1999, the
team managed 11 closed-end municipal funds with over $3 billion in assets.
BlackRock Financial's Investment Process. BlackRock Financial has in-depth
expertise in the fixed income market. BlackRock Financial applies the same
risk-controlled, active sector rotation style (discussed below) to the
management process for all of its fixed income portfolios. BlackRock Financial
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 Financial.
BlackRock Financial's portfolio management process emphasizes research and
analysis of specific sectors and securities, not interest rate speculation.
BlackRock Financial believes that market-timing strategies can be highly
volatile and potentially produce inconsistent results. Instead, BlackRock
Financial 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 (discussed below).
In the municipal market, BlackRock Financial believes one of the most
important determinants of value is supply and demand. BlackRock Financial's
ability to monitor investor flows and frequency and seasonality of issuance is
helpful in anticipating the impact of supply and demand on sectors. BlackRock
Financial believes that the breadth and expertise of its municipal bond team
allows it to anticipate issuance flows, forecast which sectors are likely to
have the most supply and plan its investment strategy accordingly.
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BlackRock Financial also believes that over the long-term, intense credit
analysis will add value and avoid significant relative performance
impairments. The municipal credit team is led by Susan Heide, Ph.D., who is
assisted by five municipal research analysts. Ms. Heide has been managing
director responsible for municipal credit research at BlackRock Financial
since December 15, 1998. Ms. Heide joined BlackRock Financial in 1993 as a
director. The municipal credit team has an average of ten years of experience
in municipal credit research.
BlackRock Financial's approach to credit risk incorporates a combination of
sector-based top-down macro-analysis of industry sectors to determine relative
weightings with an 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 issuer-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 Financial's analytic process focuses on anticipating
changes in credit trends before market recognition. Credit research is a
critical element of BlackRock Financial's municipal process. BlackRock
Financial's yield curve management process involves an evaluation of the
risk/return trade off for bonds having different durations, and selecting
bonds believed to present an attractive yield relative to the degree of
interest rate risk involved.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock Advisors
and the Trust, the Trust has agreed to pay for the services and facilities
provided by BlackRock Advisors a fee, payable monthly in arrears, at an annual
rate equal to .60% of the average weekly value of the Trust's Managed Assets
(the "management fee"). The investment management agreement covers both
investment advisory and administration services. The Trust will reimburse
BlackRock Advisors for all out-of-pocket expenses BlackRock Advisors incurs in
connection with performing administrative services for the Trust. In addition,
with the approval of the board of trustees, a pro rata portion of the
salaries, bonuses, health insurance, retirement benefits and similar
employment costs for the time spent on Trust operations (other than the
provision of services required under the investment management agreement) of
all personnel employed by BlackRock Advisors or BlackRock Financial who devote
substantial time to Trust operations or the operations of other investment
companies advised by the Trust may be reimbursed to BlackRock Advisors or
BlackRock Financial.
Managed Assets are the total assets of the Trust minus the sum of accrued
liabilities (other than indebtedness attributable to leverage). This means
that during periods in which the Trust is using leverage, the fee paid to
BlackRock Advisors will be higher than if the Trust did not use leverage
because the fee is calculated as a percentage of the Trust's Managed Assets,
including those purchased with leverage. From the management fee, BlackRock
Advisors will pay BlackRock Financial, for serving as sub-adviser, a fee equal
to the annual rate of .35% of the average weekly value of the Trust's Managed
Assets.
In addition to the fee of BlackRock Advisors, the Trust pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with BlackRock Advisors), custodian, transfer and
dividend disbursing expenses, legal fees, rating agency fees, expenses of
independent auditors, expenses of repurchasing shares, expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any.
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For the first nine years of the Trust's operations, BlackRock Advisors has
undertaken to waive fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
Percentage Waived
Year Ending (as a percentage of average
December 31, weekly Managed Assets)
------------ ---------------------------
<S> <C>
1999*............................................ .25%
2000............................................. .25%
2001............................................. .25%
2002............................................. .25%
2003............................................. .25%
2004............................................. .25%
2005............................................. .20%
2006............................................. .15%
2007............................................. .10%
2008............................................. .05%
</TABLE>
- --------
* From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the Trust's
fees and expenses beyond December 31, 2008 or after termination of the
investment management agreement.
NET ASSET VALUE
The net asset value of the common shares of the Trust will be computed based
upon the value of the Trust's portfolio securities and other assets. Net asset
value per common share will be determined as of the close of the regular
trading session on the New York Stock Exchange no less frequently than the
last Friday of each week. The Trust calculates net asset value per common
share by subtracting the Trust's liabilities (including accrued expenses,
dividends payable and any borrowings of the Trust) and the liquidation value
of any outstanding shares of preferred stock of the Trust from the Trust's
total assets (the value of the securities the Trust holds plus cash or other
assets, including interest accrued but not yet received) and dividing the
result by the total number of common shares of the Trust outstanding.
The Trust values its fixed income securities by using market quotations,
prices provided by market makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics
in accordance with procedures established by the board of trustees of the
Trust. A substantial portion of the Trust's fixed income investments will be
valued utilizing one or more pricing services approved by the board of
trustees. Debt securities having a remaining maturity of 60 days or less when
purchased and debt securities originally purchased with maturities in excess
of 60 days but which currently have maturities of 60 days or less are valued
at cost adjusted for amortization of premiums and accretion of discounts. Any
securities or other assets for which current market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Trust's board of trustees.
DISTRIBUTIONS
The Trust will distribute to holders of its common shares monthly dividends
of all or a portion of its tax-exempt interest income after payment of
dividends on any Preferred Shares of the Trust which may be outstanding. It is
expected that the initial monthly dividend on shares of the Trust's common
shares will be
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declared approximately 45 days and paid approximately 60 to 90 days after
completion of this offering. The Trust expects that all or a portion of any
capital gain and other taxable income will be distributed once annually.
Various factors will affect the level of the Trust's income, including the
asset mix, the amount of leverage utilized by the Trust and the effects
thereof and the Trust's use of hedging. To permit the Trust to maintain a more
stable monthly distribution, the Trust may from time-to-time distribute less
than the entire amount of tax-exempt interest income earned in a particular
period. The undistributed tax-exempt interest income would be available to
supplement future distributions. As a result, the distributions paid by the
Trust for any particular monthly period may be more or less than the amount of
tax-exempt interest income actually earned by the Trust during the period.
Undistributed tax-exempt interest income will add to the Trust's net asset
value and, correspondingly, distributions from undistributed tax-exempt
interest income will be deducted from the Trust's net asset value. Common
shareholders will automatically have all dividends and distributions
reinvested in common shares of the Trust issued by the Trust or purchased in
the open market in accordance with the Trust's Dividend Reinvestment Plan
unless an election is made to receive cash. See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
Unless you elect to receive cash, all dividends declared for your common
shares of the Trust will be automatically reinvested by State Street Bank and
Trust Company, agent for shareholders in administering the Trust's Dividend
Reinvestment Plan (the "Plan Agent" and the "Plan," respectively), in
additional shares of the Trust. If you elect not to participate in the Plan
you will receive all dividends in cash paid by check mailed directly to you
(or, if the shares are held in street or other nominee name, then to such
nominee) by State Street Bank and Trust Company, as dividend disbursing agent.
You may elect not to participate in the Plan and to receive all dividends in
cash by sending written instructions to State Street Bank and Trust Company,
as dividend disbursing agent, at the address set forth below. Participation in
the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the Plan Agent not less than
ten days prior to any dividend record date; otherwise such termination will be
effective with respect to any subsequently declared dividend.
The Plan Agent will open an account for each common shareholder under the
Plan in the same name that the common shareholder's common shares are
registered. Whenever the Trust declares a dividend payable in cash, non-
participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in common shares. If, on the record date for any
dividend, the net asset value per common share is equal to or less than the
market price per common share, the Plan Agent will invest the dividend amount
on behalf of the participants in common shares newly issued by the Trust at
net asset value. On the other hand, if the net asset value per common share is
greater than the market value, the Plan Agent will invest the dividend amount
on behalf of the participants in common shares acquired in the open-market on
the New York Stock Exchange or elsewhere.
If during the open market purchase period the Plan Agent is unable to invest
the full dividend amount, or if the net asset value per common share becomes
equal to or less than the market price per common share, the Plan Agent may
invest any uninvested portion of the dividend amount in newly issued common
shares at net asset value. It is, nevertheless, possible that, due to changes
in market conditions or net asset value, shares are acquired in the open
market at prices that exceed net asset value.
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The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. Common shares in the
account of each Plan participant will be held by the Plan Agent on behalf of
the Plan participant, and each shareholder proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
under the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of common shares certified from
time to time by the record shareholder's name and held for the account of
beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to common shares issued
directly by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred in connection with open-market purchases. The
automatic reinvestment of dividends will not relieve participants of any
Federal, state or local income tax that may be payable (or required to be
withheld) on such dividends. See "Tax Matters."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan.
There is no direct service charge to participants in the Plan; however, the
Trust reserves the right to amend the Plan to include a service charge payable
by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent
at 225 Franklin Street, Boston, MA 02110.
DESCRIPTION OF SHARES
Common Shares
The Trust is an unincorporated business trust organized under the laws of
Delaware pursuant to an Agreement and Declaration of Trust dated June 17,
1999. The Trust is authorized to issue an unlimited number of common shares of
beneficial interest, par value $0.001 per share. Each common share has one
vote and, when issued and paid for in accordance with the terms of this
offering, will be fully paid and non-assessable. Whenever Preferred Shares are
outstanding, the holders of common shares will not be entitled to receive any
distributions from the Trust unless all accrued dividends on Preferred Shares
have been paid, and unless asset coverage (as defined in the Investment
Company Act) with respect to Preferred Shares would be at least 200% after
giving effect to the distributions. See "--Preferred Shares" below and the
statement of additional information under "Repurchase of Common Shares." All
common shares are equal as to dividends, assets and voting privileges and have
no conversion, preemptive or other subscription rights. The Trust will send
annual and semi-annual reports, including financial statements, to all holders
of its shares.
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The Trust has no present intention of offering any additional shares other
than the Preferred Shares and common shares issued under the Trust's Dividend
Reinvestment Plan. Any additional offerings of shares will require approval by
the Trust's board of trustees. Any additional offering of common shares will
be subject to the requirements of the Investment Company Act, which requires
that shares may not be issued at a price below the then current net asset
value, exclusive of sales load, except in connection with an offering to
existing holders of common shares or with the consent of a majority of the
Trust's outstanding voting securities.
The common shares have been approved for listing on the New York Stock
Exchange subject to official notice of issuance, under the symbol "BSD."
The Trust's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Trust intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
of common shares by the amount of the sales load and organization and offering
expenses paid by the Trust. BlackRock Advisors has agreed to pay all
organizational expenses and offering costs, other than the sales load, that
exceed $0.03 per common share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Trust do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading on the New York Stock Exchange through a
broker or otherwise. Shares of closed-end investment companies frequently
trade on an exchange at prices lower than net asset value. Shares of closed-
end investment companies like the Trust that invest predominately in
investment grade municipal bonds have during some periods traded at prices
higher than net asset value and during other periods have traded at prices
lower than net asset value. Because the market value of the common shares may
be influenced by such factors as dividend levels, which are in turn affected
by expenses; call protection; dividend stability; portfolio credit quality;
net asset value; relative demand for and supply of such shares in the market;
general market and economic conditions; and other factors beyond the control
of the Trust, the Trust cannot assure you that common shares will trade at a
price equal to or higher than net asset value in the future. The common shares
are designed primarily for long-term investors, and you should not purchase
the common shares if you intend to sell them soon after purchase. See
"Preferred Shares and Leverage" and the statement of additional information
under "Repurchase of Common Shares."
Preferred Shares
The Agreement and Declaration of Trust provides that the Trust's board of
trustees may authorize and issue preferred shares, with rights as determined
by the board of trustees, by action by the board of trustees without the
approval of the holders of the common shares. Holders of common shares have no
preemptive right to purchase any preferred shares that might be issued.
The Trust's board of trustees has indicated its intention to authorize an
offering of preferred shares, representing approximately 38% of the Trust's
total assets immediately after the preferred shares are issued, within
approximately one to three months after completion of this offering of common
shares, subject to market conditions and to the board of trustees' continuing
belief that leveraging the Trust's capital structure through the issuance of
preferred shares (the "Preferred Shares") is likely to achieve the potential
benefits to the holders of common shares described in this prospectus. The
Trust may conduct other offerings of Preferred Shares in the future subject to
the same percentage restriction, after giving effect to previously issued
Preferred Shares. The board of trustees also reserves the right to change the
foregoing percentage limitation and may issue Preferred
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<PAGE>
Shares to the extent that the aggregate liquidation preference of all
outstanding Preferred Shares does not exceed 50% of the value of the Trust's
total assets. We cannot assure you, however, that any Preferred Shares will be
issued. Although the terms of any Preferred Shares, including dividend rate,
liquidation preference and redemption provisions, will be determined by the
board of trustees, subject to applicable law and the Agreement and Declaration
of Trust, it is likely that the Preferred Shares will be structured to carry a
relatively short-term dividend rate reflecting interest rates on short-term
tax-exempt debt securities, by providing for the periodic redetermination of
the dividend rate at relatively short intervals through an auction,
remarketing or other procedure. The Trust also believes that it is likely that
the liquidation preference, voting rights and redemption provisions of the
Preferred Shares will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Trust, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per share plus accrued
and unpaid dividends, whether or not declared, before any distribution of
assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Trust.
Voting Rights. The Investment Company Act requires that the holders of any
Preferred Shares, voting separately as a single class, have the right to elect
at least two trustees at all times. In addition, subject to the prior rights,
if any, of the holders of any other class of senior securities outstanding,
the holders of any Preferred Shares have the right to elect a majority of the
trustees of the Trust at any time two years' dividends on any Preferred Shares
are unpaid. The Investment Company Act also requires that, in addition to any
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding Preferred Shares, voting separately
as a class, would be required to (1) adopt any plan of reorganization that
would adversely affect the Preferred Shares, and (2) take any action requiring
a vote of security holders under Section 13(a) of the Investment Company Act,
including, among other things, changes in the Trust's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Conversion to Open- End Trust." As a result of these voting
rights, the Trust's ability to take any such actions may be impeded to the
extent that there are any Preferred Shares outstanding. The board of trustees
presently intends that, except as otherwise indicated in this prospectus and
except as otherwise required by applicable law, holders of Preferred Shares
will have equal voting rights with holders of shares of common shares (one
vote per share, unless otherwise required by the Investment Company Act), and
will vote together with holders of common shares as a single class.
It is presently required that in connection with the election of the Trust's
trustees, on and after issuance of any Preferred Shares, the holders of all
outstanding Preferred Shares, voting as a separate class, would be entitled to
elect two trustees of the Trust, and the remaining trustees would be elected
by holders of common shares and Preferred Shares, voting together as a single
class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights, or
powers, or increase or decrease the number of Preferred Shares. The class vote
of holders of Preferred Shares described above will in each case be in
addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Trust. The terms of
the Preferred Shares are expected to provide that (1) they are redeemable by
the Trust in whole or in part at the original purchase price
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per share plus accrued dividends per share, (2) the Trust may tender for or
purchase Preferred Shares and (3) the Trust may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of Preferred Shares
by the Trust will reduce the leverage applicable to the common shares, while
any resale of shares by the Trust will increase that leverage.
The discussion above describes the present intention of the board of
trustees with respect to an offering of Preferred Shares. If the board of
trustees determines to proceed with such an offering, the terms of the
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Trust's Agreement and Declaration of
Trust. The board of trustees, without the approval of the holders of common
shares, may authorize an offering of Preferred Shares or may determine not to
authorize such an offering, and may fix the terms of the Preferred Shares to
be offered.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Trust or to change the composition of its board of trustees.
This could have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control over the Trust, which attempts
could have the effect of increasing the expenses of the Trust and disrupting
the normal operation of the Trust. The board of trustees is divided into three
classes, with the terms of one class expiring at each annual meeting of
shareholders. At each annual meeting, one class of trustees is elected to a
three-year term. This provision could delay for up to two years the
replacement of a majority of the board of trustees. A trustee may be removed
from office by the action of two-thirds of the remaining trustees or by a vote
of the holders of at least two-thirds of the shares.
In addition, the Trust's Agreement and Declaration of Trust requires the
favorable vote of the holders of at least 75% of the outstanding shares of
each class of the Trust, voting as a class, then entitled to vote to approve,
adopt or authorize certain transactions with five percent-or-greater holders
of a class of shares and their associates, unless two-thirds of the board of
trustees by resolution has approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. For
purposes of these provisions, a five percent-or-greater holder of a class of
shares (a "Principal Shareholder") refers to any person who, whether directly
or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any
class of shares of beneficial interest of the Trust. The transactions subject
to these special approval requirements are:
. 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 million, 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,
of any assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than $1 million, aggregating
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for purposes of such computation all assets sold, leased or exchanged in
any series of similar transactions within a twelve-month period.
The board of trustees has determined that provisions with respect to the
board of trustees and the 75% voting requirements described above, and the
requirements relating to conversion to an open-end trust described below,
which voting requirements are greater than the minimum requirements under
Delaware law or the Investment Company Act, are in the best interest of
shareholders generally. Reference should be made to the Agreement and
Declaration of Trust on file with the Securities and Exchange Commission for
the full text of these provisions.
CLOSED-END TRUST STRUCTURE
The Trust is a newly-organized, diversified management investment company
(commonly referred to as a closed-end fund). Closed-end funds differ from
open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange
and do not redeem their shares at the request of the shareholder. This means
that if you wish to sell your shares of a closed-end fund you must trade them
on the market like any other stock at the prevailing market price at that
time. In a mutual fund, if the shareholder wishes to sell shares of the fund,
the mutual fund will redeem or buy back the shares at "net asset value." Also,
mutual funds generally offer new shares on a continuous basis to new
investors, and closed-end funds generally do not. The continuous inflows and
outflows of assets in a mutual fund can make it difficult to manage the fund's
investments. By comparison, closed-end funds are generally able to stay more
fully invested in securities that are consistent with their investment
objectives, and also have greater flexibility to make certain types of
investments, and to use certain investment strategies, such as financial
leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their net asset
value. Because of this possibility and the recognition that any such discount
may not be in the interest of shareholders, the Trust's board of trustees
might consider from time to time engaging in open market repurchases, tender
offers for shares at net asset value or other programs intended to reduce the
discount. We cannot guarantee or assure, however, that the Trust's board of
trustees will decide to engage in any of these actions. Nor is there any
guarantee or assurance that such actions, if undertaken, would result in the
shares trading at a price equal or close to net asset value per share. The
board of trustees might also consider converting the Trust to an open-end
mutual fund, which would also require a vote of the shareholders of the Trust.
CONVERSION TO OPEN-END TRUST
The Trust may be converted to an open-end investment company at any time by
an amendment to the Agreement and Declaration of Trust. The Agreement and
Declaration of Trust provides that such an amendment must be approved by the
affirmative vote of a majority of trustees then in office and by the holders
of two-thirds of the Trust's outstanding shares, including any Preferred
Shares, entitled to vote on the matter, voting as a single class (or a
majority of such shares if the amendment previously was approved, adopted or
authorized by at least two-thirds of the total number of trustees) and,
assuming the Trust has issued Preferred Shares, by the affirmative vote of a
majority of Preferred Shares, voting as a separate class. Such a vote also
would satisfy a separate requirement in the Investment Company Act that the
change be approved by the shareholders. If approved in the foregoing manner,
conversion of the Trust could not occur until 90 days after the shareholders'
meeting at which such conversion was approved and would also require at least
30 days' prior notice to all shareholders.
28
<PAGE>
Conversion of the Trust to an open-end investment company would require the
redemption of any outstanding Preferred Shares, which could eliminate or alter
the leveraged capital structure of the Trust with respect to the shares.
Following any such conversion, it is also possible that certain of the Trust's
investment policies and strategies would have to be modified to assure
sufficient portfolio liquidity. In the event of conversion, the common shares
would cease to be listed on the New York Stock Exchange or other national
securities exchanges or market systems. Shareholders of an open-end investment
company may require the company to redeem their shares at any time, except in
certain circumstances as authorized by or under the Investment Company Act, at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. The Trust expects to pay all such
redemption requests in cash, but intends to reserve the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Trust were converted to an open-end
fund, it is likely that new shares would be sold at net asset value plus a
sales load. The board of trustees believes, however, that the closed-end
structure is desirable in light of the Trust's investment objectives and
policies. Therefore, you should not assume that it is likely that the board of
trustees would vote to convert the Trust to an open-end fund.
REPURCHASE OF SHARES
Shares of closed-end investment companies often trade at a discount to their
net asset value, and the Trust's common shares may also trade at a discount to
their net asset value, although it is possible that they may trade at a
premium above net asset value. The market price of the Trust's common shares
will be determined by such factors as relative demand for and supply of such
shares in the market, the Trust's net asset value, general market and economic
conditions and other factors beyond the control of the Trust. See "Net Asset
Value." Although the Trust's common shareholders will not have the right to
redeem their common shares, the Trust may take action to repurchase common
shares in the open market or make tender offers for its common shares at their
net asset value. This may have the effect of reducing any market discount from
net asset value.
There is no assurance that, if action is undertaken to repurchase or tender
for common shares, such action will result in the common shares' trading at a
price which approximates their net asset value. Although common share
repurchases and tenders could have a favorable effect on the market price of
the Trust's common shares, you should be aware that the acquisition of common
shares by the Trust will decrease the total assets of the Trust and,
therefore, have the effect of increasing the Trust's expense ratio. Any common
share repurchases or tender offers will be made in accordance with
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the statement of additional information provides
general tax information related to an investment in the common shares. Because
tax laws are complex and often change, you should consult your tax adviser
about the tax consequences of an investment in the Trust.
The Trust primarily invests in municipal bonds issued by states, cities and
local authorities and certain possessions and territories of the United States
(such as Puerto Rico or Guam) or in municipal bonds whose income is otherwise
exempt from regular Federal income tax. Consequently, the regular monthly
dividends you receive will be exempt from regular Federal income taxes. A
portion of these dividends, however, may be subject to the Federal alternative
minimum tax.
29
<PAGE>
Although the Trust does not seek to realize taxable income or capital gains,
the Trust may realize and distribute taxable income or capital gains from time
to time as a result of the Trust's normal investment activities. The Trust
will distribute at least annually any taxable income or realized capital
gains. Distributions of net short-term gains are taxable to you as ordinary
income. Distributions of net long-term capital gains are taxable to you as
long-term capital gain regardless of how long you have owned your common
shares. Dividends will not qualify for a dividends received deduction if you
are a corporate shareholder.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the
source of investment income by state and the portion of income that is subject
to the Federal alternative minimum tax. You will receive this statement from
the firm where you purchased your common shares if you hold your investment in
street name; the Trust will send you this statement if you hold your shares in
registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its earnings and to pay tax-exempt
dividends, the Trust must meet certain requirements that govern the Trust's
sources of income, diversification of assets and distribution of earnings to
shareholders. The Trust intends to meet these requirements. If the Trust
failed to do so, the Trust would be required to pay corporate taxes on its
earnings and your distributions would be taxable as ordinary income to the
extent of earnings and profits. In particular, in order for the Trust to pay
tax-exempt dividends, at least 50% of the value of the Trust's total assets
must consist of tax-exempt obligations each quarter. The Trust intends to meet
this requirement. If the Trust failed to do so, it would not be able to pay
tax-exempt dividends and your distributions attributable to interest received
by the Trust from any source would be taxable as ordinary income.
The Trust may be required to withhold 31% of certain of your dividends if
you have not provided the Trust with your correct taxpayer identification
number (if you are an individual, normally your Social Security number), or if
you are otherwise subject to back-up withholding. If you receive Social
Security benefits, you should be aware that tax-free income is taken into
account in calculating the amount of these benefits that may be subject to
Federal income tax. If you borrow money to buy Trust shares, you may not
deduct the interest on that loan. Under Federal income tax rules, Trust shares
may be treated as having been bought with borrowed money even if the purchase
of the Trust shares cannot be traced directly to borrowed money.
If you are subject to the Federal alternative minimum tax, a portion of your
regular monthly dividends may be subject to such tax.
State and Local Tax Matters
The exemption from Federal income tax for exempt-interest dividends does not
necessarily result in exemption for such dividends under the income or other
tax laws of any state or local taxing authority. In some states, the portion
of any exempt-interest dividend that is derived from interest received by a
regulated investment company on its holdings of that state's securities and
its political subdivisions and instrumentalities is exempt from that state's
income tax. Therefore, the Trust will report annually to its shareholders the
percentage of interest income earned by the Trust during the preceding year on
tax-exempt obligations indicating, on a state-by-state basis, the source of
such income. Shareholders of the Trust are advised to consult with their own
tax advisers about state and local tax matters.
Please refer to the statement of additional information for more detailed
information. You are urged to consult your tax adviser.
30
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in 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
common shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc...........................................
Prudential Securities Incorporated.................................
A.G. Edwards & Sons, Inc...........................................
EVEREN Securities, Inc.............................................
Fahnestock & Co. Inc...............................................
Gruntal & Co., L.L.C...............................................
J.J.B. Hilliard, W.L. Lyons, Inc...................................
Morgan Keegan & Company, Inc.......................................
Raymond James & Associates, Inc....................................
The Robinson-Humphrey Company, LLC.................................
---
Total............................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the common shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the common shares
(other than those covered by the over-allotment option described below) if
they purchase any of the common shares.
The underwriters, for whom Salomon Smith Barney Inc. and Prudential
Securities Incorporated are acting as representatives, propose to offer some
of the common shares directly to the public at the public offering price set
forth on the cover page of this prospectus and some of the common shares to
certain dealers at the public offering price less a concession not in excess
of $0.45 per common share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per common share on sales to
certain other dealers. If all of the common shares are not sold at the initial
offering price, the representatives may change the public offering price and
the other selling terms. The representatives have advised the Trust that the
underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority. Investors must pay for any common
shares purchased on or before August , 1999.
The Trust has granted to the underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to additional common
shares at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional common shares approximately
proportionate to such underwriter's initial purchase commitment.
The Trust, BlackRock Advisors and BlackRock Financial have agreed that, for
a period of 180 days from the date of this prospectus, they will not, without
the prior written consent of Salomon Smith Barney Inc., on behalf of the
underwriters, dispose of or hedge any common shares of the Trust or any
securities convertible into or exchangeable for common shares. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject
to these agreements at any time without notice.
31
<PAGE>
Prior to this offering, there has been no public market for the common
shares. Consequently, the initial public offering price for the common shares
was determined by negotiation among the Trust, BlackRock Advisors and the
representatives. There can be no assurance, however, that the price at which
the common shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the underwriters or that an
active trading market in the common shares will develop and continue after
this offering. The common shares have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance, under the trading
or "ticker" symbol "BSD."
The Trust, BlackRock Advisors and BlackRock Financial have each agreed to
indemnify the several underwriters or contribute to losses arising out of
certain liabilities, including liabilities under the Securities Act.
The Trust has agreed to pay the underwriters $75,000 as partial
reimbursement of expenses incurred in connection with the offering. BlackRock
Advisors has agreed to pay organizational expenses and offering costs (other
than sales load) that exceed $0.03 per share.
In connection with the requirements for listing the Trust's common shares on
the New York Stock Exchange, the underwriters have undertaken to sell lots of
100 or more common shares to a minimum of 2,000 beneficial owners in the
United States. The minimum investment requirement is 100 common shares.
Certain underwriters may make a market in the common shares after trading in
the common shares has commenced on the New York Stock Exchange. No underwriter
is, however, obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of the underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the common shares as a result of any market-
making activities undertaken by any underwriter. This prospectus is to be used
by any underwriter in connection with the offering and, during the period in
which a prospectus must be delivered, with offers and sales of the common
shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The underwriters have advised the Trust that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the common shares at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common shares on behalf
of an underwriter for the purpose of fixing or maintaining the price of the
common shares. A "covering transaction" is a bid for or purchase of the common
shares on behalf of an underwriter to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is a contractual
arrangement whereby if, during a specified period after the issuance of the
common shares, the underwriters purchase common shares in the open market for
the account of the underwriting syndicate and the common shares purchased can
be traced to a particular underwriter or member of the selling group, the
underwriting syndicate may require the underwriter or selling group member in
question to purchase the common shares in question at the cost price to the
syndicate or may recover from (or decline to pay to) the underwriter or
selling group member in question any or all compensation (including, with
respect to a representative, the applicable syndicate management fee)
applicable to the common shares in question. As a result, an underwriter or
selling group member and, in turn, brokers may lose the fees that they
otherwise would have earned from a sale of the common shares if their customer
resells the common shares while the penalty bid is in effect. The underwriters
are not required to engage in any of these activities, and any such
activities, if commenced, may be discontinued at any time.
32
<PAGE>
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of
any underwriter to the Trust, BlackRock Advisors or
BlackRock Financial by notice to the Trust, BlackRock Advisors or BlackRock
Financial if, prior to delivery of and payment for the common shares, (1)
trading in the common shares or securities generally on the New York Stock
Exchange, American Stock Exchange, Nasdaq National Market or the Nasdaq Stock
Market shall have been suspended or materially limited, (2) additional
material governmental restrictions not in force on the date of the
underwriting agreement have been imposed upon trading in securities generally
or a general moratorium on commercial banking activities in New York shall
have been declared by either Federal or state authorities or (3) any outbreak
or material escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions,
occurs, the effect of which is such as to make it, in the judgment of the
representatives, impracticable or inadvisable to commence or continue the
offering of the common shares at the offering price to the public set forth on
the cover page of the prospectus or to enforce contracts for the resale of the
common shares by the underwriters.
The Trust anticipates that from time to time the representatives of the
underwriters and certain other underwriters may act as brokers or dealers in
connection with the execution of the Trust's portfolio transactions after they
have ceased to be underwriters and, subject to certain restrictions, may act
as brokers while they are underwriters.
J.J.B. Hilliard, W.L. Lyons, Inc., one of the underwriters, is an affiliate
of BlackRock Advisors and BlackRock Financial.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, will act as the Trust's Custodian, Transfer Agent and
Dividend Disbursing Agent.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed
upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts, and for the underwriters by Simpson Thacher & Bartlett, New
York, New York.
33
<PAGE>
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Use of Proceeds........................................................... B-3
Investment Objectives and Policies........................................ B-3
Investment Policies and Techniques........................................ B-6
Other Investment Policies and Techniques.................................. B-15
Management of the Trust................................................... B-18
Portfolio Transactions and Brokerage...................................... B-25
Description of Shares..................................................... B-26
Repurchase of Common Shares............................................... B-27
Tax Matters............................................................... B-29
Performance Related and Comparative Information........................... B-33
Experts................................................................... B-35
Additional Information.................................................... B-36
Report of Independent Auditors............................................ B-36
Financial Statements...................................................... B-37
Ratings of Investments (Appendix A)....................................... A-1
Taxable Equivalent Yield Table (Appendix B)............................... B-1
General Characteristics and Risks of Hedging Transactions (Appendix C).... C-1
</TABLE>
You should rely only on the information contained in this prospectus. The
Trust has not authorized anyone to provide you with different information. The
Trust is not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
,000,000 Shares
The BlackRock
Strategic Municipal Trust
Common Shares
--------
PROSPECTUS
August , 1999
--------
Salomon Smith Barney
Book Running Manager
Prudential Securities
Co-Lead Manager
A.G. Edwards & Sons, Inc.
EVEREN Securities, Inc.
Fahnestock & Co. Inc.
Gruntal & Co.
J.J.B. Hilliard, W.L. Lyons, Inc.
Morgan Keegan & Company, Inc.
Raymond James & Associates, Inc.
The Robinson-Humphrey Company
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this statement of additional information is not complete and
may be changed. No person may 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
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 24, 1999
The BlackRock Strategic Municipal Trust
STATEMENT OF ADDITIONAL INFORMATION
The BlackRock Strategic Municipal Trust (the "Trust") is a newly organized,
closed-end, diversified management investment company. This statement of
additional information relating to common shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated August __, 1999. This statement of additional information does not
include all information that a prospective investor should consider before
purchasing common shares, and investors should obtain and read the prospectus
prior to purchasing such shares. A copy of the prospectus may be obtained
without charge by calling (888) 825-2257. You may also obtain a copy of the
prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this statement
of additional information have the meanings ascribed to them in the
prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Use of Proceeds.......................................................... B-3
Investment Objectives and Policies....................................... B-3
Investment Policies and Techniques....................................... B-6
Other Investment Policies and Techniques................................. B-15
Management of the Trust................................................... B-18
Portfolio Transactions and Brokerage..................................... B-25
Description of Shares.................................................... B-26
Repurchase of Common Shares.............................................. B-27
Tax Matters.............................................................. B-29
Performance Related and Comparative Information.......................... B-33
Experts.................................................................. B-35
Additional Information................................................... B-35
Report of Independent Auditors........................................... B-36
Financial Statements..................................................... B-37
Ratings of Investments (Appendix A)...................................... A-1
Taxable Equivalent Yield Table (Appendix B).............................. B-1
General Characteristics and Risks of Hedging Transactions (Appendix C)... C-1
</TABLE>
B-1
<PAGE>
This statement of additional information is dated August __, 1999.
B-2
<PAGE>
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Policies and Techniques--
Investment in Municipal Bonds--Portfolio Investments," the income on which is
subject to regular Federal income tax and securities of other open- or closed-
end investment companies that invest primarily in municipal bonds of the type in
which the Trust may invest directly.
INVESTMENT OBJECTIVES AND POLICIES
The Trust has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of Federal tax law, and the Trust expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. Common shares therefore would not ordinarily be a suitable investment
for investors who are subject to the Federal alternative minimum tax or who
would become subject to such tax by purchasing common shares. The suitability of
an investment in common shares will depend upon a comparison of the after-tax
yield likely to be provided from the Trust with that from comparable tax-exempt
investments not subject to the alternative minimum tax, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding common
shares and Preferred Shares, if any, 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;
B-3
<PAGE>
(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 objectives and policies or the
entry into repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent that
in connection with the disposition of portfolio securities or the sale
of its own securities the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other than municipal
bonds secured by real estate or interests therein; provided that the
Trust may hold and sell any real estate acquired in connection with
its investment in portfolio securities; or
(6) purchase or sell commodities or commodity contracts for any purposes
except as, and to the extent, permitted by applicable law without the
Trust becoming subject to registration with the Commodities Futures
Trading Commission as a commodity pool.
When used with respect to particular shares of the Trust, "majority of the
outstanding" means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or (ii) more than 50% of the outstanding shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1)
above, securities of the U.S. Government, its agencies, or instrumentalities,
and securities backed by the credit of a governmental entity are not considered
to represent industries. However, obligations backed only by the assets and
revenues of non-governmental users may for this purpose be deemed to be issued
by such non-governmental users. Thus, the 25% limitation would apply to such
obligations. It is nonetheless possible that the Trust may invest more than 25%
of its total assets in a broader economic sector of the market for municipal
obligations, such as revenue obligations of hospitals and other health care
facilities or electrical utility revenue obligations. The Trust reserves the
right to invest more than 25% of its assets in industrial development bonds and
private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1)
above, an 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
B-4
<PAGE>
or letter of credit, such a guarantee or letter of credit would be considered a
separate security and would be treated as an issue of such government, other
entity or bank. When a municipal bond is insured by bond insurance, it shall not
be considered a security that is issued or guaranteed by the insurer; instead,
the issuer of such municipal bond will be determined in accordance with the
principles set forth above. The foregoing restrictions do not limit the
percentage of the Trust's assets that may be invested in municipal bonds insured
by any given insurer.
Under the Investment Company Act of 1940, the Trust may invest only up to
10% of its total assets in the aggregate in shares of other investment companies
and only up to 5% of its total assets in any one investment company, provided
the investment does not represent more than 3% of the voting stock of the
acquired investment company at the time such shares are purchased. As a
shareholder in any investment company, the Trust will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Trust's advisory fees and 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, giving effect to such sale,
the market value of all securities sold short does not exceed 25% of
the value of the Trust's total assets and the Trust's aggregate short
sales of a particular class of securities does not exceed 25% of the
then outstanding securities of that class. The Trust may also make
short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Trust owns or
has the immediate and unconditional right to acquire at no additional
cost the identical security.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act or any exemptive
relief obtained thereunder.
(3) Purchase securities of companies for the purpose of exercising
control.
(4) Invest in inverse floating rate securities (which are securities that
pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
B-5
<PAGE>
(5) Invest more than 5% of total Trust assets in securities of any one
issuer, except that this limitation does not apply to bonds issued by
the United States Government, its agencies and instrumentalities or to
the investment of 25% of the Trust's total assets.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
In addition, to comply with Federal tax requirements for qualification as a
"regulated investment company," the Trust's investments will be limited in a
manner such that at the close of each quarter of each fiscal year, (a) no more
than 25% of the Trust's total assets are invested in the securities of a single
issuer and (b) with regard to at least 50% of the Trust's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
These tax-related limitations may be changed by the Trustees to the extent
appropriate in light of changes to applicable tax requirements.
The Trust intends to apply for ratings for the Preferred Shares from
Moody's and/or S&P. In order to obtain and maintain the required ratings, the
Trust will be required to comply with investment quality, diversification and
other guidelines established by Moody's or S&P Ratings Services. Such guidelines
will likely be more restrictive than the restrictions set forth above. The Trust
does not anticipate that such guidelines would have a material adverse effect on
the Trust's holders of common shares or its ability to achieve its investment
objectives. The Trust presently anticipates that any Preferred Shares that it
intends to issue would be initially given the highest ratings by Moody's (Aaa)
or by S&P (AAA), but no assurance can be given that such ratings will be
obtained. No minimum rating is required for the issuance of Preferred Shares by
the Trust. Moody's and S&P receive fees in connection with their ratings
issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trust's
investment objectives, policies and techniques that are described in the
prospectus.
Investment in Municipal Bonds
Portfolio Investments
The Trust will invest its net assets primarily in municipal bonds that pay
interest that is exempt from regular Federal income tax.
Issuers of bonds rated Ba/BB or B are regarded as having current capacity
to make principal and interest payments but are subject to business, financial
or economic conditions which could adversely affect such payment capacity.
Municipal bonds rated Baa
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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 Financial's research and analysis when investing in
these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Trust will primarily invest in municipal bonds with long-term
maturities in order to maintain a dollar weighted average maturity of 15-30
years, but the dollar 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
Financial'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
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municipal commercial paper. The Trust will invest only in taxable temporary
investments which are U.S. Government securities or securities rated within the
highest grade by Moody's, S&P or Fitch, and which mature within one year from
the date of purchase or carry a variable or floating rate of interest. See
Appendix A for a general description of Moody's, S&P's and Fitch's ratings of
securities in such categories. Taxable temporary investments of the Trust may
include certificates of deposit issued by U.S. banks with assets of at least $1
billion, or commercial paper or corporate notes, bonds or debentures with a
remaining maturity of one year or less, or repurchase agreements. See "Other
Investment Policies and Techniques--Repurchase Agreements." To the extent the
Trust invests in taxable investments, the Trust will not at such times be in a
position to achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and the Trust will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Also included within the general category of municipal bonds described in
the prospectus are participations in lease obligations or installment purchase
contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Trust's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Trust will only
purchase Municipal Lease Obligations where BlackRock Financial believes the
issuer has a strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
In addition to the types of municipal bonds described in the prospectus,
the Trust may invest in other securities that pay interest that is or make
other distributions that are exempt from regular federal income tax, regardless
of the technical legal structure of the issuer or the instrument. The Trust
treats all of such tax-exempt securities as municipal bonds.
Short-Term Investments
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Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested,
the Trust may invest up to 100% of its total assets in cash equivalents and
short-term taxable fixed-income securities, although the Trust intends to invest
in taxable short-term investments only in the event that suitable tax-exempt
short-term investments are not available at reasonable prices and yields. Short-
term taxable fixed income investments are defined to include, without
limitation, the following:
(1) U.S. government securities, including bills, notes and bonds differing
as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include
securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small
Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Certificates of deposit purchased by the Trust
may not be fully insured by the FDIC.
(3) Repurchase agreements, which involve purchases of debt securities. At
the time the Trust purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back
the securities at a fixed price and time. This assures a predetermined
yield for the Trust during its holding period, since the resale price
is always greater than the purchase price and reflects an agreed-upon
market rate. Such actions afford an opportunity for the Trust to
invest temporarily available cash. The Trust
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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 Financial 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 Financial does
so in an effort to determine that the value of the collateral always
equals or exceeds the agreed-upon repurchase price to be paid to the
Trust. If the seller were to be subject to a Federal bankruptcy
proceeding, the ability of the Trust to liquidate the collateral could
be delayed or impaired because of certain provisions of the bankruptcy
laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Trust and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Trust at any time. BlackRock Financial 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.
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Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities on municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or tax-exempt money market
indices.
While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are available
in the marketplace and the Trust may invest in such other types of notes to the
extent permitted under its investment objectives, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management techniques and
instruments. The Trust may purchase and sell futures contracts, enter into
various
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interest rate transactions and may purchase and sell exchange-listed and
over-the-counter put and call options on securities, financial indices and
futures contracts (collectively, "Additional Investment Management Techniques").
These Additional Investment Management Techniques may be used for duration
management and other risk management to attempt to protect against possible
changes in the market value of the Trust's portfolio resulting from trends in
the debt securities markets and changes in interest rates, to protect the
Trust's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to establish a position in
the securities markets as a temporary substitute for purchasing particular
securities and to enhance income or gain. There is no particular strategy that
requires use of one technique rather than another as the decision to use any
particular strategy or instrument is a function of market conditions and the
composition of the portfolio. The Additional Investment Management Techniques
are described below. The ability of the Trust to use them successfully will
depend on BlackRock Financial's ability to predict pertinent market movements as
well as sufficient correlation among the instruments, which cannot be assured.
Inasmuch as any obligations of the Trust that arise from the use of Additional
Investment Management Techniques will be covered by segregated liquid high grade
assets or offsetting transactions, the Trust and BlackRock Financial believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to its borrowing restrictions. Commodity options and
futures contracts regulated by the Commodity Futures Trading Commission (the
"CFTC") have specific margin requirements described below and are not treated as
senior securities. The use of certain Additional Investment Management
Techniques may give rise to taxable income and have certain other consequences.
See "Tax Matters."
Interest Rate Transactions. The Trust may enter into interest rate swaps
and the purchase or sale of interest rate caps and floors. The Trust expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities the
Trust anticipates purchasing at a later date. The Trust will ordinarily use
these transactions as a hedge or for duration or risk management although it is
permitted to enter into them to enhance income or gain. The Trust will not sell
interest rate caps or floors that it does not own. Interest rate swaps involve
the exchange by the Trust with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments on the payment dates. The
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Trust will accrue the net amount of the excess, if any, of the Trust's
obligations over its entitlements with respect to each interest rate swap on a
daily basis and will segregate with a custodian an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least equal
to the accrued excess. The Trust will not enter into any interest rate swap, cap
or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest rating category of at
least one nationally recognized statistical rating organization at the time of
entering into such transaction. If there is a default by the other party to such
a transaction, the Trust will have contractual remedies pursuant to the
agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Trust may also
enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will ordinarily engage in such transactions only
for bona fide hedging, risk management (including duration management) and other
portfolio management purposes. However, the Trust is also permitted to enter
into such transactions for non-hedging purposes to enhance income or gain, in
accordance with the rules and regulations of the CFTC, which currently provide
that no such transaction may be entered into if at such time more than 5% of the
Trust's net assets would be posted as initial margin and premiums with respect
to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Trust may sell or
purchase call options ("calls") on municipal bonds and indices based upon the
prices of future contracts and debt securities that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets. A call gives
the purchaser of the option the right to buy, and obligates the seller to sell,
the underlying security, futures contract or index at the exercise price at any
time or at a specified time during the option period. All such calls sold by the
Trust must be "covered" as long as the call is outstanding (i.e., the Trust must
own the securities or futures contract subject to the call or other securities
acceptable for applicable escrow requirements). A call sold by the Trust exposes
the Trust during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security, index or
futures contract and may require the Trust to hold a security of futures
contract which it might otherwise have sold. The purchase of a call gives the
Trust the right to buy a security, futures contract or index at a fixed price.
Calls on futures on municipal bonds must also be covered by deliverable
securities or the futures contract or by liquid high grade debt securities
segregated to satisfy the Trust's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may purchase
put options ("puts") that relate to municipal bonds (whether or not it holds
such securities in its portfolio), indices or futures contracts. The Trust may
also sell puts on municipal bonds, indices or futures contracts on such
securities if the Trust's contingent obligations on such puts are secured by
segregated assets consisting of cash or liquid high grade debt securities having
a value not less than the exercise price.
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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.
Appendix C contains further information about the characteristics, risks
and possible benefits of Additional Investment Management Techniques and the
Trust's other policies and limitations (which are not fundamental policies)
relating to investment in futures contracts and options. The principal risks
relating to the use of futures contracts and other Additional Investment
Management Techniques are: (a) less than perfect correlation between the prices
of the instrument and the market value of the securities in the Trust's
portfolio; (b) possible lack of a liquid secondary market for closing out a
position in such instruments; (c) losses resulting from interest rate or other
market movements not anticipated by the adviser; and (d) the obligation to meet
additional variation margin or other payment requirements, all of which could
result in the Trust being in a worse position than if such techniques had not
been used.
Certain provisions of the Internal Revenue Code of 1986 may restrict or
affect the ability of the Trust to engage in Additional Investment Management
Techniques. See "Tax Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a
transaction in which the Trust sells a security it does not own in anticipation
that the market price of that security will decline. The Trust may make short
sales to hedge positions, for duration and risk management, in order to maintain
portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Trust may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities. The Trust will also be
required to segregate similar collateral with its custodian to the extent, if
any, necessary so that the aggregate collateral value is at all times at least
equal to the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Trust on such security,
the Trust may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Trust replaces the borrowed security, the Trust will
incur a loss;
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conversely, if the price declines, the Trust will realize a gain. Any gain will
be decreased, and any loss increased, by the transaction costs described above.
Although the Trust's gain is limited to the price at which it sold the security
short, its potential loss is theoretically unlimited.
The Trust will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Trust's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Trust
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the Trust owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid securities are
subject to legal or contractual restrictions on disposition or lack an
established secondary trading market. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar securities
that are not subject to restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis and may
purchase or sell municipal bonds on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Trust will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. If the Trust
disposes of the right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward commitment, it
can incur a gain or loss. At the time the Trust entered into a transaction on a
when-issued or forward commitment basis, it will segregate with its custodian
cash or other liquid high grade debt securities with a value not less than the
value of the when-issued or forward commitment securities. The value of these
assets will be monitored daily to ensure that their marked to market value will
at all times equal or exceed the corresponding obligations of the Trust. There
is always a risk that the securities may not be delivered and that the Trust may
incur a loss. Settlements in the ordinary course, which typically occur monthly
for mortgage-related securities, are not treated by the Trust as when-issued or
forward commitment transactions and accordingly are not subject to the foregoing
restrictions.
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Borrowing
Although it has no present intention of doing so, the Trust reserves the
right to borrow funds to the extent permitted as described under the caption
"Investment Objectives and Policies--Investment Limitations." The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investing and repurchases of shares of the Trust. Borrowing is a form
of leverage and, in that respect, entails risks comparable to those associated
with the issuance of Preferred Shares.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein
and in the prospectus. 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 its custodian containing liquid instruments having a
value not less than the repurchase price (including accrued interest). If the
Trust establishes and maintains such a segregated account, a reverse repurchase
agreement will not be considered a borrowing by the Trust; however, under
circumstances in which the Trust does not establish and maintain such a
segregated account, such reverse repurchase agreement will be considered a
borrowing for the purpose of the Trust's limitation on borrowings. The use by
the Trust of reverse repurchase agreements involves many of the same risks of
leverage since the proceeds derived from such reverse repurchase agreements may
be invested in additional securities. Reverse repurchase agreements involve the
risk that the market value of the securities acquired in connection with the
reverse repurchase agreement may decline below the price of the securities the
Trust has sold but is obligated to repurchase. Also, reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Trust in connection with the reverse repurchase agreement
may decline 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
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the repurchase contract. Income generated from transactions in repurchase
agreements will be taxable. See "Tax Matters" for information relating to the
allocation of taxable income between common shares and Preferred Shares, if any.
The Trust will only enter into repurchase agreements with registered securities
dealers or domestic banks that, in the opinion of BlackRock Financial, present
minimal credit risk. The risk to the Trust is limited to the ability of the
issuer to pay the agreed-upon repurchase price on the delivery date; however,
although the value of the underlying collateral at the time the transaction is
entered into always equals or exceeds the agreed-upon repurchase price, if the
value of the collateral declines there is a risk of loss of both principal and
interest. In the event of default, the collateral may be sold but the Trust
might incur a loss if the value of the collateral declines, and might incur
disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Trust may be
delayed or limited. BlackRock Financial 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 Advisors
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 that meet certain creditworthiness standards. By lending
its portfolio securities, the Trust attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that may occur during the term of the loan will be for the
account of the Trust. The Trust may lend its portfolio securities so long as the
terms and the structure of such loans are not inconsistent with the requirements
of the Investment Company Act, which currently require that (a) the borrower
pledge and maintain with the Trust collateral consisting of cash, a letter of
credit issued by a domestic U.S. bank, or securities issued or guaranteed by the
U.S. government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is "marked to
the market" on a daily basis), (c) the loan be made subject to termination by
the Trust at any time and (d) the Trust receive reasonable interest on the
B-17
<PAGE>
loan (which may include the Trust's investing any cash collateral in interest
bearing short-term investments), any distributions on the loaned securities and
any increase in their market value. The Trust will not lend portfolio securities
if, as a result, the aggregate value of such loans exceeds 33 1/3% of the value
of the Trust's total assets (including such loans). Loan arrangements made by
the Trust will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange. All relevant facts and
circumstances, including the creditworthiness of the Qualified Institution, will
be monitored by the Adviser, and will be considered in making decisions with
respect to lending of securities, subject to review by the Trust's board of
trustees.
The Trust may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Trust's board of trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting such
a loan, the loan must be called and the securities voted.
MANAGEMENT OF THE TRUST
Investment Advisory Agreement
Although BlackRock Advisors intends to devote such time and effort to the
business of the Trust as is reasonably necessary to perform its duties to the
Trust, the services of BlackRock Advisors are not exclusive and BlackRock
Advisors provides similar services to other investment companies and other
clients and may engage in other activities.
The investment management agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, BlackRock Advisors is not liable to the Trust or any of
the Trust's shareholders for any act or omission by BlackRock Advisors in the
supervision or management of its respective investment activities or for any
loss sustained by the Trust or the Trust's shareholders and provides for
indemnification by the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain limitations and
conditions.
The investment management agreement was approved by the Trust's board of
trustees, on August 19, 1999, including a majority of the trustees who are not
parties to the agreement or interested persons of any such party (as such term
is defined in the Investment Company Act). The investment management agreement
was approved by the sole common shareholder of the Trust on August 23, 1999. 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
B-18
<PAGE>
the Investment Company Act) and (2) by the vote of a majority of the trustees
who are not parties to the 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 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, on 60 days' written notice by either party to the other. The
advisory 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
Subadviser is a wholly-owned subsidiary of BlackRock Advisors. Pursuant
to the sub-investment advisory agreement, BlackRock Advisors has appointed
BlackRock Financial, one of its affiliates, to handle the day-to-day investment
management of the Trust. BlackRock Financial will receive a portion of the
advisory fee paid by the Trust to BlackRock Advisors. From the management fee,
BlackRock Advisors will pay BlackRock Financial, for serving as sub-adviser, a
fee equal to an annual rate of .35% of the average weekly value of the Trust's
Managed Assets.
The sub-investment advisory agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or disregard of its obligations
thereunder, BlackRock Financial is not liable to the Trust or any of the Trust's
shareholders for any act or omission by BlackRock Financial 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 indemnification by the
Trust of BlackRock Financial, 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.
Although BlackRock Financial 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 are not exclusive and BlackRock
Financial 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 August 19, 1999, 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 on August 23, 1999.
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 such term is defined in
B-19
<PAGE>
the Investment Company Act) and (2) by the vote of a majority of the trustees,
who are not parties to such agreement for 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 by BlackRock Financial, on 60 days' written
notice by either party to the other. The sub-investment advisory agreement will
terminate automatically upon any termination of the advisory agreement between
the Trust and BlackRock Advisors. The sub-investment advisory agreement will
also terminate automatically in the event of its assignment (as such term is
defined in the Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day to day operations. The officers
are directly responsible to the Trust's board of trustees which sets broad
policies for the Trust and chooses its officers. The following is a list of the
trustees and officers of the Trust and a brief statement of their present
positions and principal occupations during the past five years. Trustees who are
interested persons of the Trust (as defined in the Investment Company Act) are
denoted by an asterisk (*). The business address of the Trust, BlackRock
Advisors, BlackRock Financial and their board members and officers is 345 Park
Avenue, New York, New York 10154, unless specified otherwise below. The trustees
listed below are either trustees or directors of other closed-end funds in which
BlackRock Advisors acts as investment adviser.
<TABLE>
<CAPTION>
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
- -------------------------- ---------- ---------------------------------------
<S> <C> <C>
Andrew F. Brimmer Trustee President of Brimmer & Company, Inc.,
4400 MacArthur Blvd., N.W. a Washington, D.C.-based economic and
Suite 302 financial consulting firm. Director of
Washington, DC 20007 AirBorne Express, CarrAmerica Realty
Age: 72 Corporation and Borg-Warner Automotive.
Formerly member of the Board of
Governors of the Federal Reserve System.
Formerly Director of BankAmerica
Corporation (Bank of America), BellSouth
Corporation, College Retirement Equities
Fund (Trustee), Commodity Exchange,
Inc. (Public Governor), Connecticut
Mutual Life Insurance Company, E.I. du
Pont de Nemours & Company, Electronic
Realty Associates, Equitable Life
Assurance Society of the United States,
Gannett Company (publishing), MNC
Financial Corporation (American Security
Bank), NMC Capital Management, Navistar
International Corporation (truck
manufacturing) and UAL Corporation
(United Airlines).
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
- -------------------------- ---------- ---------------------------------------
<S> <C> <C>
Richard E. Cavanagh Trustee President and Chief Executive Officer
845 Third Avenue of The Conference Board, Inc., a leading
New York, NY 10022 global business membership organization
Age: 52 from 1995-present. Former Executive Dean
of the John F. Kennedy School of
Government at Harvard University from
1988-1995. Acting Director, Harvard
Center for Business and Government (1991-
1993). Formerly Partner (principal) of
McKinsey & Company, Inc. (1980-1988).
Former Executive Director of Federal
Cash Management, White House Office of
Management and Budget (1977-1979). Co-
author, THE WINNING PERFORMANCE (best
selling management book published in 13
national editions). Trustee, Wesleyan
University, Drucker Foundation and
Educational Testing Services (ETS).
Director, Arch Chemicals (chemicals),
Fremont Group (investments) and
The Guardian Life Insurance Company of
America (insurance).
Kent Dixon Trustee Consultant/Investor. Former President
9495 Blind Pass Road and Chief Executive Officer of Empire
Unit #602 Federal Savings Bank of America and
St. Petersburg, FL 33706 Banc PLUS Savings Association, former
Age: 61 Chairman of the Board, President and
Chief Executive Officer of Northeast
Savings. Former Director of ISFA (the
owner of INVEST, a national securities
brokerage service designed for banks
and thrift institutions).
Frank J. Fabozzi Trustee Consultant. Editor of THE JOURNAL OF
858 Tower View Circle PORTFOLIO MANAGEMENT and Adjunct
New Hope, PA 18938 Professor of Finance at the School of
Age: 50 Management at Yale University. Director,
Guardian Mutual Trusts 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.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
- -------------------------- ---------- ---------------------------------------
<S> <C> <C>
Laurence D. Fink* Trustee Chairman and Chief Executive Officer of
Age: 45 BlackRock Financial Management, Inc.
since March 1998. Formerly a 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 (December
1980-March 1988). Currently, Chairman of
the Board and Director of each of
BlackRock Financial's Trusts and
Anthracite Capital, Inc. and as Director
of BlackRock Trust Investors I,
BlackRock Trust Investors II, BlackRock
Trust Investors III, BlackRock Asset
Investors and BlackRock MQE Investors
Trustee of New York University Medical
Center, Dwight Englewood School,
National Outdoor Leadership School and
Phoenix House. A Director of VIMRx
Pharmaceuticals, Inc. and Innovir
Laboratories, Inc.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John E. Anderson
P.O. Box 1595 Graduate School of Management,
Pauma Valley, CA 92061 University of California since July 1,
Age: 69 1993. Director, Imperial Credit
Industries (mortgage banking), Jacobs
Engineering Group, Inc., Rockwell
International Corporation, Payden &
Rygel Investment Trust (mutual trust),
Provident Investment Counsel Trusts
(investment companies), Timken Company
(roller bearing and steel) and Motor
Cargo Industries (transportation).
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.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
- -------------------------- ---------- ---------------------------------------
<S> <C> <C>
Walter F. Mondale Trustee Partner, Dorsey & Whitney, a law firm
220 South Sixth Street (December 1996-present, September 1987-
Minneapolis, MN 55402 August 1993). Formerly U.S. Ambassador
Age: 70 to Japan (1993-1996). Formerly Vice
President of the United States, U.S.
Senator and Attorney General of the
State of Minnesota. 1984 Democratic
Nominee for President of the United
States.
Ralph L. Schlosstein* Trustee President of BlackRock Financial since
Age: 47 and March 1988. Formerly a Managing Director
President of Lehman Brothers, Inc. and co-head of
its Mortgage and Savings Institutional
Group. Currently President of each of
the closed-end funds in which BlackRock
Financial acts as investment adviser.
Trustee of Denison University and New
Visions for Public Education in New York
City. A Director of the Pulte
Corporation and a member of the Visiting
Board of Overseers of the John F.
Kennedy School of Government at Harvard
University.
Keith T. Anderson Vice Managing Director of BlackRock Financial
Age: 39 President since April 1988. From February 1987 to
April 1988, Vice President at The First
Boston Corporation in the Fixed Income
Research Department. Previously Vice
President and Senior Portfolio Manager
at Criterion Investment Management
Company (now Nicholas-Applegate).
Henry Gabbay Treasurer Managing Director and Chief Operating
Age: 51 Officer of BlackRock Financial since
February 1989. From September 1984 to
February 1989, Vice President at The
First Boston Corporation.
Robert S. Kapito Vice Managing Director and Vice Chairman of
Age: 41 President BlackRock Financial since March 1988.
Formerly Vice President at The First
Boston Corporation in the Mortgage
Products Group (from December 1985 to
March 1988).
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
- -------------------------- ---------- ---------------------------------------
<S> <C> <C>
James Kong Assistant Managing Director of BlackRock Financial
Age: 38 Treasurer since January 1991. From April 1987 to
April 1989, Assistant Vice President at
The First Boston Corporation in the
CMO/ABO Administration Department.
Previously affiliated with Deloitte
Haskins & Sells (now Deloitte & Touche
LLP).
Karen H. Sabath Secretary Managing Director of BlackRock Financial
Age: 34 since August 1988. From June 1986 to
July 1988, Associate at The First Boston
Corporation in the Mortgage Finance
Department. From August 1988 to December
1992, Associate Vice President of
BlackRock Advisors.
Michael C. Huebsch Vice Managing Director of the Adviser since
Age: 40 President January 1989. From July 1985 to January
1989, Vice President at The First Boston
Corporation in the Fixed Income Research
Department.
Kevin Klingert Vice Managing Director of the Adviser since
Age: 36 President October 1991. From March 1985 to October
1991, Assistant Vice President at
Merrill Lynch, Pierce, Fenner & Smith in
the Unit Investment Trust Department.
Richard Shea, Esq. Vice Director of BlackRock Financial since
Age: 39 President/ February 1993. From December 1988 to
Tax February 1993, Associate Vice President
and Tax Counsel at Prudential Securities
Incorporated. From August 1984 to
December 1988, Senior Tax Specialist at
Laventhol & Horwath.
</TABLE>
Prior to this offering, all of the outstanding shares of the Trust were owned by
BlackRock Advisors.
No officer or employee of the Trust receives any compensation from the Trust for
serving as an officer or trustee of the Trust. The Trust pays each trustee who
is not an "interested person" of the Trust (as defined in the Investment Company
Act) $6,000 per year plus $1,500 per board meeting attended in person or by
telephone for travel and out-of-pocket expenses.
The aggregate estimated compensation received by each current trustee of the
Trust for the fiscal year ending December 31, 1999 and the aggregate estimated
compensation to be received by each current trustee of the BlackRock family of
funds for the fiscal year ending December 31, 1999 as a whole are estimated as
follows:
B-24
<PAGE>
<TABLE>
<CAPTION>
1999 Estimated
Aggregate Estimated Total Compensation from
Compensation From the Trust and Fund
Name of Board Member Trust Complex Paid to Board Member*
- ----------------------- ------------------ ----------------------------------
<S> <C> <C>
Andrew R. Brimmer............ $ 6,000 $ 160,000
Richard E. Cavanagh.......... $ 6,000 $ 160,000
Kent Dixon................... $ 6,000 $ 160,000
Frank J. Fabozzi............. $ 6,000 $ 160,000
Laurence D. Fink............. $ 0 $ 0
James Clayburn LaForce, Jr... $ 6,000 $ 160,000
Ralph L. Schlosstein......... $ 0 $ 0
Walter F. Mondale............ $ 6,000 $ 160,000
</TABLE>
- -----------
* The BlackRock family of funds consists of 21 closed-end funds. Total
compensation from the Trust and Fund complex paid to each board member is
capped at $160,000; Trustee fees paid by the Trust are reduced based on the
Trust's relative net asset value in the event that the cap is applicable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BlackRock Financial is responsible for decisions to buy and sell securities
for the Trust, the selection of brokers and dealers to effect the transactions
and the negotiation of prices and any brokerage commissions. The securities in
which the Trust invests are traded principally in the over-the-counter market.
In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although price of the security usually includes a mark-up to the
dealer. Securities purchased in underwritten offerings generally include, in the
price, a fixed amount of compensation for the manager(s), underwriter(s) and
dealer(s). The Trust may also purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid. Purchases
and sales of debt securities on a stock exchange are effected through brokers
who charge a commission for their services.
BlackRock Financial is responsible for effecting securities transactions of
the Trust and will do so in a manner deemed fair and reasonable to shareholders
of the Trust and not according to any formula. BlackRock Financial's primary
considerations in selecting the manner of executing securities transactions for
the Trust will be prompt execution of orders, the size and breadth of the market
for the security, the reliability, integrity and financial condition and
execution capability of the firm, the size of the difficulty in executing the
order, and the best net price. There are many instances when, in the judgment of
BlackRock Financial, 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
B-25
<PAGE>
the policy of BlackRock Financial, absent special circumstances, to pay higher
commissions to a firm because it has supplied such research or other
services.
BlackRock Financial is able to fulfill its obligations to furnish a
continuous investment program to the Trust without receiving such information
from brokers; however, it considers access to such information to be an
important element of financial management. Although such information is
considered useful, its value is not determinable, as it must be reviewed and
assimilated by BlackRock Financial, and does not reduce BlackRock Financial's
normal research activities in rendering investment advice. It is possible that
BlackRock Financial'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 BlackRock
Financial manages may own from time to time some of the same investments as the
Trust. Investment decisions for the Trust are made independently from those of
such other investment companies or accounts; however, from time to time, the
same investment decision may be made for more than one company or account. When
two or more companies or accounts seek to purchase or sell the same securities,
the securities actually purchased or sold will be allocated among the companies
and accounts on a good faith equitable basis by BlackRock Financial in its
discretion in accordance with the accounts' various investment objectives. In
some cases, this system may adversely affect the price or size of the position
obtainable for the Trust. In other cases, however, the ability of the Trust to
participate in volume transactions may produce better execution for the Trust.
It is the opinion of the Trust's board of trustees that this advantage, when
combined with the other benefits available due to BlackRock Financial's
organization, outweighs any disadvantages that may be said to exist from
exposure to simultaneous transactions.
Although the investment management agreement contains no restrictions on
portfolio turnover, it is not the Trust's policy to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Trust will be approximately 100%
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rates, actual turnover may be
higher or lower. Higher portfolio turnover results in increased Trust expenses,
including brokerage commissions, dealer mark-ups and other transaction costs on
the sale of securities and on the reinvestment in other securities.
DESCRIPTION OF SHARES
Common Shares
The Trust intends to hold annual meetings of shareholders so long as the
common shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
Preferred Shares
B-26
<PAGE>
Although the terms of the Preferred Shares, including their dividend rate,
voting rights, liquidation preference and redemption provisions, will be
determined by the board of trustees (subject to applicable law and the Trust's
Agreement and Declaration of Trust) when it authorizes a Preferred Shares
offering, the Trust currently expects that the preference on distributions,
liquidation preference, voting rights and redemption provisions of the Preferred
Shares will likely be as stated in the prospectus.
If the board of trustees determines to proceed with an offering of
Preferred Shares, the terms of the Preferred Shares may be the same as, or
different from, the terms described in the prospectus, subject to applicable law
and the Trust's Agreement and Declaration of Trust. The board of trustees,
without the approval of the holders of common shares, may authorize an offering
of Preferred Shares or may determine not to authorize such an offering, and may
fix the terms of the preferred shares to be offered.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its shareholders
will not have the right to cause the Trust to redeem their shares. Instead, the
Trust's common shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Trust's board of trustees may consider action that might be taken to reduce
or eliminate any material discount from net asset value in respect of common
shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Trust to an open-end investment company. The
board of trustees may not decide to take any of these actions. In addition,
there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred
Shares are outstanding, the Trust may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accrued Preferred Shares dividends have
been paid and (2) at the time of such purchase, redemption or acquisition, the
net asset value of the Trust's portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares on the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by the Trust will be borne by the Trust and will not
reduce the stated consideration to be paid to tendering shareholders.
B-27
<PAGE>
Subject to its investment limitations, the Trust may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Trust
in anticipation of share repurchases or tenders will reduce the Trust's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Trust's board of trustees would have to comply with the Securities
Exchange Act of 1934 and the Investment Company Act and the rules and
regulations under each of those Acts.
Although the decision to take action in response to a discount from net
asset value will be made by the board of trustees at the time it considers such
issue, it is the board's present policy, which may be changed by the board of
trustees, not to authorize repurchases of common shares or a tender offer for
such shares if (1) such transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange, or (b) impair
the Trust's status as a regulated investment company under the Internal Revenue
Code of 1986 (which would make the Trust a taxable entity, causing the Trust's
income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Trust) or as a registered closed-end
investment company under the Investment Company Act; (2) the Trust would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Trust's investment objectives and policies in order to repurchase shares; or
(3) there is, in the board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Trust, (b) general suspension of or
limitation on prices for trading securities on the New York Stock Exchange, (c)
declaration of a banking moratorium by Federal or state authorities or any
suspension of payment by United States banks in which the Trust invests, (d)
material limitation affecting the Trust or the issuers of its portfolio
securities by Federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Trust or its shareholders if shares were repurchased. The board of trustees may
in the future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Trust's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Trust's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Trust may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Trust of its common shares will decrease the
Trust's total assets which would likely have the effect of increasing the
Trust's expense ratio. Any purchase by the Trust of its common shares at a time
when Preferred Shares are outstanding will increase the leverage applicable to
the outstanding common shares then remaining.
B-28
<PAGE>
Before deciding whether to take any action if the common shares trade below
net asset value, the Trust's board of trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Trust's portfolio, the impact of any action that might be taken
on the Trust or its shareholders and market considerations. Based on these
considerations, even if the Trust's shares should trade at a discount, the board
of trustees may determine that, in the interest of the Trust and its
shareholders, no action should be taken.
TAX MATTERS
Federal Income Tax Matters
The following discussion of Federal income tax matters is based upon the
advice of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the
Trust.
The Trust intends to qualify under Subchapter M of the Internal Revenue
Code of 1986, as amended, for tax treatment as a regulated investment company.
In order to qualify as a regulated investment company, the Trust must satisfy
certain requirements relating to the source of its income, diversification of
its assets, and distributions of its income to its shareholders. First, the
Trust must derive at least 90% of its annual gross income (including tax-exempt
interest) from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including but not limited to gains from options and
futures) derived with respect to its business of investing in such stock,
securities or currencies (the "90% gross income test"). Second, the Trust must
diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets is comprised of cash,
cash items, United States Government securities, securities of other regulated
investment companies and other securities limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the Trust's total
assets and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the total assets is invested
in the securities of any one issuer (other than United States Government
securities and securities of other regulated investment companies) or two or
more issuers controlled by the Trust and engaged in the same, similar or related
trades or business .
As a regulated investment company, the Trust will not be subject to Federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of net
long-term capital loss, and any other taxable income other than "net capital
gain" (as defined below) and is reduced by deductible expenses) and (ii) its net
tax-exempt interest (the excess of its gross tax-exempt interest income over
certain disallowed deductions). The Trust may retain for investment its net
capital gain (which consists of the excess of its net long-term capital gain
over its net short-term capital loss). However, if the Trust retains any net
capital gain or any
B-29
<PAGE>
investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If the Trust retains any net capital
gain, it may designate the retained amount as undistributed capital gains in a
notice to its holders of common shares who, if subject to Federal income tax on
long-term capital gains, (i) will be required to include in income for Federal
income tax purposes, as long-term capital gain, their share of such
undistributed amount and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Trust against their Federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For Federal income tax purposes, the tax basis of shares owned by a
holder of common shares of the Trust will be increased by an amount equal under
current law to the difference between the amount of undistributed capital gains
included in the holders of common shares' gross income and the tax deemed paid
by the holders of common shares under clause (ii) of the preceding sentence. The
Trust intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
Distributions by the Trust of investment company taxable income, if any,
will be taxable to shareholders as ordinary income whether received in cash or
additional shares. Any net capital gain realized by the Trust and distributed to
shareholders in cash or additional shares will be taxable to shareholders as
long-term capital gain regardless of the length of time investors have owned
shares of the Trust. Distributions by the Trust that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholders' tax basis in
his or her shares. Any excess will be treated as gain from the sale of his or
her shares, as discussed below.
If the Trust engages in hedging transactions involving financial futures
and options, these transactions will be subject to special tax rules, the effect
of which may be to accelerate income to the Trust, defer the Trust's losses,
cause adjustments in the holding periods of the Trust's securities, convert
long-term capital gains into short-term capital gains and convert short-term
capital losses into long-term capital losses. These rules could therefore affect
the amount, timing and character of distributions to holders of common shares.
Prior to purchasing shares in the Trust, an investor should carefully
consider the impact of dividends which are expected to be or have been declared,
but not paid. Any dividend declared shortly after a purchase of such shares
prior to the record date will have the effect of reducing the per share net
asset value by the per share amount of the dividend.
B-30
<PAGE>
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to holders of
common shares of record on a specified date in one of those months and paid
during the following January, will be treated as having been distributed by the
Trust (and received by the holder of common shares) on December 31.
The Trust intends to invest in sufficient tax-exempt municipal securities
to permit payment of "tax-exempt dividends" (as defined in the Internal Revenue
Code of 1986, as amended). Except as provided below, exempt-interest dividends
paid to holders of common shares are not includable in the holder's gross income
for Federal income tax purposes.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. To the
extent the Trust receives income treated as tax preference items for purposes of
the Federal alternative minimum tax, a portion of the dividends paid by it,
although otherwise exempt from Federal income tax, will be taxable to holders of
common shares to the extent that their tax liability is determined under the
Federal alternative minimum tax. The Trust will annually supply holders of
common shares with reports indicating the amount and nature of all income
distributed to them as well as the percentage of Trust income attributable to
tax preference items subject to the Federal alternative minimum tax.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the Federal alternative minimum tax on individuals and corporations.
The Trust may invest a portion of its assets in municipal securities subject to
this provision so that a portion of its exempt-interest dividends is an item of
tax preference to the extent such dividends represent interest received from
these private-activity bonds. Accordingly, investment in the Trust could cause a
holder of common shares to be subject to, or result in an increased liability
under, the Federal alternative minimum tax.
For corporations, Federal alternative minimum taxable income is increased
by 75% of the difference between an alternative measure of income ("adjusted
current earnings") and the amount otherwise determined to be the alternative
minimum taxable income. Interest on municipal bonds, and therefore all exempt-
interest dividends received from the Trust, are included in calculating adjusted
current earnings.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to Federal income tax.
Although exempt-interest dividends generally may be treated by holders of
common shares as items of interest excluded from their gross income, each holder
is advised to consult his tax adviser with respect to whether exempt-interest
dividends retain their exclusion if the shareholder would be treated as a
"substantial user," or a "related person" of a substantial user, of the
facilities financed with respect to any of the tax-exempt obligations held by
the Trust. "Substantial user" is defined under the Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of the facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the useable area of the
facilities or from whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
natural persons, affiliated corporations, a partnership and its partners and an
S corporation and its shareholders.
B-31
<PAGE>
The redemption or exchange of common shares normally will result in capital
gain or loss to the holders of common shares. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities will be taxed
at a maximum rate of 20%, while net short-term capital gains and other ordinary
income will be taxed at a maximum rate of 39.6%. Because of the limitations on
itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.
All or a portion of a sales charge paid in purchasing common shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
common shares or shares of another fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. In addition, no
loss will be allowed on the redemption or exchange of common shares if the
shareholder purchases other shares of the Trust (whether through reinvestment of
distributions or otherwise) or the shareholder acquires or enters into a
contract or option to acquire securities that are substantially identical to
shares of the Trust within a period of 61 days beginning 30 days before and
ending 30 days after such redemption or exchange. If disallowed, the loss will
be reflected in an adjustment to the basis of the shares acquired. Further, any
losses realized on the sale or exchange of common shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends received
with respect to such common shares and, if not disallowed, such losses will be
treated as long-term capital losses to the extent of any capital gain dividends
received with respect to such common shares.
In order to avoid a 4% Federal excise tax, the Trust must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and any excess of realized capital gains over
realized capital losses for the prior year that was not distributed during such
year and on which the Trust paid no Federal income tax. For purposes of the
excise tax, a regulated investment company may reduce its capital gain net
income (but not below its net capital gain) by the amount of any net ordinary
loss for the calendar year. The Trust intends to make timely distributions in
compliance with these requirements and consequently it is anticipated that it
generally will not be required to pay the excise tax.
B-32
<PAGE>
If in any year the Trust should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Trust would incur a regular
corporate Federal income tax upon its income for that year, and distributions to
its shareholders would be taxable to shareholders as ordinary dividend income
for Federal income tax purposes to the extent of the Trust's earnings and
profits.
The Trust is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate shareholders who have
not furnished to the Trust their correct taxpayer identification number (in the
case of individuals, their Social Security number) and certain certifications,
or who are otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Internal Revenue Code of 1986, as amended, and the Treasury Regulations
presently in effect as they directly govern the taxation of the Trust and its
shareholders. For complete provisions, reference should be made to the pertinent
sections of the Internal Revenue Code of 1986, as amended, and Treasury
Regulations. The Internal Revenue Code of 1986, as amended, and the Treasury
Regulations are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Trust transactions. Holders
of common shares are advised to consult their own tax advisers for more detailed
information concerning the Federal taxation of the Trust and the income tax
consequences to its holders of common shares.
State Tax Matters
The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any state or local taxing authority. Some states exempt from state
income tax that portion of any exempt-interest dividend that is derived from
interest received by a regulated investment company on its holdings of
securities of that state and its political subdivisions and instrumentalities.
Therefore, the Trust will report annually to its holders of common shares the
percentage of interest income earned by the Trust during the preceding year on
tax-exempt obligations indicating, on a state-by-state basis, the source of such
income. Shareholders of the Trust are advised to consult with their own tax
advisers about state and local tax matters.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Trust may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of the Trust to an alternative investment
should be made with consideration of differences in features and expected
performance. The Trust may obtain data from sources or reporting services, such
as Bloomberg Financial ("Bloomberg") and Lipper that the Trust believes to be
generally accurate.
B-33
<PAGE>
Past performance is not indicative of future results. At the time holders
of common shares sell their shares, they may be worth more or less than their
original investment.
An analysis of national closed-end municipal funds represented in the
Lipper General Municipal Closed-End Fund category shows a positive correlation
between higher annualized dividends and higher market prices as of June 30,
1999. The Trust is designed to provide investors with higher, tax-free
dividends.*
The Trust's management has agreed to reduce expenses over the first nine
years by waiving certain fees. This may enable the Trust to pay higher common
share dividends, even though the Trust will have a lower net asset value than a
no-load fund. The Trust expects that, for the first five years of operation, its
expenses will be lower than those of many comparable funds, allowing investors
to receive a larger portion of the Trust's income.
Of course, there can be no assurance that the relationship between the
market price and dividend level of closed-end funds shown below will continue in
the future, or that the Trust's common shares will trade at the same level as
other funds paying the same dividend level.
<TABLE>
<CAPTION>
1 YRS
06/30/1998
06/30/1999
Fund Latest
Name Mkt Inc Divs
<S> <C> <C>
General Muni Debt Funds (Leveraged)
ACM Muni Secs Income 13.56 0.9425
American Muni Income 13.13 0.75343
Blackrock Inv Qual Muni 14.25 0.8439
Duff & Phelps Util Tx-Fr 16.5 0.96
Investment Grd Muni Inc 15.19 0.9
Kemper Muni Income Tr 15.39 1.0575
MSDW Muni Prem Inc 12.84 0.79875
MSDW Quality Muni Inc 14.69 0.93
MSDW Quality Muni Inv 14.19 0.915
MSDW Quality Muni Sec 13.06 0.7725
Municipal Advantage Fund 12.88 0.798
Municipal Partners Fund 13.5 0.798
Municipal Partners II 12.56 0.75
Muniholdings 14.56 0.97066
Muniholdings II 13.31 0.82935
Munivest Fund 13.965 0.895005
Munivest Fund II 13.19 0.82078
Muniyield Fund 14.44 0.96264
Muniyield Quality 13.56 0.86867
Muniyield Quality II 13 0.87197
Nuveen Invmnt Qual Muni 15.19 0.9625
Nuveen Muni Advant 15.69 0.996
Nuveen Muni Mkt Opp 15.94 1.008
Nuveen Perf Pls Muni 14.88 0.912
Nuveen Prem Inc Muni 14.19 0.855
Nuveen Prem Inc Muni 2 15.81 0.933
Nuveen Prem Inc Muni 4 14.31 0.8235
Nuveen Premier Muni Inc 15.25 0.9685
Nuveen Qual Inc Muni 16 1.026
Nuveen Sel Qual Muni 15 0.954
Putnam Inv GD Muni II 14.81 0.96
Putnam Inv GD Muni III 12.94 0.8004
Putnam Inv Grade Muni 14.81 0.96
Putnam Muni Oppty Trust 14.63 0.9087
Van Kampen Adv Muni II 12.63 0.744
Van Kampen Adv Muni Inc 15.06 0.9
Van Kampen Inv Grd Muni 13.05 0.84562
Van Kampen Muni Inc Tr 13.99 0.96
Van Kampen Muni Oppty II 13.13 0.78
Van Kampen Muni Oppty Tr 15.31 0.9
Van Kampen Muni Trust 15.69 0.96
Van Kampen Select Sector 12.13 0.72
Van Kampen Strat Sector 13.06 0.78
Van Kampen Tr Inv Grd 15.75 0.99
Van Kampen Val Muni Inc 13.69 0.81
</TABLE>
Source: Lipper, Inc.
*Monthly dividends are free from regular Federal income tax, but a substantial
portion of dividends may be subject to the Federal alternative minimum tax,
state and local taxes. Capital gains will be subject to capital gains
taxes.
Past performance does not guarantee future results. For illustrative
purposes share prices and dividends for each fund have been normalized as
necessary to calibrate each fund's offering price with the Fund's $15.00 initial
public offering price.
The Trust expects that, for the first five years of operation, its
expenses will be lower than those of many comparable funds, allowing investors
to receive a larger portion of the Trust's income.
Market price is affected by many factors, including market interest rates,
income tax rates, the common shares' net asset value and dividend stability, the
portfolio's duration, call protection and credit quality, analyst
recommendations and other market factors. Any of these factors individually or
collectively may at any given time be as or more important to market price than
annualized dividend rates. A positive correlation does not necessarily mean that
higher dividends cause or result in higher market prices, and you should not
assume that any particular level of dividends will result in any particular
market price. What's more, the positive correlation between dividends and market
price of this particular group of funds does not necessarily mean that every
fund in the group exhibits a positive correlation between dividend and market
price, and, in fact it is possible that the Trust will not exhibit such a
correlation. There can be no assurance that the correlation illustrated by the
data above will continue in the future.
B-34
<PAGE>
The structure of closed-end funds contains several important features for
investing in municipal bonds. Closed-end funds are generally able to remain more
fully invested because they are not subject to daily asset inflows and outflows
and have greater flexibility for utilizing a leveraged capital structure. These
characteristics of closed-end funds can provide greater flexibility in portfolio
management and the potential for higher yields. The use of leverage may cause
investors to receive a larger return or loss than may be received from a similar
investment that is not leveraged.
<TABLE>
<CAPTION>
Lipper Closed-End Lipper Open-End 30-Year U.S.
Municipal Fund General Municipal Treasury
Average (Leveraged) Fund Average Bond
------------------- ----------------- ------------
<S> <C> <C> <C>
Current Yield 6.15% 4.57% 5.97%
Current Taxable
Equivalent Yield 10.18% 7.57% 5.97%
</TABLE>
Source: Lipper, Inc. Yields for the Lipper Closed-End General Municipal Fund
Average (Leveraged) and the Lipper Open-End General Municipal Fund Average are
as of June 30, 1999. U.S. Yield for the funds included in the Lipper Closed-End
Municipal Fund Average are calculated based on market prices. Treasury yield
source is Bloomberg Inc. Current Taxable Equivalent Yields are calculated by
assuming a maximum 39.6% tax rate and do not take into account state and local
taxes or the alternative minimum tax. It is not possible to invest directly in
an average or index. The Trust will not seek to match the composition or
performance of any such indices or averages. Performance of the various indices
should not be viewed as indicative of the performance of the Trust.
EXPERTS
The Statement of Assets and Liabilities of the Trust as of August 19, 1999
and statement of operations for the period then ended appearing in this
statement of additional information has been audited by Deloitte & 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 & Touche LLP, located
at 200 Berkeley Street, Boston, Massachusetts, provides auditing services to the
Trust.
B-35
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Trust with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. The
prospectus and this statement of additional information do not contain all of
the information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Trust and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the prospectus and this statement of additional
information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of The BlackRock Strategic Municipal Trust
We have audited the accompanying statement of assets and liabilities of The
BlackRock Strategic Municipal Trust (the Trust) as of August 19, 1999, and the
related statement of operations for the period then ended. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The BlackRock Strategic Municipal Trust as
of August 19, 1999, and the results of its operations for the period then ended
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
August 20, 1999
B-36
<PAGE>
THE BLACKROCK STRATEGIC MUNICIPAL TRUST
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 19, 1999
<TABLE>
<S> <C>
ASSETS:
Cash $ 100,003
Receivable from Investment Adviser (Note 3) 25,000
------------
Total Assets 125,003
------------
LIABILITIES:
Organization costs payable 25,000
------------
Net Assets $ 100,003
============
Net assets per share, equivalent to 6,981 shares of beneficial interest
issued and outstanding, par value $0.001 unlimited shares authorized $ 14.33
============
STATEMENT OF OPERATIONS
For the period June 17, 1999 (inception) to August 19, 1999
Investment Income $ -
------------
Expenses
Organization expenses 25,000
------------
Total expenses before reimbursement 25,000
Reimbursement from BlackRock Advisors, Inc (Note 3) (25,000)
------------
Total expenses after reimbursement -
Net investment income -
Net change in net assets resulting from operations $ -
============
</TABLE>
Note 1. Organization
The BlackRock Strategic Municipal Trust (the "Trust") was organized as a
Delaware business trust on June 17, 1999 and is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940. The Trust has had no operations other than the sale to BlackRock Advisors,
Inc. of 6,981 shares of beneficial interest for $100,003.
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 Advisory Fee") at an annual rate of 0.60% of the average weekly
value of the Trust's Managed Assets. From such Investment Advisory Fee,
BlackRock Advisors, Inc. will pay BlackRock for serving as sub-adviser, a fee
equal to an annual rate of 0.35% of the average weekly value of the Trust's
Managed Assets.
BlackRock Advisors, Inc. has undertaken to waive receipt of a portion of fees or
other payments from the Trust to which it is entitled in the amounts, and for
the time periods, set forth below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Percentage Waived
(as a percentage
Year Ending of average weekly
December 31, Managed Assets)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999* .................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2000...................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2001...................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2002...................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2003...................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2004...................................................................................... .25%
- -------------------------------------------------------------------------------------------------------------------------
2005...................................................................................... .20%
- -------------------------------------------------------------------------------------------------------------------------
2006...................................................................................... .15%
- -------------------------------------------------------------------------------------------------------------------------
2007...................................................................................... .10%
- -------------------------------------------------------------------------------------------------------------------------
2008...................................................................................... .05%
- -------------------------------------------------------------------------------------------------------------------------
* From the commencement of operations.
</TABLE>
BlackRock Advisors, Inc. has not undertaken to waive any amount after December
31, 2008.
Note 3. Organization and Offering Costs
Organization Expenses of $25,000 will be reimbursed by BlackRock Advisors, Inc.
Offering Costs, limited to $0.03 per share, will be charged to capital upon the
sale of shares of beneficial interest. Offering costs in excess of $0.03 per
share will be reimbursed by BlackRock Advisors, Inc.
B-37
<PAGE>
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
Long Term Debt
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
A-1
<PAGE>
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. "BB" indicates the least degree of speculation and "C" the highest.
While such debt will likely have some quality and protective characteristics
these are outweighed by major uncertainties or major exposures to adverse
conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
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.
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.
CC Debt rated "CC" has a current high vulnerability to default.
C The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
A-2
<PAGE>
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.
The "C" subscript is used to provide additional information to investors that
the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment grade level and/or
the issuer's bonds are deemed taxable.
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.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming
investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three 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).
A-3
<PAGE>
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, it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than 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 vulnerable and having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-4
<PAGE>
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
A-5
<PAGE>
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con(...) Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
category from Aa to B in the public finance sectors. The modifier 1
indicates that the issuer is in the higher end of its letter rating
category; the modifier 2 indicates a mid-range ranking; the modifier 3
indicates that the issuer is in the lower end of the letter ranking
category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity
support or demonstrated broadbased access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well-established.
A-6
<PAGE>
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
ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
A-7
<PAGE>
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of
adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are
not investment grade.
B Highly speculative. 'B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. A
'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or full
recovery in a
A-8
<PAGE>
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be
estimated with any precision, the following serve as general
guidelines. 'DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued
interest. 'DD' indicates potential recoveries in the range
of 50%-90%, and 'D' the lowest recovery potential, i.e.,
below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated 'DDD' have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities
rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated 'D' have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
A-9
<PAGE>
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' long-term rating
category, to categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert 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. RatingAlert is typically resolved over a relatively short
period.
A-10
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to
earn on a taxable investment in order to equal a stated tax-free yield on a
municipal investment. To assist you to more easily compare municipal investments
like the Trust with taxable alternative investments, the table below presents
the taxable equivalent yields for a range of hypothetical tax-free yields and
tax rates:
Taxable Equivalent of Tax-Free Yields
Tax-Free Yield
Your Tax A Tax-Exempt Yield of
Bracket 5.00% 5.50% 6.00% 6.50% 7.00%
Equals a Taxable Investment Yielding
- --------------------------------------------------------------------------------
15.00% 5.88% 6.47% 7.06% 7.65% 8.24%
- --------------------------------------------------------------------------------
28.00% 6.94% 7.64% 8.33% 9.03% 9.72%
- --------------------------------------------------------------------------------
31.00% 7.25% 7.97% 8.70% 9.42% 10.14%
- --------------------------------------------------------------------------------
36.00% 7.81% 8.59% 9.38% 10.16% 10.94%
- --------------------------------------------------------------------------------
39.60% 8.28% 9.11% 9.93% 10.76% 11.59%
- --------------------------------------------------------------------------------
The tax-exempt yields shown above are for illustration purposes only and do not
represent or predict the tax-exempt yield of the Trust. The tax rates shown are
based on 1999 Federal income tax rates for joint returns. Your clients' actual
rates will vary depending on their income, exemptions and deductions. The table
does not take into account the effect of state or local taxes or the alternative
minimum tax. Investors are urged to consult with their tax advisers for more
information.
B-1
<PAGE>
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, including
management, or to enhance income or gain as described in the prospectus, the
Trust will engage in Additional Investment Management Techniques. The Trust will
engage in such activities in the Adviser's discretion, and may not necessarily
be engaging in such activities when movements in interest rates that could
affect the value of the assets of the Trust occur. The Trust's ability to pursue
certain of these strategies may be limited by applicable regulations of the
CFTC. Certain Additional Investment Management Techniques may give rise to
taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on bond
indices ("index options"). Index options are similar to options on securities
except that, rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index options gives the holder the
right to receive cash upon exercise of the option if the level of the bond index
upon which the option is based is greater, in the case of a call, or less, in
the case of a put, than the exercise price of the option. The purchase of a put
option on a debt security could protect the Trust's holdings in a security or a
number of securities against a substantial decline in the market value. A call
option gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the exercise price during
the option period or for a specified period prior to a fixed date. The purchase
of a call option on a security could protect the Trust against an increase in
the price of a security that it intended to purchase in the future. In the case
of either put or call options that it has purchased, if the option expires
without being sold or exercised, the Trust will experience a loss in the amount
of the option premium plus any related commissions. When the Trust sells put and
call options, it receives a premium as the seller of the option. The premium
that the Trust receives for selling the option will serve as a partial hedge, in
the amount of the option premium, against changes in the value of the securities
in its portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on the
sale of the option. The Trust is authorized to purchase and sell exchange listed
options and over-the-counter options ("OTC Options") which are privately
negotiated with the counterparty. Listed options are issued by the Options
Clearing
C-1
<PAGE>
Corporation ("OCC") which guarantees the performance of the obligations of the
parties to such options.
The Trust's ability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC options are
purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Trust. With
OTC Options, such variables as expiration date, exercise price and premium will
be agreed upon between the Trust and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails to
make or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Trust would lose the premium paid for the option as well as any
anticipated benefit of the transaction. As the Trust must rely on the credit
quality of the counterparty rather than the guarantee of the OCC, it will only
enter into OTC options with counterparties with the highest long-term credit
ratings, and with primary United States government securities dealers recognized
by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or purchase
put and call options on such futures as a hedge against anticipated interest
rate changes or other market movements. The sale of a futures contract creates
an obligation by the Trust, as seller, to deliver the specific type of financial
instrument called for in the contract at a specified future time for a specified
price. Options on futures contracts are similar to options on securities except
that an option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put).
C-2
<PAGE>
Margin Requirements. At the time a futures contract is purchased or sold,
the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Trust will pay may
range from approximately 1% to approximately 5% of the value of the securities
or commodities underlying the contract. In certain circumstances, however, such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily and the payment in case of
"variation margin" may be required, a process known as "marking to the market."
Transactions in listed options and futures are usually settled by entering into
an offsetting transaction, and are subject to the risk that the position may not
be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use of
futures and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the CFTC.
Under such regulations the Trust currently may enter into such transactions
without limit for bona fide hedging purposes, including risk management and
duration management and other portfolio strategies. The Trust may also engage in
transactions in futures contracts or related options for non-hedging purposes to
enhance income or gain provided that the Trust will not enter into a futures
contract or related option (except for closing transactions) for purposes other
than bona fide hedging, or risk management including duration management if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Trust's
liquidation value, i.e., net assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. Also,
when required, a segregated account of cash equivalents will be maintained and
marked to market on a daily basis in an amount equal to the market value of the
contract. The Trust reserves the right to comply with such different standard as
may be established from time to time by CFTC rules and regulations with respect
to the purchase or sale of futures contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, short sales, reverse repurchase agreements and dollar
rolls, and listed or OTC options on securities, indices and futures contracts
sold by the Trust are generally subject to segregation and coverage requirements
of either the CFTC or the SEC, with the result that, if the Trust does not hold
the security or futures contract underlying the instrument, the Trust will be
required to segregate on an ongoing basis with its custodian, cash, U.S.
government securities, or other liquid high grade debt obligations in an amount
at least equal to the Trust's obligations with respect to such instruments. Such
amounts fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it would
otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
C-3
<PAGE>
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Trust's position. The same is true for
such instruments entered into for income or gain. In addition, certain
instruments and markets may not be liquid in all circumstances. As a result, in
volatile markets, the Trust may not be able to close out a transaction without
incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments predominantly for hedging should tend to
minimize the risk of loss due to a decline in the value of the position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Trust to successfully
utilize Additional Investment Management Techniques will depend on the Adviser's
ability to predict pertinent market movements and sufficient correlations, which
cannot be assured. Finally, the daily deposit requirements in futures contracts
that the Trust has sold create an ongoing greater potential financial risk than
do options transactions, where the exposure is limited to the cost of the
initial premium. Losses due to the use of Additional Investment Management
Techniques will reduce net asset value.
C-4
<PAGE>
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STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
___________, 1999
<PAGE>
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits
- -------------------------------------------
<S> <C> <C>
(1) Financial Statements
--------------------
Part A - None.
Part B - Report of Independent Accountants.
Statement of Assets and Liabilities.
Statement of Operations.
(2) Exhibits:
---------
(a) Agreement and Declaration of Trust.1
(b) By-Laws.1
(c) Inapplicable.
(d) Form of Specimen Certificate.3
(e) Form of Automatic Dividend Reinvestment Plan.3
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.3
(g)(2) Form of Sub-Advisory Agreement.3
(h)(1) Form of Underwriting Agreement.3
(h)(2) Form of Master Agreement among Underwriters.3
(h)(3) Form of Salomon Smith Barney Inc. Dealer Letter Agreement.3
(i) Inapplicable
(j) Form of Custodian Agreement.3
(k) Form of Registrar, Transfer Agency and Service Agreement.3
(l) Opinion and Consent of Counsel to the Trust.
(m) Inapplicable.
(n) Consent of Independent Public Accountants.
(o) Inapplicable.
(p) Initial Subscription Agreement.2
(q) Inapplicable.
(r) Inapplicable.
(s) Power of Attorney.2
</TABLE>
- -----------
1 Incorporated by reference to the Trust's Registration Statement on Form
N-2 (File Nos. 333-81331 and 811-09401), filed on June 22, 1999.
2 Incorporated by reference to the Trust's Registration Statement on Form
N-2 (File Nos. 333-81331 and 811-09401), filed on July 29, 1999.
3 Incorporated by reference to the Trust's Registration Statement on Form
N-2 (File Nos. 333-81331 and 811-09401), filed on August 19, 1999.
Item 25. Marketing Arrangements
See Sections 2 and 3 of the Form of Underwriting Agreement incorporated by
reference to the Trust's Registration Statement.
See Sections 5(m) of the Form of Underwriting Agreement incorporated by
reference to the Trust's Registration Statement.
See Sections 1, 5, 6 and 7 of the Form of Master Agreement among
Underwriters incorporated by reference to the Trust's Registration
Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this registration statement:
Registration fees............................... $ 33,360
New York Stock Exchange listing fee............. 95,100*
Printing (other than certificates).............. 111,000*
Engraving and printing certificates............. 11,000*
Fees and expenses of qualification under
state securities laws (excluding fees
of counsel)................................... 4,000*
Accounting fees and expenses.................... 25,000*
Legal fees and expenses......................... 150,000*
NASD fee........................................ 12,500
Underwriter Reimbursement....................... 75,000*
Miscellaneous................................... 40,000*
Total..................................... $ 556,960*, **
* Estimated.
** BlackRock Advisors, Inc. has agreed to pay all organizational costs and
offering costs (other than sales load) that exceed $0.03 per common share.
C-1
<PAGE>
Item 27. Persons Controlled by or under Common Control with the Registrant
Not Applicable
Item 28. Number of Holders of Shares
Number of
Title of class Record Holders
- -------------- --------------
Shares of Beneficial Interest 1
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust provides as
follows:
Section 5.1. No Shareholder of the Trust shall be subject in such capacity
to any personal liability whatsoever to any Person in connection with Trust
property or the acts, obligations or affairs of the Trust. Shareholders shall
have the same limitation of personal liability as is extended to stockholders of
a private corporation for profit incorporated under the general corporation law
of the State of Delaware. No Trustee or officer of the Trust shall be subject in
such capacity to any personal liability whatsoever to any Person, other than the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only liability to the Trust or its Shareholders arising from bad
faith, willful misfeasance, gross negligence (negligence in the case of those
Trustees or officers who are directors, officers or employees of the Trust's
investment advisor ("Affiliated Indemnitees")) or reckless disregard for his
duty to such person; and, subject to the foregoing exception, all such persons
shall look solely to the Trust property for satisfaction of claims of any nature
arising in connection with the affairs of the Trust. If any shareholder, trustee
or officer, as such, of the Trust, is made a party to any suit or proceeding to
enforce any such liability, subject to the foregoing exception, he shall not, on
account thereof, be held to any personal liability.
Section 5.2. a. The Trust hereby agrees to indemnify the Trustees and
officers of the Trust (each such person being an "indemnitee") against any
liabilities and expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and reasonable counsel fees reasonably
incurred by such indemnitee in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this Section 5.2 by
reason of his having acted in any such capacity, except with respect to any
matter as to which he shall not have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or, in the case of
any criminal proceeding, as to which he shall have had reasonable cause to
believe that the conduct was unlawful, provided, however, that no indemnitee
shall be indemnified hereunder against any liability to any person or any
expense of such indemnitee arising by reason of (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence (negligence in the case of Affiliated
Indemnitees), or (iv) reckless disregard of the duties involved in the conduct
of his position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily
prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory
only if the prosecution of such action, suit or other proceeding by such
indemnitee was authorized by a majority of the Trustees.
b. Notwithstanding the foregoing, no indemnification shall be
made hereunder unless there has been a determination (i) by a final decision on
the merits by a court or other body of competent jurisdiction before whom the
issue of entitlement to indemnification hereunder was brought that such
indemnitee is entitled to indemnification hereunder or, (ii) in the absence of
such a decision, by (1) a majority vote of a quorum of those trustees who are
neither "interested persons" (as defined in Section 2(a)(19) of the
Investment Company Act of 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 conclude that the indemnitee should be entitled to indemnification
hereunder. All determinations to make advance payments in connection with the
expense of defending any
C-2
<PAGE>
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
c. The Trust shall make advance payments in connection with
the expenses of defending any action with respect to which indemnification might
be sought hereunder if the Trust receives a written affirmation by the
indemnitee of the indemnitee's good faith belief that the standards of conduct
necessary for indemnification have been met and a written undertaking to
reimburse the Trust unless it is subsequently determined that he is entitled to
such indemnification and if a majority of the Trustees determine that the
applicable standards of conduct necessary for indemnification appear to have
been met. In addition, at least one of the following conditions must be met: (i)
the indemnitee shall provide adequate security for his undertaking, (ii) the
Trust shall be insured against losses arising by reason of any lawful advances,
or (iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
d. The rights accruing to any indemnitee under these
provisions shall not exclude any other right to which he may be lawfully
entitled.
e. Subject to any limitations provided by the Investment
Company Act of 1940 Act and this Declaration, the Trust shall have the power and
authority to indemnify other Persons providing services to the Trust to the full
extent provided by law as if the Trust were a corporation organized under the
Delaware General Corporation Law provided that such indemnification has been
approved by a majority of the Trustees.
Insofar as indemnification for liabilities arising under the Act, may be
permitted to Trustees, officers and controlling persons of the Trust, pursuant
to the foregoing provisions or otherwise, the Trust has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. Reference is made to Section 8 of the
underwriting agreement attached as Exhibit (h)(1), which is incorporated herein
by reference.
Item 30. Business and Other Connections of Investment Adviser
Reference is made to the current Form ADV filed under the Investment
Advisors Act of 1940 incorporated herein by reference for each of BlackRock
Advisors, Inc. and BlackRock Financial Management, Inc.
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., 345 Park Avenue,
New York, New York 10154 and at the offices of State Street Bank and Trust
Company, the Registrant's Custodian, Transfer Agent and Dividend Disbursing
Agent, 225 Franklin Street, Boston, Massachusetts 02110.
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
C-3
<PAGE>
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted form the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497 (h) under the Securities
Act of 1933 shall be deemed to be part of the Registration Statement as of the
time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-4
<PAGE>
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 23rd day of
August 1999.
/s/ Ralph L. Schlosstein*
---------------------------------
Ralph L. Schlosstein
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities on the 23rd day of August 1999.
<TABLE>
<CAPTION>
Name Title
<S> <C>
/s/ Andrew F. Brimmer* Trustee
- --------------------------------
Andrew F. Brimmer
/s/ Richard E. Cavanagh* Trustee
- --------------------------------
Richard E. Cavanagh
/s/ Kent Dixon* Trustee
- --------------------------------
Kent Dixon
/s/ Frank J. Fabozzi* Trustee
- --------------------------------
Frank J. Fabozzi
/s/ Laurence D. Fink* Trustee
- --------------------------------
Laurence D. Fink
/s/ James Clayburn LaForce, Jr.* Trustee
- --------------------------------
James Clayburn LaForce, Jr.
/s/ Walter F. Mondale* Trustee
- --------------------------------
Walter F. Mondale
/s/ Ralph L. Schlosstein* Trustee and President
- -------------------------------- (Principal Executive Officer)
Ralph L. Schlosstein
/s/ Henry Gabbay* Treasurer (Principal
- -------------------------------- Financial and Accounting Officer)
Henry Gabbay
*By: /s/ Karen H. Sabath
----------------------------
Karen H. Sabath
Attorney-in-fact
</TABLE>
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
<S> <C>
(a) Agreement and Declaration of Trust.1
(b) By-Laws.1
(c) Inapplicable.
(d) Form of Specimen Certificate. /1/
(e) Form of Automatic Dividend Reinvestment Plan. /1/
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement. /1/
(g)(2) Form of Sub-Advisory Agreement. /1/
(h)(1) Form of Underwriting Agreement. /1/
(h)(2) Form of Master Agreement Among Underwriters. /1/
(h)(3) Form of Salomon Smith Barney Inc. Dealer Letter Agreement. /1/
(i) Inapplicable.
(j) Form of Custodian Agreement. /1/
(k) Form of Registrar, Transfer Agency and Service Agreement. /1/
(l) Opinion and Consent of Counsel to the Trust.
(m) Inapplicable.
(n) Consent of Independent Public Accountants.
(o) Inapplicable.
(p) Initial Subscription Agreement./1/
(q) Inapplicable.
(r) Inapplicable.
(s) Power of Attorney./1/
</TABLE>
- -----------
/1/ Previously Filed.
<PAGE>
EXHIBIT L
[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
August 24, 1999
The BlackRock Strategic
Municipal Trust
345 Park Avenue
New York, New York 10154
Re: The BlackRock Strategic
Municipal Trust
Registration Statement on Form N-2
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to The BlackRock Strategic Municipal
Trust, a business trust formed under the Delaware Business Trust Act (the
"Trust"), in connection with the initial public offering by the Trust of up to
8,000,000 shares (the "Shares") of the Trust's common shares of beneficial
interest, par value $0.001 per share (the "Common Shares").
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Notification of Registration of the Trust as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), on Form N-8A, dated
June 22, 1999 as filed with the Securities and Exchange Commission (the
"Commission") on June 22, 1999, (ii) the Registration Statement of the Trust on
Form N-2 (File Nos. 333-81331 and 811-09401) as filed with the Commission on
June 22, 1999 and amended by Pre-Effective Amendment No. 1 on July 29, 1999 and
Pre-Effective Amendment No. 2 on August 19, 1999, and as it is proposed to be
amended by Pre-Effective Amendment No.
<PAGE>
The BlackRock Strategic
Municipal Trust
August 24, 1999
Page 2
3 on August 24, 1999, under the Securities Act of 1933, as amended (the "1933
Act") (such Registration Statement, as so amended and proposed to be amended,
being hereinafter referred to as the "Registration Statement"); (iii) the form
of the Underwriting Agreement (the "Underwriting Agreement") proposed to be
entered into between the Trust, as issuer, Salomon Smith Barney Inc. and
Prudential Securities Incorporated as representatives of the several
underwriters named therein (the "Underwriters"), filed as an exhibit to the
Registration Statement; (iv) a specimen certificate representing the Common
Shares; (v) the Certificate of Trust and Agreement and Declaration of Trust of
the Trust, as presently in effect; (vi) the By-Laws of the Trust, as presently
in effect; and (vii) certain resolutions of the Board of Trustees of the
Trust relating to the issuance and sale of the
Shares and related matters. We have also examined originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Trust and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Trust and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Trust, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof. As to any facts material to the opinions expressed
herein which we have not independently established
<PAGE>
The BlackRock Strategic
Municipal Trust
August 24, 1999
Page 3
or verified, we have relied upon statements and representations of officers and
other representatives of the Trust and others. In rendering the opinion set
forth below, we have assumed that if a shareholder requests a certificate
representing Common Shares that such certificate will conform to the specimen
examined by us and will have been manually signed by an authorized officer of
the transfer agent and registrar for the Common Shares and registered by such
transfer agent and registrar.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement becomes effective, (ii) the Underwriting
Agreement has been duly executed and delivered and (iii) the Shares have been
duly issued, executed and authenticated in accordance with the Agreement and
Declaration of Trust and delivered and paid for in accordance with the
Underwriting Agreement, the issuance and sale of the Shares will have been duly
authorized, and the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Opinions" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the 1933 Act or
the rules and regulations of the Commission.
Very truly yours,
Skadden, Arps, Slate, Meagher &
Flom LLP
<PAGE>
EXHIBIT N
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Pre-Effective Amendment No. 3 to the
Registration Statement of The BlackRock Strategic Municipal Trust (1933 Act File
No. 333-81331) of our report dated August 20, 1999, relating to the financial
statements of The BlackRock Strategic Municipal Trust as of August 19, 1999 and
for the period then ended appearing in the Statement of Additional Information
which is part of such Registration Statement.
We also consent to the reference to our Firm under the heading "Report of
Independent Auditors" in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
August 20, 1999
