As filed with the Securities and Exchange Commission on July 25, 2001
Securities Act Registration No. 333-58224
Investment Company Registration No. 811-10339
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
[X]
Pre-Effective Amendment No. 3
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 3
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BlackRock Municipal Income Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock Municipal Income Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
Copies to:
Michael K. Hoffman, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Simpson Thacher & Bartlett
Four Times Square 425 Lexington Avenue
New York, New York 10036 New York, New York 10017
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Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Amount Being Maximum Offering Maximum Aggregate Amount of
Title of Securities Being Registered Registered Price per Unit Offering Price Registration Fee
-----------------------------------------------------------------------------------------------------------
Common Shares, $.001 par
value.................. 43,333,333 shares $15.00 650,000,000 $162,500(/1/)
(/1/)$15,000 previously paid.
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BLACKROCK MUNICIPAL INCOME TRUST
CROSS REFERENCE SHEET
Part A--Prospectus
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover................... Cover page
Item 2. Inside Front and Outside Back Cover
Page................................. Cover page
Item 3. Fee Table and Synopsis................ Prospectus Summary; Summary
of Trust Expenses
Item 4. Financial Highlights.................. Not Applicable
Item 5. Plan of Distribution.................. Cover Page; Prospectus
Summary; Underwriting
Item 6. Selling Shareholders.................. Not Applicable
Item 7. Use of Proceeds....................... Use of Proceeds; The Trust's
Investments
Item 8. General Description of the The Trust; The Trust's
Registrant........................... Investments; Risks;
Description of Shares;
Certain Provisions in the
Declaration of Trust
Item 9. Management............................ Management of the Trust;
Custodian and Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and
Other Securities..................... Description of Shares;
Distributions; Dividend
Reinvestment Plan; Certain
Provisions in the
Declaration of Trust; Tax
Matters
Item 11. Defaults and Arrears on Senior
Securities........................... Not Applicable
Item 12. Legal Proceedings..................... Legal Opinions
Item 13. Table of Contents of the Statement of
Additional Information............... Table of Contents for the
Statement of Additional
Information
Part B--Statement of Additional Information
Item 14. Cover Page............................ Cover Page
Item 15. Table of Contents..................... Cover Page
Item 16. General Information and History....... Not Applicable
Item 17. Investment Objective and Policies..... Investment Objective and
Policies; Investment
Policies and Techniques;
Portfolio Transactions
Item 18. Management............................ Management of the Trust;
Portfolio Transactions
Item 19. Control Persons and Principal Holders
of Securities........................ Management of the Trust
Item 20. Investment Advisory and Other Management of the Trust;
Services............................. 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
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Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may +
+not sell these securities until the Registration Statement filed with the + +Securities and Exchange Commission is effective. This Prospectus is not an + +offer to sell these securities and is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + |
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 25, 2001
PROSPECTUS
[LOGO OF BLACKROCK]
4,000,000 Shares
BlackRock Municipal Income Trust
Common Shares
$15.00 per share
Investment Objective. BlackRock Municipal Income Trust (the "Trust") is a newly organized, diversified, closed-end management investment company. The Trust's investment objective is to provide current income exempt from regular Federal income tax.
Portfolio Contents. The Trust will invest primarily in municipal bonds that pay interest that is exempt from regular Federal income tax. The Trust will invest in municipal bonds that, in the opinion of the Trust's investment advisor and sub-advisor, are underrated or undervalued. Under normal market conditions, the Trust expects to be fully invested in these tax-exempt municipal bonds. The Trust will invest at least 80% of its total assets in municipal bonds that at the time of investment are investment grade quality. Investment grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's Investor Service, Inc. ("Moody's"), Standard & Poors Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds that are unrated but judged to be of comparable quality by the Trust's investment advisor and sub-advisor. The Trust may invest up to 20% of its total assets in municipal bonds that at the time of investment are rated Ba/BB or B by Moody's, S&P or Fitch or bonds that are unrated but judged to be of comparable quality by the Trust's investment advisor and sub-advisor. Bonds of below investment grade quality are regarded as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and are commonly referred to as "junk bonds." The Trust intends to invest primarily in long-term bonds and expects bonds in its portfolio to have a dollar weighted average maturity of 15 years or more under current market conditions. The Trust cannot ensure that it will achieve its investment objective.
No Prior History. Because the Trust is newly organized, its shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. The Trust's common shares have been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "BFK".
Preferred Shares. Within approximately one to three months after completion of this offering of common shares, the Trust intends to offer preferred shares representing approximately 38% of the Trust's capital immediately after the issuance of such preferred shares. There can be no assurance, however, that preferred shares representing such percentage of the Trust's capital will actually be issued. The use of preferred shares to leverage the common shares can create risks.
Investing in the common shares involves certain risks. See "Risks" on page 17 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share Total
--------- -----
Public Offering Price................................... $15.00 $
Sales Load.............................................. $ 0.675 $
Proceeds, before expenses, to the Trust................. $14.325 $
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The underwriters expect to deliver the common shares to purchasers on or about July , 2001.
Salomon Smith Barney Merrill Lynch & Co.
A.G. Edwards & Sons, Inc. Prudential Securities
UBS Warburg
Dain Rauscher Wessels Gruntal & Co., L.L.C.
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J.J.B. Hilliard, W.L. Lyons, Inc. Raymond James
A PNC Company
July , 2001.
You should read the prospectus, which contains important information about the Trust, before deciding whether to invest and retain it for future reference. A Statement of Additional Information, dated July , 2001, containing additional information about the Trust, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this prospectus. You may request a free copy of the Statement of Additional Information, the table of contents of which is on page 36 of this prospectus, by calling (888) 825-2257 or by writing to the Trust, or obtain a copy (and other information regarding the Trust) from the Securities and Exchange Commission web site (http://www.sec.gov).
The 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, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this prospectus may purchase up to additional common shares at the public offering price within 45 days from the date of this prospectus to cover over-allotments.
You should rely only on the information contained or incorporated by reference in this prospectus. The Trust has not authorized anyone to provide you with different information. The Trust is not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 4
Summary of Trust Expenses.................................................. 10
The Trust.................................................................. 12
Use of Proceeds............................................................ 12
The Trust's Investments.................................................... 12
Preferred Shares and Leverage.............................................. 15
Risks...................................................................... 17
How the Trust Manages Risk................................................. 19
Management of the Trust.................................................... 21
Net Asset Value............................................................ 24
Distributions.............................................................. 24
Dividend Reinvestment Plan................................................. 25
Description of Shares...................................................... 26
Certain Provisions in the Agreement and Declaration of Trust............... 29
Closed-End Trust Structure................................................. 30
Repurchase of Shares....................................................... 31
Tax Matters................................................................ 31
Underwriting............................................................... 33
Custodian and Transfer Agent............................................... 35
Legal Opinions............................................................. 35
Table of Contents for the Statement of Additional Information.............. 36
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Until August , 2001 (25 days after the date of this prospectus), 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.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Trust collects, how the Trust protects that information and why, in certain cases, the Trust may share information with select other parties.
Generally, the Trust does not receive any non-public personal information relating to its shareholders, although certain non-public personal information of its shareholders may become available to the Trust. The Trust does not disclose any non-public personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts (for example, to a transfer agent or third party administrator).
The Trust restricts access to non-public personal information about its shareholders to employees of the Trust's investment advisor and its affiliates with a legitimate business need for the information. The Trust maintains physical, electronic and procedural safeguards designed to protect the non- public personal information of its shareholders.
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information that you should consider before investing in our common shares. You should review the more detailed information contained in this prospectus and in the Statement of Additional Information.
The Trust........................ BlackRock Municipal Income Trust is a newly
organized, diversified, closed-end
management investment company. Throughout
the prospectus, we refer to BlackRock
Municipal Income Trust simply as the
"Trust" or as "we," "us" or "our." See "The
Trust."
The Offering..................... The Trust is offering common shares of
beneficial interest at $15.00 per share
through a group of underwriters (the
"Underwriters") led by Salomon Smith Barney
Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, A.G. Edwards & Sons, Inc.,
Prudential Securities Incorporated, UBS
Warburg LLC, Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated,
Gruntal & Co., L.L.C., J.J.B. Hilliard,
W.L. Lyons, Inc. and Raymond James &
Associates, Inc. The common shares of
beneficial interest are called "common
shares" in the rest of this prospectus. You
must purchase at least 100 common shares
($1,500). The Trust has given the
Underwriters an option to purchase up to
additional common shares to cover
orders in excess of common shares.
BlackRock Advisors, Inc. has agreed to pay
organizational expenses and offering costs
(other than sales load) that exceed $0.03
per share. See "Underwriting."
Investment Objective............. The Trust's investment objective is to
provide current income exempt from regular
Federal income tax.
Investment Policies.............. The Trust will invest primarily in
municipal bonds that pay interest that is
exempt from regular Federal income tax. The
Trust will invest in municipal bonds that,
in the opinion of BlackRock Advisors, Inc.
("BlackRock Advisors" or the "Advisor") and
BlackRock Financial Management, Inc.
("BlackRock Financial Management" or the
"Sub-Advisor") are underrated or
undervalued. Underrated municipal bonds are
those whose ratings do not, in the
Advisor's or Sub-Advisor's opinion, reflect
their true creditworthiness. Undervalued
municipal bonds are bonds that, in the
Advisor's or Sub-Advisor's opinion, are
worth more than the value assigned to them
in the marketplace. Under normal market
conditions, the Trust expects to be fully
invested in these tax-exempt municipal
bonds. The Trust will invest at least 80%
of its total assets in municipal bonds that
at the time of investment are investment
grade quality. Investment grade quality
bonds are bonds rated within the four
highest grades (Baa or BBB or better by
Moody's, S&P or Fitch) or bonds that are
unrated but judged to be of comparable
quality by the Advisor and the Sub-Advisor.
The Trust may invest up to 20% of its total
assets in municipal bonds that at the time
of investment are rated Ba/BB or B by
Moody's, S&P or Fitch or bonds that are
unrated but judged to be of
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comparable quality by the Advisor and the
Sub-Advisor. Bonds of below investment
grade quality are regarded as having
predominately speculative characteristics
with respect to the issuer's capacity to
pay interest and repay principal, and are
commonly referred to as "junk bonds." The
Trust intends to invest primarily in long-
term bonds and expects bonds in its
portfolio to have a dollar weighted average
maturity of 15 years or more under current
market conditions. The Trust cannot ensure
that it will achieve its investment
objective. See "The Trust's Investments."
Special Tax Considerations....... While exempt-interest dividends are
excluded from gross income for Federal
income tax purposes, they may be subject to
the Federal alternative minimum tax in
certain circumstances. Distributions of any
capital gain or other taxable income will
be taxable to shareholders. The Trust may
not be a suitable investment for investors
subject to the Federal alternative minimum
tax or who would become subject to such tax
by investing in the Trust. See "Tax
Matters."
Proposed Offering of Preferred Approximately one to three months after
Shares.......................... completion of this offering of the common
shares (subject to market conditions), the
Trust intends to offer preferred shares of
beneficial interest ("Preferred Shares")
that will represent approximately 38% of
the Trust's capital after their issuance.
The issuance of Preferred Shares will
leverage the common shares. Leverage
involves greater risks. The Trust's
leveraging strategy may not be successful.
See "Risks--Leverage Risk." The money the
Trust obtains by selling the Preferred
Shares will be invested in long-term
municipal bonds that will generally pay
fixed rates of interest over the life of
the bonds.
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 the common shares. Once Preferred
Shares are issued, the net asset value and
market price of the common shares and the
yield to holders of common shares will be
more volatile. See "Preferred Shares and
Leverage" and "Description of Shares--
Preferred Shares."
Investment Advisor............... BlackRock Advisors will be the Trust's
investment advisor and BlackRock Advisors'
affiliate, BlackRock Financial Management,
will provide certain day-to-day investment
management services to the Trust.
Throughout the prospectus, we sometimes
refer to BlackRock Advisors and BlackRock
Financial Management
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collectively as "BlackRock." BlackRock
Advisors will receive an annual fee,
payable monthly, in a maximum amount equal
to 0.60% of the average weekly value of the
Trust's Managed Assets. "Managed Assets"
means the total assets of the Trust
(including any assets attributable to any
Preferred Shares that may be outstanding)
minus the sum of accrued liabilities (other
than debt representing financial leverage).
The liquidation preference of the Preferred
Shares is not a liability. BlackRock
Advisors has voluntarily agreed to waive
receipt of a portion of the management fee
or other expenses of the Trust in the
amount of 0.25% of the average weekly
values of the Trust's Managed Assets for
the first five years of the Trust's
operations (through July 31, 2006), and for
a declining amount for an additional four
years (through July 31, 2010). See
"Management of the Trust."
Distributions.................... The Trust intends to distribute monthly all
or a portion of its net investment income
to holders of common shares. We expect to
declare the initial monthly dividend on the
Trust's common shares approximately 45 days
after completion of this offering and to
pay that initial monthly dividend
approximately 60 to 90 days after
completion of this offering. Unless an
election is made to receive dividends in
cash, shareholders will automatically have
all dividends and distributions reinvested
in common shares through the receipt of
additional unissued but authorized common
shares from the Trust or by purchasing
common shares in the open market through
the Trust's Dividend Reinvestment Plan. See
"Dividend Reinvestment Plan."
The Trust will distribute to holders of its
common shares monthly dividends of all or a
portion of its tax-exempt interest income
after payment of dividends on any Preferred
Shares of the Trust which may be
outstanding. If the Trust realizes a
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 dividends
paid to each class for the year in which
the income is realized. See "Distributions"
and "Preferred Shares and Leverage."
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 "BFK". See
"Description of Shares--Common Shares."
Custodian and Transfer Agent..... State Street Bank and Trust Company will
serve as the Trust's Custodian and
EquiServe Trust Company, N.A. will serve as
the Trust's Transfer Agent. See "Custodian
and Transfer 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
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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 or equal to 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, liquidity and market supply
and demand. See "Preferred Shares and
Leverage," "Risks," "Description of Shares"
and the section of the Statement of
Additional Information with the heading
"Repurchase of Common Shares." The common
shares are designed primarily for long-term
investors and you should not purchase
common shares of the Trust if you intend to
sell them shortly after purchase.
Special Risk Considerations...... No Operating History. The Trust is a newly
organized closed-end investment company
with no history of operations.
Market Discount Risk. Shares of closed-end
management investment companies frequently
trade at a discount from their net asset
value.
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. Under
normal market conditions, the Trust will
invest at least 80% of its total assets in
municipal bonds rated Baa/BBB or higher.
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. 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
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predominantly speculative with respect to the issuer's capacity to pay interest and repay principal when due and therefore involve a greater risk of default. Economic Sector Risk. The Trust may invest 25% or more of its total assets in municipal obligations of issuers in the same economic sector, such as hospitals or life care facilities and transportation related issuers. This may make the Trust more susceptible to adverse economic, political or regulatory occurrences affecting a particular economic sector. Leverage Risk. The use of leverage through the issuance of Preferred Shares creates an opportunity for increased common share net income, but also creates risks for the holders of common shares. The Trust's leveraging strategy may not be successful. We anticipate that Preferred Shares will pay adjustable rate dividends based on shorter-term interest rates that would be periodically reset. The Trust will invest the proceeds of the Preferred Shares offering in long-term, typically fixed rate, municipal bonds. So long as the Trust's municipal bond portfolio provides a higher rate of return, net of Trust expenses, than the Preferred Share dividend rate, as reset periodically, the leverage will cause the holders of common shares to receive a higher current rate of return than if the Trust were not leveraged. If, however, long- and/or short-term rates rise, the Preferred Share dividend rate could exceed the rate of return on long- term bonds held by the Trust that were acquired during periods of generally lower interest rates, reducing return to the holders of common shares. Leverage creates two major types of risks for the holders of common shares: . 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. The amount of public information available about the municipal bonds in the Trust's portfolio is generally less than that for corporate equities or bonds and the investment performance of the Trust may therefore be more dependent on the analytical abilities of BlackRock than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Trust may invest, also tends to be less well- developed or liquid than many other securities markets, which may adversely affect the Trust's ability to sell its bonds at attractive prices. |
The ability of municipal issuers to make timely payments of interest and principal may be diminished in general economic downturns and as governmental cost burdens are reallocated among Federal, state and local governments. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations, or on the ability of municipalities to levy taxes. Issuers of municipal bonds might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Trust could experience delays in collecting principal and interest and the Trust may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Trust may take possession of and manage the assets securing the issuer's obligations on such securities, which may increase the Trust's operating expenses. Any income derived from the Trust's ownership or operation of such assets may not be tax-exempt. Anti-Takeover Provisions. The Trust's Agreement and Declaration of Trust, as amended and restated, 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 or at net asset value. |
SUMMARY OF TRUST EXPENSES
The following table shows Trust expenses as a percentage of net assets attributable to common shares.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering
price).................................................. 4.50%
Dividend Reinvestment Plan Fees.......................... None*
Percentage of Net
Assets Attributable
to Common Shares**
-------------------
Annual Expenses
Management Fees............................................ 0.97%
Fees and Expense Waiver Years 1-5.......................... (0.40%)***
------
Net Management Fees Years 1-5.............................. 0.57%***
Other Expenses............................................. 0.24%
------
Total Net Annual Expenses Years 1-5........................ 0.81%***
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* You will be charged a $2.50 service charge and pay brokerage charges if you direct the Plan Agent (as defined below) to sell your common shares held in a dividend reinvestment account.
** Stated as a percentage of the Trust's total Managed Assets assuming the issuance of Preferred Shares in an amount equal to 38% of the Trust's capital (after their issuance), the Trust's expenses would be estimated as set out in the table below. "Managed Assets" means the total assets of the Trust (including any assets attributable to any Preferred Shares that may be outstanding) minus the sum of accrued liabilities (other than debt representing financial leverage). The liquidation preference of the Preferred Shares is not a liability.
Percentage of Total
Managed Assets
-------------------
Annual Expenses
Management Fees......................................... 0.60%
Fee and Expense Waiver Years 1-5........................ (0.25%)***
------
Net Management Fees Years 1-5........................... 0.35%***
Other Expenses.......................................... 0.15%
------
Total Net Annual Expenses Years 1-5..................... 0.50%***
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*** BlackRock Advisors has voluntarily agreed to waive receipt of a portion of the management fee or other expenses of the Trust in the amount of 0.40% of average weekly net assets attributable to common shares (0.25% of average weekly Managed Assets) for the first 5 years of the Trust's operations, 0.32% (0.20%) in year 6, 0.24% (0.15%) in year 7, 0.16% (0.10%) in year 8, and 0.08% (0.05%) in year 9. Without the waiver, "Total Net Annual Expenses Years 1-5" would be estimated to be 1.21% of average weekly net assets attributable to common shares and 0.75% of average weekly Managed Assets. BlackRock Advisors has agreed to pay all organizational expenses and offering costs (other than sales load) that exceed $0.03 per common share (0.20% of the offering price).
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 Net Annual Expenses Years 1-5" are based on estimated amounts for the Trust's first year of operations and assume that the Trust issues 43,333,333 common shares. If the Trust issues fewer common shares, all other things being equal, these expenses would increase. See "Management of the Trust" and "Dividend Reinvestment Plan."
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 net annual expenses of 0.81% 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/)
1 Year 3 Years 5 Years 10 Years(/2/)
------ ------- ------- -------------
Total Expenses Incurred.................... $53 $71 $90 $165
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(/1/) The example should not be considered a representation of future expenses. The example assumes that the estimated "Other Expenses" set forth in the Annual Expenses table are accurate, that fees and expenses increase as described in note 2 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/) Assumes waiver of fees and expenses of 0.32% of average weekly net assets attributable to common shares in year 6 (0.20% of average weekly Managed Assets), 0.24% (0.15%) in year 7, 0.16% (0.10%) in year 8, and 0.08% (0.05%) in year 9 and assumes that Preferred Shares remain 38% of the Trust's capital throughout the periods reflected. BlackRock Advisors has not agreed to waive any portion of its fees and expenses beyond July 31, 2010. See "Management of the Fund--Investment Management Agreement."
THE TRUST
The Trust is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act. The Trust was organized as a Delaware business trust on March 30, 2001, pursuant to an Agreement and Declaration of Trust, as later amended and restated, governed by the laws of the State of Delaware. As a newly organized entity, the Trust has no operating history. The Trust's principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is (888) 825- 2257.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be approximately $ ($ if the Underwriters exercise the over-allotment option in full) after payment of the estimated organization and offering costs. The Trust will invest the net proceeds of the offering in accordance with the Trust's investment objective and policies as stated below. We currently anticipate that the Trust will be able to invest substantially all of the net proceeds in municipal bonds that meet the Trust's investment objective and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt or taxable investment grade securities.
THE TRUST'S INVESTMENTS
Investment Objective and Policies
The Trust's investment objective is to provide current income exempt from regular Federal income tax.
The Trust will invest primarily in municipal bonds that pay interest that is exempt from regular Federal income tax. Under normal market conditions, the Trust expects to be fully invested (at least 95% of its net assets) in such tax-exempt municipal bonds. Under normal market conditions, the Trust will invest at least 80% of its total assets in investment grade quality municipal bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by BlackRock. Municipal bonds rated Baa by Moody's are investment grade, but Moody's considers municipal bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for municipal bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for higher grade municipal bonds. The Trust may invest up to 20% of its total assets in municipal bonds that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by BlackRock. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as "junk bonds." Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. These credit quality policies apply only at the time a security is purchased, and the Trust is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, BlackRock may consider such factors as BlackRock's assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix 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 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's opinion, are underrated or undervalued. Underrated municipal bonds are those whose ratings do not, in BlackRock's opinion, reflect their true
creditworthiness. Undervalued municipal bonds are bonds that, in the opinion of BlackRock, are worth more than the value assigned to them in the marketplace. BlackRock may at times believe that bonds associated with a particular municipal market sector (for example, electrical utilities), or issued by a particular municipal issuer, are undervalued. BlackRock may purchase those bonds for the Trust's portfolio because they represent a market sector or issuer that BlackRock considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal bonds of particular types (for example, hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal bonds of the market sector for reasons that do not apply to the particular municipal bonds that are considered undervalued. The Trust's investment in underrated or undervalued municipal bonds will be based on BlackRock's belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Trust will generally result in capital gains distributions subject to Federal capital gains tax.
The Trust may purchase municipal bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Trust's income. Insurance generally will be obtained from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. The Trust may purchase insured bonds and may purchase insurance for bonds in its portfolio.
During temporary defensive periods, including the period during which the net proceeds of this offering are being invested, and in order to keep the Trust's cash fully invested, the Trust may invest up to 100% of its net assets in liquid, short-term investments, including high quality, short-term securities that may be either tax-exempt or taxable. The Trust may not achieve its investment objective under these circumstances. The Trust intends to invest in taxable short-term investments only if suitable tax-exempt short-term investments are not available at reasonable prices and yields. If the Trust invests in taxable short-term investments, a portion of your dividends would be subject to regular Federal income tax.
The Trust cannot change its investment objective without the approval of the holders of a majority of the outstanding common shares and, once the Preferred Shares are issued, the Preferred Shares voting together as a single class, and of the holders of a majority of the outstanding Preferred Shares voting as a separate class. A "majority of the outstanding" means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (2) more than 50% of the shares, whichever is less. See "Description of Shares--Preferred Shares--Voting Rights" and the Statement of Additional Information under "Description of Shares--Preferred Shares" for additional information with respect to the voting rights of holders of Preferred Shares.
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal bonds may also be issued for private activities, such as housing, medical and educational facility construction or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds may be repaid only from the revenues of a specific facility or source. The Trust also may purchase municipal bonds that represent lease obligations. These carry special risks because the issuer of the bonds may not be obligated to appropriate money annually to make payments under the lease. In order to reduce this risk, the Trust will only purchase municipal bonds representing lease obligations where BlackRock believes the issuer has a strong incentive to continue making appropriations until maturity.
The municipal bonds in which the Trust will invest pay interest that, in the opinion of bond counsel to the issuer, or on the basis of another authority believed by BlackRock to be reliable, is exempt from regular Federal income tax. BlackRock will not conduct its own analysis of the tax status of the interest paid by municipal bonds held by the Trust. The Trust may also invest in municipal bonds issued by United States Territories (such as Puerto Rico or Guam) that are exempt from regular Federal income tax. In addition to the types of municipal bonds described in the prospectus, the Trust may invest in other securities that pay interest that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument. The Trust treats all of such tax-exempt securities as municipal bonds.
The yields on municipal bonds are dependent on a variety of factors, including prevailing interest rates and the condition of the general money market and the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of municipal bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of bond issuers to meet interest and principal payments.
The Trust will invest primarily in municipal bonds with long-term maturities in order to maintain a weighted average maturity of 15 or more years, but the weighted average maturity of obligations held by the Trust may be shortened, depending on market conditions.
When-Issued and Forward Commitment Securities
The Trust may buy and sell municipal bonds on a when-issued basis and may purchase or sell municipal bonds on a "forward commitment" basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, because bonds are subject to market fluctuations, the value of the bonds at the time of delivery may be less or more than cost. A separate account of the Trust will be established with its custodian consisting of cash, or other liquid high grade debt securities having a market value at all times, at least equal to the amount of the commitment.
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Trust may invest directly. The Trust generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Trust receives the proceeds of the offering of its common shares or Preferred Shares, or during periods when there is a shortage of attractive, high-yielding municipal bonds available in the market. As a shareholder in an investment company, the Trust will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Trust's advisory and other fees and expenses with respect to assets so invested. Holders of common shares would therefore be subject to duplicative expenses to the extent the Trust invests in other investment companies. BlackRock will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available municipal bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks to which the Trust is subject. As described in this prospectus in the sections entitled "Risks" and "Preferred Shares and Leverage," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of the Trust. In addition, to the extent the Trust invests in other investment companies, the Trust will be dependent upon the investment and research abilities of persons other than BlackRock. The Trust treats its investments in such open- or closed-end investment companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Trust may also invest up to 10% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from regular Federal income tax. A portion of such dividends may be capital gain distributions subject to Federal capital gains tax. Such funds in turn invest in municipal bonds and other assets that generally pay interest or make distributions that are exempt from regular Federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including 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 100% 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 (approximately 60% in Aaa/AAA; 20% in A; and 20% in Baa/BBB). BlackRock generally expects to select obligations that may not be redeemed at the option of the issuer for approximately ten years from the date of purchase by the Trust. See "-- Investment Objective and Policies."
PREFERRED SHARES AND LEVERAGE
Approximately one to three months after the completion of the offering of the common shares, subject to market conditions, the Trust intends to offer Preferred Shares representing approximately 38% of the Trust's capital immediately after the issuance of the Preferred Shares. The Preferred Shares will have complete priority upon distribution of assets over the common shares. The issuance of Preferred Shares will leverage the common shares. Leverage involves greater risks. The Trust's leveraging strategy may not be successful. Although the timing and other terms of the offering of Preferred Shares and the terms of the Preferred Shares will be determined by the Trust's board of trustees, the Trust expects to invest the proceeds of the Preferred Shares offering in long-term municipal bonds. The Preferred Shares will pay adjustable rate dividends based on shorter-term interest rates, which would be redetermined periodically by an auction process. The adjustment period for Preferred Share dividends could be as short as one day or as long as a year or more. So long as the Trust's portfolio is invested in securities that provide a higher rate of return than the dividend rate of the Preferred Shares, after taking expenses into consideration, the leverage will cause you to receive a higher current rate of income 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 for advisory and sub- advisory services
will be higher than if the Trust did not use leverage because the fees paid will be calculated on the basis of the Trust's total assets, including the gross 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 dividends paid to each class for the year in which the net capital gain or other taxable income is realized. If net capital gain or other taxable income is allocated to Preferred Shares, instead of solely tax-exempt income, the Trust will likely have to pay higher total dividends to Preferred Shareholders or make special payments to Preferred Shareholders to compensate them for the increased tax liability. This would reduce the total amount of dividends paid to the holders of common shares, but would increase the portion of the dividend that is tax- exempt. If the increase in dividend payments or the special payments to Preferred Shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the holders of common shares, the advantage of the Trust's leveraged structure to holders of common shares will be reduced.
Under the Investment Company Act, the Trust is not permitted to issue Preferred Shares unless immediately after such issuance the value of the Trust's total assets is at least 200% of the liquidation value of the outstanding Preferred Shares (i.e., the liquidation value may not exceed 50% of the Trust's total assets). In addition, the Trust is not permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value of the Trust's total assets is at least 200% of such liquidation value. If Preferred Shares are issued, the Trust intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary in order to maintain coverage of any Preferred Shares of at least 200%. In addition, as a condition to obtaining ratings on the Preferred Shares, the terms of any Preferred Shares issued are expected to include asset coverage maintenance provisions which will require the redemption of the Preferred Shares in the event of non-compliance by the Trust and may also prohibit dividends and other distributions on the common shares in such circumstances. In order to meet redemption requirements, the Trust may have to liquidate portfolio securities. Such liquidations and redemptions would cause the Trust to incur related transaction costs and could result in capital losses to the Trust. Prohibitions on dividends and other distributions on the common shares could impair the Trust's ability to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). If the Trust has Preferred Shares outstanding, two of the Trust's trustees will be elected by the holders of Preferred Shares voting separately as a class. The remaining trustees of the Trust will be elected by holders of common shares and Preferred Shares voting together as a single class. In the event the Trust failed to pay dividends on Preferred Shares for two years, holders of Preferred Shares would be entitled to elect a majority of the trustees of the Trust.
The Trust will be subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Trust. These guidelines are expected to impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Trust by the Investment Company Act. It is not anticipated that these covenants or guidelines will impede BlackRock from managing the Trust's portfolio in accordance with the Trust's investment objective and policies.
The Trust may also borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Trust securities.
Assuming that the Preferred Shares will represent approximately 38% of the Trust's capital and pay dividends at an annual average rate of 3.25%, the income generated by the Trust's portfolio (net of estimated expenses) must exceed 1.24% in order to cover the dividend payments and other expenses specifically related to the Preferred Shares. Of course, these numbers are merely estimates used for illustration. Actual Preferred Share dividend rates will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of income and changes in the value of bonds held in the Trust's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns experienced or expected to be experienced by the Trust. See "Risks." The table further reflects the issuance of Preferred Shares representing 38% of the Trust's total capital, a 5.38% yield on the Trust's investment portfolio, net of expenses, and the Trust's currently projected annual Preferred Share dividend rate of 3.25%.
Assumed Portfolio Total Return (Net of Expenses)............................. (10)% (5)% 0% 5% 10% Common Share Total Return.............. (18.12)% (10.06)% (1.99)% 6.07% 14.14% |
Common share total return is composed of two elements--the common share dividends paid by the Trust (the amount of which is largely determined by the net investment income of the Trust after paying dividends on Preferred Shares) and gains or losses on the value of the securities the Trust owns. As required by Securities and Exchange Commission rules, the table assumes that the Trust is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Trust must assume that the tax- exempt interest it receives on its municipal bond investments is entirely offset by losses in the value of those bonds.
Unless and until Preferred Shares are issued, the common shares will not be leveraged and this section will not apply.
RISKS
The net asset value of the common shares will fluctuate with and be affected by, among other things, interest rate risk, credit risk, reinvestment risk and leverage risk, and an investment in common shares will be subject to market discount risk, inflation risk and municipal bond market risk, each of which is more fully described below.
Newly Organized. The Trust is a newly organized, diversified, closed-end management investment company and has no operating history.
Market Discount Risk. As with any stock, the price of the Trust's shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Net asset value will be reduced immediately following the initial offering by the amount of the sales load and organizational and selling expenses paid by the Trust. Common shares are designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The Trust's shares may trade at a price that is less than the initial offering price. This risk may be greater for investors who sell their shares in a relatively short period of time after completion of the initial offer. The Trust's initial net asset value will be reduced by a 4.5% sales load charge.
Interest Rate Risk. Interest rate risk is the risk that bonds, and the Trust's net assets, will decline in value because of changes in interest rates. Generally, municipal bonds will decrease in value when interest rates rise and increase in value when interest rates decline. This means that the net asset value of the common shares will fluctuate with interest rate changes and the corresponding changes in the value of the Trust's municipal bond holdings. The value of the longer-term bonds in which the Trust generally invests fluctuates more in response to changes in interest rates than does the value of shorter- term bonds. Because the Trust will invest primarily in long-term bonds, the net asset value and market price per share of the common shares will fluctuate more in response to changes in market interest rates than if the Trust invested primarily in shorter-term bonds. The Trust's use of leverage, as described below, will tend to increase common share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond will become unable to meet its obligation to make interest and principal payments. In general, lower rated municipal bonds carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a negative impact on the Trust's net asset value or dividends. The Trust may invest up to 20% of its total assets in municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by BlackRock. Bonds rated Ba/BB or B are regarded as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal, and these bonds are commonly referred to as junk bonds. These securities are subject to a greater risk of default. The prices of these lower grade bonds are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Lower grade securities tend to be less liquid than investment grade securities. The market values of lower grade securities tend to be more volatile than is the case for investment grade securities.
Municipal Bond Market Risk. Investing in the municipal bond market involves certain risks. The amount of public information available about the municipal bonds in the Trust's portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Trust may therefore be more dependent on the analytical abilities of BlackRock than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Trust may invest, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Trust's ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and principal may be diminished in general economic downturns and as governmental cost burdens are reallocated among Federal, state and local governments. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal bonds might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Trust could experience delays in collecting principal and interest and the Trust may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Trust may take possession of and manage the assets securing the issuer's obligations on such securities, which may increase the Trust's operating expenses. Any income derived from the Trust's ownership or operation of such assets may not be tax-exempt.
Reinvestment Risk. Reinvestment risk is the risk that income from the Trust's bond portfolio will decline if and when the Trust invests the proceeds from matured, traded, prepaid or called bonds at market interest rates that are below the portfolio's current earnings rate. A decline in income could affect the common shares' market price or their overall returns.
Leverage Risk. Leverage risk is the risk associated with the issuance of the Preferred Shares to leverage the common shares. There is no assurance that the Trust's leveraging strategy will be successful. Once the Preferred Shares are issued, the net asset value and market value of the common shares will be more volatile, and the yield to the holders of common shares will tend to fluctuate with changes in the shorter-term dividend rates on the Preferred Shares. If the dividend rate on the Preferred Shares approaches the net rate of return on the Trust's investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate on the Preferred Shares exceeds the net rate of return on the Trust's portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Trust were not leveraged. Because the long-term bonds included in the Trust's portfolio will typically pay fixed rates of interest while the dividend rate on the Preferred Shares will be adjusted periodically, this could occur even when both long-term and short-term municipal rates rise. In addition, the Trust will pay (and the holders of common shares will bear) any costs and expenses relating to the issuance and ongoing maintenance of the Preferred Shares. Accordingly, the Trust cannot assure you that the issuance of Preferred Shares will result in a higher yield or return to the holders of the common shares.
Similarly, any decline in the net asset value of the Trust's investments will be borne entirely by the holders of common shares. Therefore, if the market value of the Trust's portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Trust were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. The Trust might be in danger of failing to maintain the required 200% asset coverage or of losing its ratings on the Preferred Shares or, in an extreme case, the Trust's current investment income might not be sufficient to meet the dividend requirements on the Preferred Shares. In order to counteract such an event, the Trust might need to liquidate investments in order to fund a redemption of some or all of the Preferred Shares. Liquidation at times of low municipal bond prices may result in capital loss and may reduce returns to the holders of common shares.
While the Trust may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Trust will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the holders of common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Trust were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turns out to be incorrect, the reduction in leverage would likely operate to reduce the income and/or total returns to holders of common shares relative to the circumstance where the Trust had not reduced leverage. The Trust may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
The Trust may invest in the securities of other investment companies. Such securities may also be leveraged and will therefore be subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the net asset value of the Trust's common shares and the returns to the holders of common shares.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions on those shares can decline. In addition, during any periods of rising inflation, Preferred Share dividend rates would likely increase, which would tend to further reduce returns to the holders of common shares.
Economic Sector and Geographic Risk. The Trust may invest 25% or more of its total assets in municipal obligations of issuers in the same state (or U.S. territory) or in municipal obligations in the same economic sector, including without limitation the following: lease rental obligations of state and local authorities; obligations dependent on annual appropriations by a state's legislature for payment; obligations of state and local housing finance authorities, municipal utilities systems or public housing authorities; obligations of hospitals or life care facilities; and industrial development or pollution control bonds issued for electrical utility systems, steel companies, paper companies or other purposes. This may make the Trust more susceptible to adverse economic, political or regulatory occurrences affecting 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.
HOW THE TRUST MANAGES RISK
Investment Limitations
The Trust has adopted certain investment limitations designed to limit investment risk. These limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding common shares and, if issued, Preferred Shares voting together as a single class, and the approval of the
holders of a majority of the Preferred Shares voting as a separate class. Among other restrictions, the Trust may not invest more than 25% of total Trust assets in securities of issuers in any one industry, except that this limitation does not apply to municipal bonds backed by the assets and revenues of governments or political subdivisions of governments.
The Trust may become subject to guidelines which are more limiting than its investment restrictions in order to obtain and maintain ratings from Moody's or S&P on the Preferred Shares that it intends to issue. The Trust does not anticipate that such guidelines would have a material adverse effect on the Trust's common shareholders or the Trust's ability to achieve its investment objective. See "Investment Objective and Policies" in the Statement of Additional Information for a complete list of the fundamental and non- fundamental investment policies of the Trust.
Quality Investments
The Trust will invest at least 80% of its total assets in bonds of investment grade quality at the time of investment. Investment grade quality means that such bonds are rated by national rating agencies 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.
Limited Issuance of Preferred Shares
Under the Investment Company Act, the Trust could issue Preferred Shares having a total liquidation value (original purchase price of the shares being liquidated plus any accrued and unpaid dividends) of up to one-half of the value of the total net assets of the Trust. If the total liquidation value of the Preferred Shares was ever more than one-half of the value of the Trust's total net assets, the Trust would not be able to declare dividends on the common shares until the liquidation value, as a percentage of the Trust's assets, was reduced. The Trust intends to issue Preferred Shares representing about 38% of the Trust's total net assets immediately after the time of issuance if the Trust sells all common shares discussed in this prospectus. This higher than required margin of net asset value provides a cushion against later fluctuations in the value of the Trust's portfolio and will subject common shareholders to less income and net asset value volatility than if the Trust were more leveraged. The Trust intends to purchase or redeem Preferred Shares, if necessary, to keep the liquidation value of the Preferred Shares below one-half of the value of the Trust's total net assets.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Trust may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Trust anticipates such an increase or change) and the Trust's leverage begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative impact of leverage on common shareholders, the Trust may shorten the average maturity of its investment portfolio (by investing in short-term, high quality securities) or may extend the maturity of outstanding Preferred Shares. The Trust may also attempt to reduce the leverage by redeeming or otherwise purchasing Preferred Shares. As explained above under "Risks--Leverage Risk," the success of any such attempt to limit leverage risk depends on BlackRock's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Trust may never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial, the Trust may sell previously unissued Preferred Shares or Preferred Shares that the Trust previously issued but later repurchased.
Currently, the Trust may not invest in inverse floating 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. This restriction is a non- fundamental policy of the Trust that may be changed by vote of the Trust's board of trustees.
Hedging Strategies
The Trust may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. These hedging strategies include using financial futures contracts, options on financial futures or options based on either an index of long-term municipal securities or on taxable debt securities whose prices, in the opinion of BlackRock, correlate with the prices of the Trust's investments. Successful implementation of most hedging strategies would generate taxable income and the Trust has no present intention to use these strategies.
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of the Trust, including supervision of the duties performed by BlackRock. There are eight trustees of the Trust. Two of the trustees are "interested persons" (as defined in the Investment Company Act). The name and business address of the trustees and officers of the Trust and their principal occupations and other affiliations during the past five years are set forth under "Management of the Trust" in the Statement of Additional Information.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock Financial Management, Inc. acts as the Trust's sub-advisor. BlackRock Advisors and BlackRock Financial Management both are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest publicly traded investment management firms in the United States with $213 billion of assets under management as of June 30, 2001. BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300 institutions and 200,000 individuals worldwide, including nine of the 10 largest companies in the U.S. as determined by Fortune Magazine, through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, including the company's flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset management firm according to Pensions & Investments, May 14, 2001.
The BlackRock organization has over 12 years of experience managing closed- end products and currently advises a closed-end family of 20 funds. BlackRock has 13 leveraged municipal closed-end funds and six open-end municipal funds under management and approximately $16 billion in municipal assets firm-wide. Clients are served from the company's headquarters in New York City, as well as offices in Wilmington, Delaware, San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified financial services organizations in the United States, and is majority-owned by PNC and by BlackRock employees.
Investment Philosophy. BlackRock's investment decision-making process for the municipal bond sector is subject to the same discipline, oversight and investment philosophy that the firm applies to other sectors of the fixed income market.
BlackRock uses a relative value strategy that evaluates the trade-off between risk and return to seek to achieve the Trust's investment objective of generating current income exempt from Federal income tax. This strategy is combined with disciplined risk control techniques and applied in sector, sub- sector and individual security selection decisions. BlackRock's extensive personnel and technology resources are the key drivers of the investment philosophy.
BlackRock's Municipal Bond Team. BlackRock uses a team approach to managing municipal portfolios. BlackRock believes that this approach offers substantial benefits over one that is dependent on the market wisdom or investment expertise of only a few individuals.
BlackRock's municipal bond team includes five portfolio managers with an average experience of 14 years and five credit research analysts with an average experience of 11 years. Kevin M. Klingert, a managing director, senior portfolio manager and head of municipal bonds at BlackRock, leads the team, a position he has held since joining BlackRock in 1991. Mr. Klingert has over 17 years of experience in the municipal market. Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice President at Merrill Lynch, Pierce, Fenner & Smith Incorporated, which he joined in 1985. The portfolio management team also includes Craig Kasap, James McGinley, F. Howard Downs and Anthony Pino. Mr. Kasap, CFA, has been a portfolio manager at BlackRock for over four years and is a member of BlackRock's Investment Strategy Group. Prior to joining BlackRock in 1997, Mr. Kasap spent the previous three years as a municipal bond trader with Keystone Investments Inc. in Boston where he was involved in formulating the firm's municipal bond investment strategies. Mr. McGinley has been a portfolio manager and a member of the Investment Strategy Group at BlackRock since 1999. Prior to joining BlackRock in 1999, Mr. McGinley was Vice President of Municipal Trading from 1996 to 1999 and Manager of the Municipal Strategy Group from 1995 to 1999 with Prudential Securities Incorporated. Mr. McGinley joined Prudential Securities Incorporated in 1993 as an Associate in Municipal Research. F. Howard Downs has been a portfolio manager since joining BlackRock in 1999. Prior to joining BlackRock in 1999, Mr. Downs was a Vice President, Institutional Salesman and Sales Manager from 1990 to 1999 at William E. Simon & Sons Municipal Securities, Inc. Mr. Downs was one of the original employees of William E. Simon & Sons Municipal Securities, Inc., founded in 1990, and was responsible for sales of municipal bonds. Anthony Pino has been a portfolio manager since joining BlackRock in 1999. Prior to joining BlackRock in 1999, he was a Brokerage Coordinator at CPI Capital. From 1996 to 1999, Mr. Pino was an Assistant Vice President and trader in the Municipal Strategy Group at Prudential Securities Incorporated.
BlackRock's municipal bond portfolio managers are responsible for over 70 municipal bond portfolios, valued at approximately $12 billion. Municipal mandates include the management of open- and closed-end mutual funds, municipal-only separate accounts or municipal allocations within larger institutional mandates. In addition BlackRock manages 14 municipal liquidity accounts valued at approximately $4.2 billion. Currently, the team manages 13 closed-end municipal funds with approximately $3.5 billion in managed assets as of March 31, 2001.
BlackRock's Investment Process. BlackRock has in-depth expertise in the fixed income market. BlackRock applies the same risk-controlled, active sector rotation style to the management process for all of its fixed income portfolios. BlackRock believes that it is unique in its integration of taxable and municipal bond specialists. Both taxable and municipal bond portfolio managers share the same trading floor and interact frequently for determining the firm's overall investment strategy. This interaction allows each portfolio manager to access the combined experience and expertise of the entire portfolio management group at BlackRock.
BlackRock's portfolio management process emphasizes research and analysis of specific sectors and securities, not interest rate speculation. BlackRock believes that market-timing strategies can be highly volatile and potentially produce inconsistent results. Instead, BlackRock thinks that value over the long-term is best achieved through a risk-controlled approach, focusing on sector allocation, security selection and yield curve management.
In the municipal market, BlackRock believes one of the most important determinants of value is supply and demand. BlackRock's ability to monitor investor flows and frequency and seasonality of issuance is helpful in anticipating the supply and demand for sectors. BlackRock believes that the breadth and expertise of its municipal bond team allow it to anticipate issuance flows, forecast which sectors are likely to have the most supply and plan its investment strategy accordingly.
BlackRock also believes that over the long-term, intense credit analysis will add incremental value and avoid significant relative performance impairments. The municipal credit team is led by Susan C. Heide, Ph.D., who has been, since 1999, Managing Director, Head of Municipal Credit Research and co- chair of BlackRock's Credit Committee. From 1995 to 1999, Dr. Heide was a Director and Head of Municipal Credit Research. Dr. Heide specializes in the credit analysis of municipal securities and as such chairs the monthly municipal bond
presentation to the Credit Committee. In addition, Dr. Heide supervises the team of municipal bond analysts that assists with the ongoing surveillance of the $12 billion in municipal bonds managed by BlackRock.
Prior to joining BlackRock as a Vice President and Head of Municipal Credit Research in 1993, Dr. Heide was Director of Research and a portfolio manager at OFFITBANK. For eight years prior to this assignment (1984 to 1992), Dr. Heide was with American Express Company's Investment Division where she was the Vice President of Credit Research, responsible for assessing the creditworthiness of $6 billion in municipal securities. Dr. Heide began her investment career in 1983 at Moody's Investors Service, Inc. where she was a municipal bond analyst.
Dr. Heide initiated the Disclosure Task Force of the National Federation of Municipal Analysts in 1988 and was co-chairperson of this committee from its inception through the completion of the Disclosure Handbook for Municipal Securities--1992 Update, published in January 1993. As a result of these efforts, the SEC implemented primary and secondary disclosure regulations for municipal bonds in July 1995. Dr. Heide has authored a number of articles on municipal finance and edited The Handbook of Municipal Bonds published in the fall of 1994. Dr. Heide was selected by the Bond Buyer as a first team All- American Municipal Analyst in 1990 and was recognized in subsequent years.
BlackRock's approach to credit risk incorporates a combination of sector- based, top-down macro-analysis of industry sectors to determine relative weightings with a name-specific (issuer-specific), bottom-up detailed credit analysis of issuers and structures. The sector-based approach focuses on rotating into sectors that are undervalued and exiting sectors when fundamentals or technicals become unattractive. The name-specific approach focuses on identifying special opportunities where the market undervalues a credit, and devoting concentrated resources to research the credit and monitor the position. BlackRock's analytical process focuses on anticipating change in credit trends before market recognition. Credit research is a critical, independent element of BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock Advisors and the Trust and certain waivers relating thereto, the Trust has agreed to pay for the investment advisory services and facilities provided by BlackRock Advisors a fee payable monthly in arrears at an annual rate equal to 0.60% of the average weekly value of the Trust's Managed Assets (the "management fee"). BlackRock Advisors has voluntarily agreed to waive receipt of a portion of the management fee or other expenses of the Trust in the amount of 0.25% of the average weekly value of the Trust's Managed Assets for the first five years of the Trust's operations (through July 31, 2006), and for a declining amount for an additional four years (through July 31, 2010). The Trust will also reimburse BlackRock Advisors for all out-of-pocket expenses BlackRock Advisors incurs in connection with performing administrative services for the Trust. In addition, with the approval of the board of trustees, a pro rata portion of the salaries, bonuses, health insurance, retirement benefits and similar employment costs for the time spent on Trust operations (other than the provision of services required under the investment management agreement) of all personnel employed by BlackRock Advisors who devote substantial time to Trust operations or the operations of other investment companies advised by the Advisor may be reimbursed to BlackRock Advisors. Managed Assets are the total assets of the Trust, which includes any proceeds from the Preferred Shares, minus the sum of accrued liabilities (other than indebtedness attributable to leverage). This means that during periods in which the Trust is using leverage, the fee paid to BlackRock Advisors will be higher than if the Trust did not use leverage because the fee is calculated as a percentage of the Trust's Managed Assets, which include those assets purchased with leverage.
In addition to the management fee of BlackRock Advisors, the Trust pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with BlackRock Advisors), custodian, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
For the first nine years of the Trust's operation, BlackRock Advisors has undertaken to waive its management fee and expenses payable by the Trust in the amounts, and for the time periods, set forth below:
Twelve Month Percentage Waived Period (as a percentage Ending of average weekly July 31 Managed Assets*) ------- ----------------- 2002**............................................... 0.25% 2003................................................. 0.25% 2004................................................. 0.25% 2005................................................. 0.25% 2006................................................. 0.25% 2007................................................. 0.20% 2008................................................. 0.15% 2009................................................. 0.10% 2010................................................. 0.05% |
*Including net assets attributable to Preferred Shares.
**From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the Trust's fees and expenses beyond July 31, 2010 or after termination of the investment management agreement.
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 on the Friday of each week and on the last business day of each month. In the event that any Friday is not a business day, the net asset value will be calculated on a date determined by BlackRock Advisors. 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 Preferred Shares of the Trust from the Trust's total assets (the value of the securities the Trust holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Trust outstanding.
The Trust values its fixed income securities by using market quotations, prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics in accordance with procedures established by the board of trustees of the Trust. A substantial portion of the Trust's fixed income investments will be valued utilizing one or more pricing services approved by the Trust's board of trustees. Debt securities having a remaining maturity of 60 days or less when purchased and debt securities originally purchased with maturities in excess of 60 days but which currently have maturities of 60 days or less are valued at cost adjusted for amortization of premiums and accretion of discounts. Any securities or other assets for which current market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by and under the general supervision and responsibility of the Trust's board of trustees.
DISTRIBUTIONS
The Trust will distribute to holders of its common shares monthly dividends of all or a portion of its tax-exempt interest income after payment of dividends on any Preferred Shares of the Trust which may be outstanding. It is expected that the initial monthly dividend on shares of the Trust's common shares will be
declared approximately 45 days and paid approximately 60 to 90 days after completion of this offering. The Trust expects that all or a portion of any capital gain and other taxable income will be distributed at least annually.
Various factors will affect the level of the Trust's income, including the asset mix, the amount of leverage utilized by the Trust and the effects thereof and the Trust's use of hedging. To permit the Trust to maintain a more stable monthly distribution, the Trust may from time to time distribute less than the entire amount of tax-exempt interest income earned in a particular period. The undistributed tax-exempt interest income would be available to supplement future distributions. As a result, the distributions paid by the Trust for any particular monthly period may be more or less than the amount of tax-exempt interest income actually earned by the Trust during the period. Undistributed tax-exempt interest income will add to the Trust's net asset value and, correspondingly, distributions from undistributed tax-exempt interest income will deduct from the Trust's net asset value. Shareholders will automatically have all dividends and distributions reinvested in common shares of the Trust issued by the Trust or purchased in the open market in accordance with the Trust's Dividend Reinvestment Plan unless an election is made to receive cash. See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
Unless you elect to receive cash by contacting the Plan Agent, all dividends declared for your common shares of the Trust will be automatically reinvested by EquiServe Trust Company, N.A. (the "Plan Agent"), agent for shareholders in administering the Trust's Dividend Reinvestment Plan (the "Plan"), in additional common 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 EquiServe Trust Company, N.A., as dividend disbursing agent. You may elect not to participate in the Plan and to receive all dividends in cash by sending written instructions or by contacting EquiServe Trust Company, N.A., 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 contacting the Plan Agent before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Plan Agent will open an account for each common shareholder under the Plan in the same name in which such common shareholder's common shares are registered. Whenever the Trust declares a dividend or other capital gain distribution (together, a "dividend") payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in common shares. The common shares will be acquired by the Plan Agent for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Trust ("newly issued common shares") or (ii) by purchase of outstanding common shares on the open market ("open-market purchases") on the New York Stock Exchange or elsewhere. If, on the payment date for any dividend, the net asset value per common share is equal to or less than the market price per common share, the Plan Agent will invest the dividend amount in newly issued common shares on behalf of the participants. The number of newly issued common shares to be credited to each participant's account will be determined by dividing the dollar amount of the dividend by the net asset value per common share on the date the common shares are issued. If, on the payment date for any dividend, the net asset value per common share is greater than the market value, the Plan Agent will invest the dividend amount in common shares acquired on behalf of the participants in open-market purchases. In the event of a market discount on the payment date for any dividend, the Plan Agent will have until the last business day before the next date on which the common shares trade on an "ex-dividend" basis or 30 days after the payment date for such dividend, whichever is sooner (the "last purchase date"), to invest the dividend amount in common shares acquired in open-market purchases. It is contemplated that the Trust will pay monthly income dividends. Therefore, the period during which open-market purchases can be made will exist only from the payment date of each dividend through the date before the next "ex-dividend" date which typically will be approximately ten days. If, before the Plan Agent has completed its open-market purchases, the market price per common share exceeds the net asset value per common share,
the average per common share purchase price paid by the Plan Agent may exceed the net asset value of the common shares, resulting in the acquisition of fewer common shares than if the dividend had been paid in newly issued common shares on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued common shares at the net asset value per common share at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the 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 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."
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 150 Royall Street, Canton, Massachusetts 02021.
DESCRIPTION OF SHARES
Common Shares
The Trust is an unincorporated business trust organized under the laws of Delaware pursuant to an Agreement and Declaration of Trust dated as of March 30, 2001, as later amended and restated. The Trust is authorized to issue an unlimited number of common shares of beneficial interest, par value $.001 per share. Each common share has one vote and, when issued and paid for in accordance with the terms of this offering, will be fully paid and non- assessable, except that the trustees shall have the power to cause shareholders to pay expenses of the Trust by setting off charges due from shareholders from declared but unpaid dividends or distributions owed the shareholders and/or by reducing the number of common shares owned by each respective shareholder. 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, unless asset coverage (as defined in the Investment Company Act) with respect to Preferred Shares would be at least 200% after giving effect to the distributions and unless certain other requirements imposed by any rating agencies rating the Preferred Shares have been met. See "--Preferred Shares" below. All common shares are equal as to dividends, assets and voting privileges and have no conversion, preemptive or other subscription rights. The Trust will send annual and semi-annual reports, including financial statements, to all holders of its shares.
The Trust has no present intention of offering any additional shares other than the Preferred Shares and common shares issued under the Trust's Dividend Reinvestment Plan. Any additional offerings of shares will require approval by the Trust's board of trustees. Any additional offering of common shares will be subject to the requirements of the Investment Company Act, which requires that shares may not be issued at a price below the then current net asset value, exclusive of sales load, except in connection with an offering to existing holders of common shares or with the consent of a majority of the Trust's outstanding voting securities.
The Trust has been approved for listing of the common shares on the New York Stock Exchange, subject to official notice of issuance, under the symbol "BFK".
The Trust's net asset value per share generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater because the Trust intends to have a leveraged capital structure. Net asset value will be reduced immediately following the offering of common shares by the amount of the sales load and organization and offering expenses paid by the Trust. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Trust do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional common shares or sell shares already held, the shareholder may do so by trading on the New York Stock Exchange through a broker or otherwise. Shares of closed-end investment companies frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Trust that invest predominantly 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, as amended and restated, 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 of 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 is likely to achieve the potential benefits to the holders of common shares described in this prospectus. The Trust may conduct other offerings of Preferred Shares in the future subject to the same percentage restriction, after giving effect to previously issued Preferred Shares. The board of trustees also reserves the right to change the foregoing percentage limitation and may issue Preferred Shares to the extent permitted by the Investment Company Act, which currently limits the aggregate liquidation preference of all outstanding Preferred Shares to 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, as amended and restated, 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 Preferred 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 "Certain Provisions in the Agreement and Declaration of 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 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 to increase or decrease the authorized number of Preferred Shares. The class vote of holders of Preferred Shares described above will in each case be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Trust. The terms of the Preferred Shares are expected to provide that (1) they are redeemable by the Trust in whole or in part at the original purchase price per share plus accrued dividends per share, (2) the Trust may tender for or purchase Preferred Shares and (3) the Trust may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of Preferred Shares by the Trust will reduce the leverage applicable to the common shares, while any resale of shares by the Trust will increase that leverage.
The discussion above describes the present intention of the board of trustees with respect to an offering of Preferred Shares. If the board of trustees determines to proceed with such an offering, the terms of the Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Trust's Agreement and Declaration of Trust, as amended and restated. 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, as amended and restated, includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Trust or to change the composition of its board of trustees. This could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control over the Trust. Such attempts could have the effect of increasing the expenses of the Trust and disrupting the normal operation of the Trust. The board of trustees is divided into three classes, with the terms of one class expiring at each annual meeting of shareholders. At each annual meeting, one class of trustees is elected to a three-year term. This provision could delay for up to two years the replacement of a majority of the board of trustees. A trustee may be removed from office by the action of a majority of the remaining trustees followed by a vote of the holders of at least 75% of the shares then entitled to vote for the election of the respective trustee.
In addition, the Trust's Agreement and Declaration of Trust, as amended and restated, requires the favorable vote of a majority of the Trust's board of trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, to approve, adopt or authorize certain transactions with 5% or greater holders of a class or series of shares and their associates, unless the transaction has been approved by at least 80% of the trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required. For purposes of these provisions, a 5% or greater holder of a class or series of shares (a "Principal Shareholder") refers to any person who, whether directly or indirectly and whether alone or together with its affiliates and associates, beneficially owns 5% or more of the outstanding shares of any class or series of shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements are:
. the merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder;
. the issuance of any securities of the Trust to any Principal Shareholder for cash, except pursuant to the Dividend Reinvestment Plan;
. the sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period; or
. the sale, lease or exchange to the Trust or any subsidiary of the Trust, in exchange for securities of the Trust, of any assets of any Principal Shareholder, except assets having an aggregate fair market value of less than $1,000,000, aggregating for purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period.
To convert the Trust to an open-end investment company, the Trust's Agreement and Declaration of Trust, as amended and restated, requires the favorable vote of a majority of the board of the trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of shares of the Trust, voting separately as a class or series, unless such amendment has been approved by at least 80% of the trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required. The foregoing vote would satisfy a separate requirement in the Investment Company Act that any conversion of the Trust to an open-end investment company be approved by the shareholders. If approved in the foregoing manner, conversion of the Trust to an open-end investment company could not occur until 90 days after the shareholders' meeting at which such conversion was approved and would also require at least 30 days' prior notice to all shareholders. Conversion of the Trust to an open-end investment company would require the redemption of all outstanding Preferred Shares, which could eliminate or alter the leveraged capital structure of the Trust with respect to the common shares. Following any such conversion, it is also possible that certain of the Trust's investment policies and strategies would have to be
modified to assure sufficient portfolio liquidity. In the event of conversion, the common shares would cease to be listed on the New York Stock Exchange or other national securities exchanges or market systems. Shareholders of an open- end investment company may require the company to redeem their shares at any time, except in certain circumstances as authorized by or under the Investment Company Act, at their net asset value, less such redemption charge, if any, as might be in effect at the time of a redemption. The Trust expects to pay all such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities. If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If the Trust were converted to an open-end fund, it is likely that new shares would be sold at net asset value plus a sales load. The board of trustees believes, however, that the closed-end structure is desirable in light of the Trust's investment objective and policies. Therefore, you should assume that it is not likely that the board of trustees would vote to convert the Trust to an open-end fund.
To liquidate the Trust, the Trust's Agreement and Declaration of Trust, as amended and restated, requires the favorable vote of a majority of the board of trustees followed by the favorable vote of the holders of at least 75% of the outstanding shares of each affected class or series of the Trust, voting separately as a class or series, unless such amendment has been approved by at least 80% of trustees, in which case "a majority of the outstanding voting securities" (as defined in the Investment Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding voting securities" under the Trust's Agreement and Declaration of Trust, as amended and restated, each class and series of the Trust shall vote together as a single class, except to the extent required by the 1940 Act or the Trust's Agreement and Declaration of Trust, as amended and restated, with respect to any class or series of shares. If a separate vote is required the applicable proportion of shares of the class or series, voting as a separate, class also will be required.
The board of trustees has determined that provisions with respect to the board of trustees and the shareholder voting requirements described above, which voting requirements are greater than the minimum requirements under Delaware law or the Investment Company Act, are in the best interest of shareholders generally. Reference should be made to the Agreement and Declaration of Trust, as amended and restated, on file with the Securities and Exchange Commission for the full text of these provisions.
CLOSED-END TRUST STRUCTURE
The Trust is a newly organized, diversified, closed-end 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 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.
REPURCHASE OF SHARES
Shares of closed-end investment companies often trade at a discount to their net asset values, and the Trust's common shares may also trade at a discount to their net asset value, although it is possible that they may trade at a premium above net asset value. The market price of the Trust's common shares will be determined by such factors as relative demand for and supply of such common shares in the market, the Trust's net asset value, general market and economic conditions and other factors beyond the control of the Trust. See "Net Asset Value." Although the Trust's common shareholders will not have the right to redeem their common shares, the Trust may take action to repurchase common shares in the open market or make tender offers for its common shares. This may have the effect of reducing any market discount from net asset value.
There is no assurance that, if action is undertaken to repurchase or tender for common shares, such action will result in the common shares' trading at a price which approximates their net asset value. Although share repurchases and tenders could have a favorable effect on the market price of the Trust's common shares, you should be aware that the acquisition of common shares by the Trust will decrease the total assets of the Trust and, therefore, may have the effect of increasing the Trust's expense ratio and decreasing the asset coverage with respect to any Preferred Shares outstanding. Any share repurchases or tender offers will be made in accordance with requirements of the Securities Exchange Act of 1934 and the Investment Company Act.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the Statement of Additional Information provides general tax information related to an investment in the common shares. The discussion reflects applicable tax laws of the United States as of the date of this prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service retroactively or prospectively. Because tax laws are complex and often change, you should consult your tax advisor about the tax consequences of an investment in the Trust.
The Trust primarily invests in municipal bonds whose income is otherwise exempt from regular Federal income tax. Consequently, the regular monthly dividends you receive will generally be exempt from regular Federal income tax. A portion of these dividends, however, may be subject to the Federal alternative minimum tax.
Although the Trust does not seek to realize taxable income or capital gains, the Trust may realize and distribute taxable income or capital gains from time to time as a result of the Trust's normal investment activities. The Trust will distribute at least annually any taxable income or realized capital gains. Distributions of net short-term gains are taxable as ordinary income. Distributions of net long-term capital gains are taxable to you as long-term capital gains regardless of how long you have owned your common shares. Dividends will not qualify for a dividends received deduction generally available to corporate shareholders.
Each year, you will receive a year-end statement designating the amounts of tax-exempt dividends, capital gains income dividends and ordinary income dividends paid to you during the preceding year, including the source of investment income by state and the portion of income that is subject to the Federal alternative minimum tax. 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 taxable income and to be permitted 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 taxable income and all the distributions would be taxable as ordinary income to the extent of the Trust's earnings and profits. In particular, in order for the Trust to pay tax-exempt dividends, at least 50% of the value of the Trust's total assets must consist of tax-exempt obligations. The Trust intends to meet this requirement. If the Trust failed to do so, it would not be able to pay tax-exempt dividends and your distributions attributable to interest received by the Trust from any source would be taxable as ordinary income to the extent of the Trust's earnings and profits.
The Trust may be required to withhold on certain of your dividends if you have not provided the Trust with your correct taxpayer identification number (if you are an individual, normally your Social Security number), or if you are otherwise subject to back-up withholding. If you receive Social Security benefits, you should be aware that tax-free income is taken into account in calculating the amount of these benefits that may be subject to Federal income tax. If you borrow money to buy Trust shares, you may not deduct the interest on that loan. Under Federal income tax rules, Trust shares may be treated as having been bought with borrowed money even if the purchase of the Trust shares cannot be traced directly to borrowed money.
If you are subject to the Federal alternative minimum tax, a portion of your regular monthly dividends may be taxable.
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 advisors about state and local tax matters.
Please refer to the Statement of Additional Information for more detailed information. You are urged to consult your tax advisor.
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each Underwriter named below has 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.
Number
Underwriters of Shares
------------ ---------
Salomon Smith Barney Inc. .....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
A.G. Edwards & Sons, Inc. .....................................
Prudential Securities Incorporated.............................
UBS Warburg LLC................................................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..................................................
Gruntal & Co., L.L.C. .........................................
J.J.B. Hilliard, W.L. Lyons, Inc. .............................
Raymond James & Associates, Inc. ..............................
-------
Total........................................................
=======
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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., Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Gruntal & Co., L.L.C., J.J.B. Hilliard, W.L. Lyons, Inc. and Raymond James & Associates, Inc. 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. per common share. The sales load the Trust will pay of $0.675 per common share is equal to 4.5% of the initial offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0. per common share on sales to certain other dealers. If all of the common shares are not sold at the initial offering price, the representatives may change the public offering price and other selling terms. 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 July , 2001.
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 and BlackRock 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 of the Trust or grant any options or warrants to purchase common shares of the Trust. Salomon Smith Barney Inc. in its sole discretion may release any of the securities subject to the foregoing agreement at any time without notice.
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 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 "BFK".
The Trust, BlackRock Advisors and BlackRock Financial Management have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933.
The Trust has agreed to pay the Underwriters $50,000 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 and 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 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 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 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.
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 Management by notice to the Trust, BlackRock Advisors or BlackRock Financial Management 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 this 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.
Prior to the public offering of common shares, BlackRock Advisors will purchase common shares from the Trust in an amount satisfying the net worth requirements of Section 14(a) of the Investment Company Act.
J.J.B. Hilliard, W.L. Lyons, Inc., one of the Underwriters, is an affiliate of BlackRock Advisors and BlackRock Financial Management.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich Street, New York, New York 10013. The principal business address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial Center, New York, New York 10080.
CUSTODIAN AND TRANSFER AGENT
The Custodian of the assets of the Trust is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The Custodian performs custodial, fund accounting and portfolio accounting services. EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, will serve as the Trust's Transfer Agent with respect to the common shares.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York and for the Underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett may rely as to certain matters of Delaware law on the opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds............................................................ B-2
Investment Objective and Policies.......................................... B-2
Investment Policies and Techniques......................................... B-4
Other Investment Policies and Techniques................................... B-10
Management of the Trust.................................................... B-13
Portfolio Transactions and Brokerage....................................... B-19
Description of Shares...................................................... B-20
Repurchase of Common Shares................................................ B-20
Tax Matters................................................................ B-22
Performance Related and Comparative Information............................ B-26
Experts.................................................................... B-29
Additional Information..................................................... B-29
Financial Statements....................................................... F-1
Report of Independent Auditors............................................. F-1
APPENDIX A Ratings of Investments.......................................... A-1
APPENDIX B Taxable Equivalent Yield Table.................................. B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies......... C-1
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4,000,000 Shares
BlackRock
Municipal Income Trust
Common Shares
PROSPECTUS
July , 2001
Salomon Smith Barney
Merrill Lynch & Co.
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg
Dain Rauscher Wessels
Gruntal & Co., L.L.C.
J.J.B. Hilliard, W.L. Lyons, Inc.
A PNC Company
Raymond James
NA-PRO-6-01
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ + +The information in this Statement of Additional Information is not complete + +and may be changed. We may not sell these securities until the Registration + +Statement filed with the Securities and Exchange Commission is effective. + +This Statement of Additional Information is not an offer to sell these + +securities and it is not soliciting an offer to buy these securities in any + +state where the offer or sale is not permitted. + |
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 25, 2001
BlackRock Municipal Income Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Municipal Income Trust (the "Trust") is a newly organized, diversified, closed-end management investment company. This Statement of Additional Information relating to common shares does not constitute a prospectus, but should be read in conjunction with the prospectus relating thereto dated July , 2001. This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing common shares, and investors should obtain and read the prospectus prior to purchasing such shares. A copy of the prospectus may be obtained without charge by calling (888) 825-2257. You may also obtain a copy of the prospectus on the Securities and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the prospectus.
TABLE OF CONTENTS
Page
----
Use of Proceeds............................................................ B-2
Investment Objective and Policies.......................................... B-2
Investment Policies and Techniques......................................... B-4
Other Investment Policies and Techniques................................... B-10
Management of the Trust.................................................... B-13
Portfolio Transactions and Brokerage....................................... B-19
Description of Shares...................................................... B-20
Repurchase of Common Shares................................................ B-21
Tax Matters................................................................ B-22
Performance Related and Comparative Information............................ B-25
Experts.................................................................... B-28
Additional Information..................................................... B-28
Financial Statements....................................................... F-1
Report of Independent Auditors............................................. F-1
APPENDIX A Ratings of Investments.......................................... A-1
APPENDIX B Taxable Equivalent Yield Table.................................. B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies......... C-1
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This Statement of Additional Information is dated July , 2001.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment objective and policies, the net proceeds of the offering will be invested in high quality, short-term tax-exempt money market securities or in high quality municipal bonds with relatively low volatility (such as pre-refunded and intermediate-term bonds), to the extent such securities are available. If necessary to invest fully the net proceeds of the offering immediately, the Trust may also purchase, as temporary investments, short-term taxable investments of the type described under "Investment Policies and Techniques-- Short-Term Taxable Fixed Income Securities," the income on which is subject to regular Federal income tax, and securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the type in which the Trust may invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The Trust has not established any limit on the percentage of its portfolio that may be invested in municipal bonds subject to the alternative minimum tax provisions of Federal tax law, and the Trust expects that a portion of the income it produces will be includable in alternative minimum taxable income. Common shares therefore would not ordinarily be a suitable investment for investors who are subject to the Federal alternative minimum tax or who would become subject to such tax by purchasing common shares. The suitability of an investment in common shares will depend upon a comparison of the after-tax yield likely to be provided from the Trust with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investor's tax position. Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding common shares and Preferred Shares voting together as a single class, and of the holders of a majority of the outstanding Preferred Shares voting as a separate class:
(1) invest 25% or more of the value of its total assets in any one industry, provided that this limitation does not apply to municipal bonds other than those municipal bonds backed only by assets and revenues of nongovernmental issuers;
(2) issue senior securities or borrow money other than as permitted by the Investment Company Act or pledge its assets other than to secure such issuances or in connection with hedging transactions, short sales, when- issued and forward commitment transactions and similar investment strategies;
(3) make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities consistent with the Trust's investment objective and policies or the entry into repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale of its own securities the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other than municipal bonds secured by real estate or interests therein, provided that the Trust may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
(6) purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the Trust becoming subject to registration with the Commodity Futures Trading Commission (the "CFTC") as a commodity pool.
When used with respect to particular shares of the Trust, "majority of the
outstanding" means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non-governmental issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that the Trust may invest more than 25% of its total assets in a broader economic sector of the market for municipal obligations, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue obligations. The Trust reserves the right to invest more than 25% of its assets in industrial development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1) above, a non-governmental issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other govern- mental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Trust's assets that may be invested in municipal bonds insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a shareholder in any investment company, the Trust will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Trust's advisory fees and other expenses with respect to assets so invested. Holders of common shares would therefore be subject to duplicative expenses to the extent the Trust invests in other investment companies. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein and in the prospectus. As described in the prospectus in the section entitled "Risks," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Trust is also subject to the following non-fundamental restrictions and policies, which may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with applicable laws, rules and regulations and unless after giving effect to such sale, the market value of all securities sold short does not exceed 25% of the value of the Trust's total assets and the Trust's aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that class. The Trust may also make short sales "against the box" without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security;
(2) purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act or any exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of exercising control.
The restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the acquisition of securities.
In addition, to comply with Federal tax requirements for qualification as a "regulated investment company," the Trust's investments will be limited in a manner such that at the close of each quarter of each fiscal year, (a) no more than 25% of the value of the Trust's total assets are invested in the securities (other than United States government securities or securities of other regulated investment companies) of a single issuer or two or more issuers controlled by the Trust and engaged in the same, similar or related trades or businesses and (b) with regard to at least 50% of the Trust's total assets, no more than 5% of its total assets are invested in the securities (other than United States government securities or securities of other regulated investment companies) of a single issuer. These tax-related limitations may be changed by the Trustees to the extent appropriate in light of changes to applicable tax requirements.
The Trust intends to apply for ratings for the Preferred Shares from Moody's and/or S&P. In order to obtain and maintain the required ratings, the Trust will be required to comply with investment quality, diversification and other guidelines established by Moody's or S&P. Such guidelines will likely be more restrictive than the restrictions set forth above. The Trust does not anticipate that such guidelines would have a material adverse effect on the Trust's holders of common shares or its ability to achieve its investment objective. The Trust presently anticipates that any Preferred Shares that it intends to issue would be initially given the highest ratings by Moody's (Aaa) or by S&P (AAA), but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of Preferred Shares by the Trust. Moody's and S&P receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trust's investment objective, policies and techniques that are described in the prospectus.
Portfolio Investments
The Trust will invest primarily in a portfolio of investment grade municipal bonds that are exempt from regular Federal income tax.
Issuers of bonds rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect such payment capacity. Municipal bonds rated Baa or BBB are considered "investment grade" securities; municipal bonds rated Baa are considered medium grade obligations which lack outstanding investment characteristics and have speculative characteristics, while municipal bonds rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal bonds rated AAA in which the Trust may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest. Municipal bonds rated below investment grade quality are obligations of issuers that are considered predominantly speculative with respect to the issuer's capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Municipal bonds rated below investment grade tend to be less marketable than higher-quality bonds because the market for them is less broad. The market for unrated municipal bonds is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Trust may have greater difficulty selling its portfolio securities. The Trust will be more dependent on BlackRock's research and analysis when investing in these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the municipal
bonds they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, municipal bonds with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield.
The Trust will primarily invest in municipal bonds with long-term maturities in order to maintain a weighted average maturity of 15 or more years, but the average weighted maturity may be shortened from time to time depending on market conditions. As a result, the Trust's portfolio at any given time may include both long-term and intermediate-term municipal bonds. Moreover, during temporary defensive periods (e.g., times when, in BlackRock's opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term municipal bonds are available), and in order to keep cash on hand fully invested, including the period during which the net proceeds of the offering are being invested, the Trust may invest any percentage of its assets in short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the type in which the Trust may invest directly. The Trust intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such municipal bonds maturing in three years or less from the date of issuance) and municipal commercial paper. The Trust will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moody's, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest. Taxable temporary investments of the Trust may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See "Other Investment Policies and Techniques-- Repurchase Agreements." To the extent the Trust invests in taxable investments, the Trust will not at such times be in a position to achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply only at the time of the purchase of a security and the Trust will not be required to dispose of securities in the event Moody's, S&P or Fitch downgrades its assessment of the credit characteristics of a particular issuer.
Also included within the general category of municipal bonds described in the prospectus are participations in lease obligations or installment purchase contract obligations (hereinafter collectively called "Municipal Lease Obligations") of municipal authorities or entities. Although a Municipal Lease Obligation does not constitute a general obligation of the municipality for which the municipality's taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payments due under the Municipal Lease Obligation. However, certain Municipal Lease Obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In the case of a "non-appropriation" lease, the Trust's ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and the disposition or re-leasing of the property might prove difficult. In order to reduce this risk, the Trust will only purchase Municipal Lease Obligations where BlackRock believes the issuer has a strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to the laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon municipalities to levy taxes. There is also the possibility that, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal bonds may be materially affected.
In addition to the types of municipal bonds described in the prospectus, the Trust may invest in other securities that pay interest that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument. The Trust treats all such tax-exempt securities as municipal bonds.
Short-Term Taxable Fixed-Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, the Trust may invest up to 100% of its total assets in cash equivalents and short- term taxable fixed-income securities, although the Trust intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Short-term taxable fixed income investments are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by the Trust may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Trust purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Trust during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Trust to invest temporarily available cash. The Trust may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers' acceptances in which the Trust may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Trust is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Trust is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Trust could incur a loss of both principal and interest. BlackRock monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. BlackRock does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Trust. If the seller were to be subject to a Federal bankruptcy proceeding, the ability of the Trust to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Trust and a corporation. There is no secondary market for such notes. However, they are redeemable by the Trust at any time. BlackRock will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Trust's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that are exempt from regular Federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed income securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuer's access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuer's capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuer's ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuer's ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as those described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Trust may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management techniques and instruments. The Trust may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively, "Additional Investment Management Techniques"). These Additional Investment Management Techniques may be used for duration management and other risk management techniques in an attempt to protect against possible changes in the market value of the Trust's portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect the Trust's unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Additional Investment Management Techniques are described below. The ability of the Trust to use them successfully will depend on BlackRock's ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of the Trust that arise from the use of Additional Investment Management Techniques will be covered by segregated liquid assets or offsetting transactions, the Trust and BlackRock believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Commodity options and futures contracts regulated by the CFTC have specific margin requirements described below and are not treated as senior securities. The use of certain Additional Investment Management Techniques may give rise to taxable income and have certain other consequences. See "Tax Matters."
Interest Rate Transactions. The Trust may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Trust expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Trust anticipates purchasing at a later date. The Trust will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. The Trust will not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Trust receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. The Trust will accrue the net amount of the excess, if any, of the Trust's obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. The Trust will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of entering into such
transaction. If there is a default by the other party to such a transaction, the Trust will have contractual remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Trust may also enter into contracts for the purchase or sale for future delivery ("futures contracts") of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. The Trust will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, the Trust is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of the Trust's net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities, Indices and Futures Contracts. The Trust may sell or purchase call options ("calls") on municipal bonds and indices based upon the prices of futures contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or at a specified time during the option period. All such calls sold by the Trust must be "covered" as long as the call is outstanding (i.e., the Trust must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by the Trust exposes the Trust during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require the Trust to hold a security or futures contract which it might otherwise have sold. The purchase of a call gives the Trust the right to buy a security, futures contract or index at a fixed price. Calls on futures on municipal bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy the Trust's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may purchase put options ("puts") that relate to municipal bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. The Trust may also sell puts on municipal bonds, indices or futures contracts on such securities if the Trust's contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. The Trust will not sell puts if, as a result, more than 50% of the Trust's assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the Trust may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock permits the Trust to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. The Trust will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a contract between the Trust and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Trust buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Trust equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, the Trust will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by the Trust. The Trust will not enter into MMD Rate Locks if, as a result, more than 50% of its assets would be required to cover its potential obligations under its hedging and other investment transactions.
Appendix C contains further information about the characteristics, risks and possible benefits of Additional Investment Management Techniques and the Trust's other policies and limitations (which are not fundamental policies) relating to investment in futures contracts and options. The principal risks relating to the use of futures contracts and other Additional Investment Management Techniques are: (a) less than perfect correlation between the prices of the instrument and the market value of the securities in the Trust's portfolio; (b) possible lack of a liquid secondary market for closing out a position in such instruments; (c) losses resulting from interest rate or other market movements not anticipated by BlackRock; and (d) the obligation to meet additional variation margin or other payment requirements, all of which could result in the Trust being in a worse position than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the ability of the Trust to engage in Additional Investment Management Techniques. See "Tax Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a transaction in which the Trust sells a security it does not own in anticipation that the market price of that security will decline. The Trust may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trust may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other high grade liquid securities. The Trust will also be required to segregate similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by the Trust on such security, the Trust may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time the Trust replaces the borrowed security, the Trust will incur a loss; conversely, if the price declines, the Trust will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Trust's gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
The Trust will not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its total assets or the Trust's aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. The Trust may also make short sales "against the box" without respect to such limitations. In this type of short sale, at the time of the sale, the Trust owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis and may purchase or sell municipal bonds on a "forward commitment" basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but the Trust will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If the Trust disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the time the Trust 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 are not treated by the Trust as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Borrowing
Although it has no present intention of doing so, the Trust reserves the right to borrow funds to the extent permitted as described under the caption "Investment Objective and Policies--Investment Restrictions." The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of the Trust. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by the Trust with an agreement by the Trust to repurchase the securities at an agreed upon price, date and interest payment. At the time the Trust enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Trust establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Trust; however, under certain circumstances in which the Trust does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Trust's limitation on borrowings. The use by the Trust of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities the Trust has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Trust in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Trust's obligation to repurchase the securities, and the Trust's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Trust would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities (U.S. government securities or municipal bonds) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Trust's holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. See "Tax Matters" for information relating to the allocation of taxable income between common shares and Preferred Shares, if any. The Trust will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of BlackRock, present minimal credit risk. The risk to the Trust is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Trust might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Trust may be delayed or limited. BlackRock will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, BlackRock will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a bond that does not pay interest for its entire life. The market prices of zero coupon bonds are affected to a greater extent by changes in prevailing levels of interest rates and thereby tend to be more volatile in price than securities that pay interest periodically. In addition, because the Trust accrues income with respect to these securities prior to the receipt of such interest, it may have to dispose of portfolio securities under disadvantageous circumstances in order to obtain cash needed to pay income dividends in amounts necessary to avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to brokers, dealers and other financial institutions which meet the creditworthiness standards established by the board of trustees of the Trust ("Qualified Institutions"). By lending its portfolio securities, the Trust attempts to increase its income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Trust. The Trust may lend its portfolio securities so long as the terms and the structure of such loans are not inconsistent with the requirements of the Investment Company Act, which currently require that (a) the borrower pledge and maintain with the Trust collateral consisting of cash, a letter of credit issued by a U.S. bank, or securities issued or guaranteed by the U.S. government having a value at all times not less than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the value of the loan is "marked to the market" on a daily basis), (c) the loan be made subject to termination by the Trust at any time and (d) the Trust receive reasonable interest on the loan (which may include the Trust's investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. The Trust will not lend portfolio securities if, as a result, the aggregate value of such loans exceeds 33 1/3% of the value of the Trust's total assets (including such loans). Loan arrangements made by the Trust will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange. All relevant facts and circumstances, including the creditworthiness of the Qualified Institution, will be monitored by BlackRock and will be considered in making decisions with respect to lending of securities, subject to review by the Trust's board of trustees.
The Trust may pay reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the Trust's board of trustees. In addition, voting rights may pass with the loaned securities, but if a material event were to occur affecting such a loan, the loan must be called and the securities voted.
Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest municipal bonds. Residual interest municipal bonds pay interest at rates that bear an inverse relationship to the interest rate on another security or the value of an index ("inverse floaters"). An investment in inverse floaters may involve greater risk than an investment in a fixed-rate bond. Because changes in the interest rate on the other security or index inversely affect the residual interest paid on the inverse floater, the value of an inverse floater is generally more volatile than that of a fixed-rate bond. Inverse floaters have interest rate adjustment formulas which generally reduce or, in the extreme, eliminate the interest paid to the Trust when short-term interest rates rise, and increase the interest paid to the Trust when short-term interest rates fall. Inverse floaters have varying degrees of liquidity, and the market for these securities is relatively volatile. These securities tend to underperform the market for fixed-rate bonds in a rising interest rate environment, but tend to outperform the market for fixed-rate bonds when interest rates decline. Shifts in long-term interest rates may, however, alter this tendency. Although volatile, inverse floaters typically offer the potential for yields exceeding the yields available on fixed-rate bonds with comparable credit quality, coupon, call provisions and maturity. These securities usually permit the investor to convert the floating rate to a fixed rate (normally adjusted downward), and this optional conversion feature may provide a partial hedge against rising rates if exercised at an opportune time. Investment in inverse floaters may amplify the effects of the Trust's use of leverage. Should short- term interest rates rise, the combination of the Trust's investment in inverse floaters and the use of leverage likely will adversely affect the Trust's income and distributions to common shareholders. Although the Trust does not intend initially to invest in inverse floaters, the Trust may do so at some point in the future. The Trust will provide shareholders 30 days' written notice prior to any change in its policy of not investing in inverse floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of BlackRock Advisors are not exclusive and BlackRock Advisors provides similar services to other investment companies and other clients and may engage in other activities.
The investment management agreement also provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, BlackRock Advisors is not liable to the Trust or any of the Trust's shareholders for any act or omission by BlackRock Advisors in the supervision or management of its respective investment activities or for any loss sustained by the Trust or the Trust's shareholders and provides for indemnification by the Trust of BlackRock Advisors, its directors, officers, employees, agents and control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations and conditions.
The investment management agreement and certain waivers of management fees were approved by the Trust's board of trustees on May 24, 2001, including a majority of the trustees who are not parties to the agreement or interested persons of any such party (as such term is defined in the Investment Company Act). This agreement provides for the Trust to pay a management fee at an annual rate equal to 0.70% of the average weekly value of the Trust's Managed Assets. A related waiver letter from BlackRock Advisors provided for a temporary fee waiver of 0.30% of the average weekly value of the Trust's total Managed Assets in each of the first five years of the Trust's operations (through July 31, 2006) and for a declining amount for an additional
five years. Subsequently, BlackRock Advisors unilaterally agreed to permanently waive a portion of the management fee to which it is entitled equal to 0.10% of the average weekly value of the Trust's total Managed Assets and adjusted the temporary fee waiver so that BlackRock Advisors would waive 0.25% of the average weekly value of the Trust's total Managed Assets in each of the first five years and would waive a declining amount for an additional four years as set forth in the prospectus under "Management of the Trust--Investment Management Agreement." The net effect of the permanent fee waiver and the adjusted temporary fee waiver schedule was to reduce the management fees paid by the Trust by 0.05% of the Trust's total Managed Assets in each of the first ten years of the Trust's operations and to reduce the management fees paid by the Trust by 0.10% of the Trust's total Managed Assets in each year thereafter.
The investment management agreement and the waivers of management fees were approved by the sole common shareholder of the Trust as of July 19, 2001. The investment management agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated, will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Trust's board of trustees or the vote of a majority of the outstanding voting securities of the Trust (as such term is defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to the investment management agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The investment management agreement may be terminated as a whole at any time by the Trust, without the payment of any penalty, upon the vote of a majority of the Trust's board of trustees or a majority of the outstanding voting securities of the Trust or by BlackRock Advisors, on 60 days' written notice by either party to the other. The investment management agreement will terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
Sub-Investment Advisory Agreement
BlackRock Financial Management, the Sub-Advisor, is a wholly owned subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory agreement, BlackRock Advisors has appointed BlackRock Financial Management, one of its affiliates, to perform certain of the day-to-day investment management of the Trust. BlackRock Financial Management will receive a portion of the management fee paid by the Trust to BlackRock Advisors. From the management fees, BlackRock Advisors will pay BlackRock Financial Management, for serving as Sub-Advisor, a fee equal to: (i) prior to July 31, 2002, 38% of the monthly management fees received by BlackRock Advisors, (ii) from August 1, 2002 to July 31, 2003, 19% of the monthly management fees received by BlackRock Advisors; and (iii) after July 31, 2003, 0% of the management fees received by BlackRock Advisors; provided thereafter that the Sub-Advisor may be compensated at cost for any services rendered to the Trust at the request of BlackRock Advisors and approved of by the board of trustees.
The sub-investment advisory agreement also provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Trust will indemnify BlackRock Financial Management, its directors, officers, employees, agents, associates and control persons for liabilities incurred by them in connection with their services to the Trust, subject to certain limitations.
Although BlackRock Financial Management intends to devote such time and effort to the business of the Trust as is reasonably necessary to perform its duties to the Trust, the services of BlackRock Financial Management are not exclusive and BlackRock Financial Management provides similar services to other investment companies and other clients and may engage in other activities.
The sub-investment advisory agreement was approved by the Trust's board of trustees on May 24, 2001, including a majority of the trustees who are not parties to the agreement or interested persons of any such party (as such term is defined in the Investment Company Act). The sub-investment advisory agreement was approved by the sole common shareholder of the Trust as of July 19, 2001. The sub-investment advisory agreement will continue in effect for a period of two years from its effective date, and if not sooner terminated,
will continue in effect for successive periods of 12 months thereafter, provided that each continuance is specifically approved at least annually by both (1) the vote of a majority of the Trust's board of trustees or the vote of a majority of the outstanding voting securities of the Trust (as defined in the Investment Company Act) and (2) by the vote of a majority of the trustees who are not parties to such agreement or interested persons (as such term is defined in the Investment Company Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The sub-investment advisory agreement may be terminated as a whole at any time by the Trust, without the payment of any penalty, upon the vote of a majority of the Trust's board of trustees or a majority of the outstanding voting securities of the Trust, or by BlackRock Advisors or BlackRock Financial Management, on 60 days' written notice by either party to the other. The sub-investment advisory agreement will also terminate automatically in the event of its assignment (as such term is defined in the Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day-to-day operations. The officers are directly responsible to the Trust's board of trustees which sets broad policies for the Trust and chooses its officers. The following is a list of the trustees and officers of the Trust and a brief statement of their present positions and principal occupations during the past five years. Trustees who are interested persons of the Trust (as defined in the Investment Company Act) are denoted by an asterisk (*). Trustees who are independent trustees (as defined in the Investment Company Act) (the "Independent Trustees") are denoted without an asterisk. The business address of the Trust, BlackRock Advisors and their board members and officers is 100 Bellevue Parkway, Wilmington, Delaware 19809, unless specified otherwise below. The trustees listed below are either trustees or directors of other closed-end funds in which BlackRock Advisors acts as investment advisor.
Name and Address Principal Occupation During the Past Five
Title Years and Other Affiliations
Andrew F. Brimmer....... Trustee President of Brimmer & Company, Inc., a
4400 MacArthur Blvd Washington, D.C.-based economic and financial
N.W. consulting firm. Director of CarrAmerica
Suite 302 Realty Corporation and Borg-Warner
Washington, DC 20007 Automotive. Formerly member of the Board of
Age: 74 Governors of the Federal Reserve System.
Formerly Director of AirBorne Express,
BankAmerica Corporation (Bank of America),
Bell South Corporation, College Retirement
Equities Fund (Trustee), Commodity Exchange,
Inc. (Public Governor), Connecticut Mutual
Life Insurance Company, E.I. Dupont de
Nemours & Company, Equitable Life Assurance
Society of the United States, Gannett
Company, Mercedes-Benz of North America, MNC
Financial Corporation (American Security
Bank), NMC Capital Management, Navistar
International Corporation, PHH Corp. and UAL
Corporation (United Airlines).
Richard E. Cavanagh..... Trustee President and Chief Executive Officer of The
845 Third Avenue Conference Board, Inc., a leading global
New York, NY 10022 business membership organization, from 1995-
Age: 54 present. Former Executive Dean of the John F.
Kennedy School of Government at Harvard
University from 1988-1995. Acting Director,
Harvard Center for Business and Government
(1991-1993). Formerly Partner (principal) of
McKinsey & Company, Inc. (1980-1988). Former
Executive Director of Federal Cash
Management, White House Office of Management
and Budget (1977-1979). Co-author, The
Winning Performance (best selling management
book published in 13 national
B-15
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Name and Address Principal Occupation During the Past Five
Title Years and Other Affiliations
editions). Trustee Emeritus, Wesleyan
University. Trustee, Drucker Foundation,
Airplanes Group, Aircraft Finance Trust (AFT)
and Educational Testing Service (ETS).
Director, Arch Chemicals, Fremont Group and
The Guardian Life Insurance Company of
America.
Kent Dixon.............. Trustee Consultant/Investor. Former President and
430 Sandy Hook Road Chief Executive Officer of Empire Federal
Savings Bank of America and Banc PLUS Savings
St. Petersburg, FL Association, former Chairman of the Board,
33706 President and Chief Executive Officer of
Age: 63 Northeast Savings. Former Director of ISFA
(the owner of INVEST, a national securities
brokerage service designed for banks and
thrift institutions).
Trustee Consultant. Editor of The Journal of
Frank J. Fabozzi... Portfolio Management and Adjunct Professor of
858 Tower View Circle Finance at the School of Management at Yale
New Hope, PA 18938 University. Director, Guardian Mutual Funds
Age: 52 Group. Author and editor of several books on
fixed income portfolio management. Visiting
Professor of Finance and Accounting at the
Sloan School of Management, Massachusetts
Institute of Technology from 1986 to August
1992.
Laurence D. Fink*....... Trustee Director, Chairman and Chief Executive
Age: 48 Officer of BlackRock, Inc. since its
formation in 1998 and of BlackRock, Inc.'s
predecessor entities since 1988. Chairman of
the Management Committee of BlackRock, Inc.
Formerly, Managing Director of the First
Boston Corporation, Member of its Management
Committee, Co-head of its Taxable Fixed
Income Division and Head of its Mortgage and
Real Estate Products Group. Currently,
Chairman of the Board of each of the closed-
end Trusts in which BlackRock Advisors, Inc.
acts as investment advisor, President,
Treasurer and a Trustee of the BlackRock
Funds, Chairman of the Board and Director of
Anthracite Capital, Inc., a Director of
BlackRock's offshore funds and alternative
products and Chairman of the Board of Nomura
BlackRock Asset Management Co., Ltd.
Currently, Vice Chairman of the Board of
Trustees of Mount Sinai-New York University
Medical Center and Health System and a Member
of the Board of Phoenix House.
James Clayburn La Trustee Dean Emeritus of The John E. Anderson
Force, Jr............... Graduate School of Management, University of
P.O. Box 1595 California since July 1, 1993. Director,
Pauma Valley, CA 92061 Jacobs Engineering Group, Inc., Payden &
Age: 72 Rygel Investment Trust, Provident Investment
Counsel Funds, Timken Company, Motor Cargo
Industries and Trust for Investment Managers.
Acting Dean of The School of Business, Hong
Kong University of Science and Technology
1990-1993. From 1978 to September 1993, Dean
of The John E. Anderson Graduate School of
Management, University of California.
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Name and Address Principal Occupation During the Past Five
Title Years and Other Affiliations
Walter F. Mondale...... Trustee Partner, Dorsey & Whitney, a law firm
(December 1996-present, September 1987-
220 South Sixth Street August 1993). Formerly, U.S. Ambassador to
Minneapolis, MN 55402 Japan (1993-1996). Formerly Vice President
Age: 73 of the United States, U.S. Senator and
Attorney General of the State of Minnesota.
1984 Democratic Nominee for President of the
United States. Director, Northwest Airlines
Corporation, NWA Inc., Northwest Airlines,
Inc. and UnitedHealth Group Corporation.
Ralph L.
Schlosstein*...... Trustee and Director since 1999 and President of
Age: 50 President BlackRock, Inc. since its formation in 1998
and of BlackRock, Inc.'s predecessor
entities since 1988. Member of the
Management Committee and Investment Strategy
Group of BlackRock, Inc. Formerly, Managing
Director of Lehman Brothers, Inc. and Co-
head of its Mortgage and Savings
Institutions Group. Currently, President of
each of the closed-end Trusts in which
BlackRock Advisors, Inc. acts as investment
advisor and a Director and Officer of
BlackRock's alternative products. Currently,
a Member of the Visiting Board of Overseers
of the John F. Kennedy School of Government
at Harvard University, the Financial
Institutions Center Board of the Wharton
School of the University of Pennsylvania,
and a Trustee of New Visions for Public
Education in New York City. Formerly, a
Director of Pulte Corporation and a Member
of Fannie Mae's Advisory Council.
Anne F. Ackerley....... Secretary Managing Director of BlackRock, Inc. since
2000. Formerly First Vice President and
Age: 39 Chief Operating Officer, Mergers and
Acquisitions Group at Merrill Lynch & Co.
from 1997 to 2000; First Vice President and
Chief Operating Officer, Public Finance
Group at Merrill Lynch & Co. from 1995 to
1997; First Vice President, Emerging Markets
Fixed Income Research at Merrill Lynch & Co.
prior thereto.
Henry Gabbay...... Treasurer Managing Director of BlackRock, Inc. and its
Age: 53 predecessor entities.
Robert S. Kapito....... Vice Vice Chairman of BlackRock , Inc. and its
President predecessor entities.
Age: 44
Kevin Klingert......... Vice Managing Director of BlackRock, Inc. and its
Age: 38 President predecessor entities.
James Kong........ Assistant Managing Director of BlackRock, Inc. and its
Age: 40 Treasurer predecessor entities.
Vice
Richard Shea, Esq...... President/ Managing Director of BlackRock, Inc. since
Tax 2000; Chief Operating Officer and Chief
Age: 41 Financial Officer of Anthracite Capital,
Inc. since 1998. Formerly, Director of
BlackRock, Inc. and its predecessor
entities.
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Prior to this offering, all of the outstanding shares of the Trust were owned by BlackRock Advisors.
The fees and expenses of the Independent Trustees of the Trust are paid by the Trust. The trustees who are members of the BlackRock organization receive no compensation from the Trust. During the year ended December 31, 2000, the Independent Trustees/Directors earned the compensation set forth below in their capacities as trustees/directors of the funds in the BlackRock Family of Funds. It is estimated that the Independent Trustees will receive from the Trust the amounts set forth below for the Trust's calendar year ending December 31, 2001, assuming the Trust had been in existence for the full calendar year.
Total Compensation from
Estimated the Trust and Fund
Compensation Complex Paid to
Name of Board Member From Trust Board Member(/1/)
-------------------- ------------ -----------------------
Andrew R. Brimmer.................. $6,000(/2/)(/3/) $160,000(/4/)
Richard E. Cavanagh................ $6,000(/2/) $160,000(/4/)
Kent Dixon......................... $6,000(/2/) $160,000(/4/)
Frank J. Fabozzi................... $6,000(/2/) $160,000(/4/)
James Clayburn La Force, Jr. ...... $6,000(/2/) $160,000(/4/)
Walter F. Mondale.................. $6,000(/2/) $160,000(/4/)
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(/1/) Represents the total compensation earned by such persons during the calendar year ended December 31, 2000 from the twenty-two closed-end funds advised by the Advisor (the "Fund Complex"). Two of these funds, BlackRock Target Term Trust and the BlackRock 2001 Term Trust were terminated on December 29, 2000 and June 30, 2001 respectively.
(/2/) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La Force and Mondale will defer $1,500, $1,500, $3,750 and $1,500, respectively, pursuant to the Fund Complex's deferred compensation plan.
(/3/) At a meeting of the boards of directors/trustees of the Fund Complex held on August 24, 2000, Dr. Brimmer was appointed "lead director" for each board of trustees/directors in the Fund Complex. For his services as lead trustee/director, Dr. Brimmer will be compensated in the amount of $40,000 per annum by the Fund Complex to be allocated among the funds in the Fund Complex based on each fund's relative net assets.
(/4/) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale deferred $12,000, $12,000, $77,500 and $31,000, respectively, pursuant to the Fund Complex's deferred compensation plan.
Each Independent Trustee/Director receives an annual fee calculated as follows: (i) $6,000 from each fund/trust in the Fund Complex and (ii) $1,500 for each meeting of each board in the Fund Complex attended by such Independent Trustee/Director. The total annual aggregate compensation for each Independent Trustee/Director is capped at $160,000 per annum, except that Dr. Brimmer receives an additional $40,000 from the Fund Complex for acting as the lead trustee/director for each board of trustees/directors in the Fund Complex. In the event that the $160,000 cap is met with respect to an Independent Trustee/Director, the amount of the Independent Trustee/Director's fee borne by each fund in the Fund Complex is reduced by reference to the net assets of the Trust relative to the other funds in the Fund Complex. In addition, the attendance fees of each Independent Trustee/Director of the funds/trusts are reduced proportionately, based on each respective fund's/trust's net assets, so that the aggregate per meeting fee for all meetings of the boards of trustees/directors of the funds/trusts held on a single day does not exceed $20,000 for any Independent Trustee/Director.
Codes of Ethics
The Trust, the Advisor, the Sub-Advisor and the Trust's principal underwriters have adopted codes of ethics under Rule 17j-1 of the Investment Company Act. These codes permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Trust.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock Financial Management acts as the Trust's sub-advisor. BlackRock Advisors and BlackRock Financial Management are both wholly owned subsidiaries of BlackRock, Inc., which is one of the largest publicly traded investment management firms in the
United States with $213 billion of assets under management as of June 30, 2001. BlackRock Advisors is one of the nation's leading fixed income managers with over $122 billion of fixed income assets under management. BlackRock, Inc. and its affiliates manage assets on behalf of more than 3,300 institutions and 200,000 individuals worldwide, including nine of the 10 largest companies in the U.S. as determined by Fortune Magazine, through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, including the company's flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's 26th largest asset management firm according to Pensions & Investments, May 14 , 2001.
The BlackRock organization has over 12 years of experience managing closed- end products and currently advises a closed-end family of 20 funds. BlackRock has 13 leveraged municipal closed-end funds under management and approximately $16 billion in municipal assets firm-wide. As of June 30, 2001, BlackRock managed over $5.4 billion in closed-end products. In March 2001, a Fortune Magazine article entitled "The Hidden Beauty of Bonds" by Andy Serwer called BlackRock "perhaps the greatest success story on Wall Street in the past half- decade." In addition, BlackRock provides risk management and investment system services to a growing number of institutional investors under the BlackRock Solutions name. In January 2001, Risk Magazine named BlackRock "Asset Management Risk Manager of the Year." Clients are served from the company's headquarters in New York City, as well as offices in Wilmington, Delaware, San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified financial services organizations in the United States, and is majority-owned by PNC and by BlackRock employees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to buy and sell securities for the Trust, the selection of brokers and dealers to effect the transactions and the negotiation of prices and any brokerage commissions. The securities in which the Trust invests are traded principally in the over- the-counter market. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of such securities usually includes a mark-up to the dealer. Securities purchased in underwritten offerings generally include, in the price, a fixed amount of compensation for the manager(s), underwriter(s) and dealer(s). The Trust may also purchase certain money market instruments directly from an issuer, in which case no commissions or discounts are paid. Purchases and sales of debt securities on a stock exchange are effected through brokers who charge a commission for their services.
The Advisor and the Sub-Advisor are responsible for effecting securities transactions of the Trust and will do so in a manner deemed fair and reasonable to shareholders of the Trust and not according to any formula. The Advisor's and the Sub-Advisor's primary considerations in selecting the manner of executing securities transactions for the Trust will be prompt execution of orders, the size and breadth of the market for the security, the reliability, integrity and financial condition and execution capability of the firm, the difficulty in executing the order, and the best net price. There are many instances when, in the judgment of the Advisor or the Sub-Advisor, more than one firm can offer comparable execution services. In selecting among such firms, consideration is given to those firms which supply research and other services in addition to execution services. Consideration may also be given to the sale of shares of the Trust. However, it is not the policy of BlackRock, absent special circumstances, to pay higher commissions to a firm because it has supplied such research or other services.
The Advisor and the Sub-Advisor are able to fulfill their obligation to furnish a continuous investment program to the Trust without receiving research or other information from brokers; however, each considers access to such information to be an important element of financial management. Although such information is considered useful, its value is not determinable, as it must be reviewed and assimilated by the Advisor and/or the Sub-Advisor, and does not reduce the Advisor's and/or the Sub-Advisor's normal research activities in
rendering investment advice under the investment management agreement or the sub-investment advisory agreement. It is possible that the Advisor's and/or the Sub-Advisor's expenses could be materially increased if it attempted to purchase this type of information or generate it through its own staff.
One or more of the other investment companies or accounts which the Advisor and/or the Sub-Advisor manages may own from time to time some of the same investments as the Trust. Investment decisions for the Trust are made independently from those of such other investment companies or accounts; however, from time to time, the same investment decision may be made for more than one company or account. When two or more companies or accounts seek to purchase or sell the same securities, the securities actually purchased or sold will be allocated among the companies and accounts on a good faith equitable basis by the Advisor and/or the Sub-Advisor in their discretion in accordance with the accounts' various investment objectives. In some cases, this system may adversely affect the price or size of the position obtainable for the Trust. In other cases, however, the ability of the Trust to participate in volume transactions may produce better execution for the Trust. It is the opinion of the Trust's board of trustees that this advantage, when combined with the other benefits available due to the Advisor's or the Sub-Advisor's organization, outweighs any disadvantages that may be said to exist from exposure to simultaneous transactions.
It is not the Trust's policy to engage in transactions with the objective of seeking profits from short-term trading. It is expected that the annual portfolio turnover rate of the Trust will be approximately 100% excluding securities having a maturity of one year or less. Because it is difficult to predict accurately portfolio turnover rates, actual turnover may be higher or lower. Higher portfolio turnover results in increased Trust costs, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of securities and on the reinvestment in other securities.
DESCRIPTION OF SHARES
Common Shares
The Trust intends to hold annual meetings of shareholders so long as the common shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Preferred Shares
Although the terms of the Preferred Shares, including their dividend rate, voting rights, liquidation preference and redemption provisions, will be determined by the board of trustees (subject to applicable law and the Trust's Agreement and Declaration of Trust, as amended and restated) 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, as amended and restated. 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.
The board of trustees (subject to applicable law and the Trust's Agreement and Declaration of Trust as amended and restated) may authorize an offering, without the approval of the holders of either common shares or Preferred Shares, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the board of trustees see fit. The Trust currently does not expect to issue any other classes of shares, or series of shares, except for the common shares and the Preferred Shares.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its shareholders will not have the right to cause the Trust to redeem their shares. Instead, the Trust's common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than net asset value, the Trust's board of trustees may consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of common shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Trust to an open-end investment company. The board of trustees may decide not to take any of these actions. In addition, there can be no assurance that share repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred Shares are outstanding, the Trust may not purchase, redeem or otherwise acquire any of its common shares unless (1) all accrued Preferred Shares dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Trust's portfolio (determined after deducting the acquisition price of the common shares) is at least 200% of the liquidation value of the outstanding Preferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). Any service fees incurred in connection with any tender offer made by the Trust will be borne by the Trust and will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Trust in anticipation of share repurchases or tenders will reduce the Trust's net income. Any share repurchase, tender offer or borrowing that might be approved by the Trust's board of trustees would have to comply with the Securities Exchange Act of 1934, as amended, the Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net asset value will be made by the board of trustees at the time it considers such issue, it is the board's present policy, which may be changed by the board of trustees, not to authorize repurchases of common shares or a tender offer for such shares if: (1) such transactions, if consummated, would (a) result in the delisting of the common shares from the New York Stock Exchange, or (b) impair the Trust's status as a regulated investment company under the Code, (which would make the Trust a taxable entity, causing the Trust's income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Trust) or as a registered closed-end investment company under the Investment Company Act; (2) the Trust would not be able to liquidate portfolio securities in an orderly manner and consistent with the Trust's investment objective and policies in order to repurchase shares; or (3) there is, in the board's judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) general suspension of or limitation on prices for trading securities on the New York Stock Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or New York banks, (d) material limitation affecting the Trust or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if shares were repurchased. The board of trustees may in the future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tender offers at or below net asset value will result in the Trust's shares trading at a price equal
to their net asset value. Nevertheless, the fact that the Trust's shares may be the subject of repurchase or tender offers from time to time, or that the Trust may be converted to an open-end investment company, may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Trust of its common shares will decrease the Trust's total assets which would likely have the effect of increasing the Trust's expense ratio. Any purchase by the Trust of its common shares at a time when Preferred Shares are outstanding will increase the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below net asset value, the Trust's board of trustees would likely consider all relevant factors, including the extent and duration of the discount, the liquidity of the Trust's portfolio, the impact of any action that might be taken on the Trust or its shareholders and market considerations. Based on these considerations, even if the Trust's shares should trade at a discount, the board of trustees may determine that, in the interest of the Trust and its shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain Federal income tax consequences to a shareholder of acquiring, holding and disposing of common stock of the Trust. The discussion reflects applicable tax laws of the United States as of the date of this prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service retroactively or prospectively.
The Trust intends to qualify under Subchapter M of the Code for tax treatment as a regulated investment company. In order to qualify as a regulated investment company, the Trust must satisfy certain requirements relating to the source of its income, diversification of its assets, and distributions of its income to its shareholders. First, the Trust must derive at least 90% of its annual gross income (including tax-exempt interest) from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "90% gross income test"). Second, the Trust must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets is comprised of cash, cash items, United States government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Trust's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the total assets is invested in the securities of any one issuer (other than United States government securities and securities of other regulated investment companies) or two or more issuers controlled by the Trust and engaged in the same, similar or related trades or businesses.
As a regulated investment company, the Trust will not be subject to Federal income tax on its income that it distributes each taxable year to its shareholders, provided that in such taxable year it distributes at least 90% of the sum of (i) its "investment company taxable income" (which includes dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in excess of long-term capital loss, and any other taxable income other than "net capital gain" (as defined below) and is reduced by deductible expenses) determined without regard to the deduction for dividends paid and (ii) its net tax-exempt interest (the excess of its gross tax-exempt interest income over certain disallowed deductions). The Trust may retain for investment its net capital gain (which consists of the excess of its net long-term capital gain over its net short-term capital loss). However, if the Trust retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Trust retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to Federal income tax on long-term capital gains, (i) will be required to include in income for Federal income tax purposes, as long-term capital gain, their share of such
undistributed amount and (ii) will be entitled to credit their proportionate shares of the tax paid by the Trust against their Federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For Federal income tax purposes, the tax basis of shares owned by a shareholder of the Trust will be increased by the amount of undistributed capital gains included in the gross income of the shareholder less the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. 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, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
Distributions by the Trust of investment company taxable income, if any, will be taxable to shareholders as ordinary income whether received in cash or additional shares. Net long-term capital gains realized by the Trust and distributed to shareholders in cash or additional shares will be taxable to shareholders as long-term capital gains regardless of the length of time investors have owned shares of the Trust. Distributions by the Trust that do not constitute ordinary income dividends, capital gain distributions or exempt- interest dividends (as defined below) will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his or her shares. Any excess will be treated as gain from the sale of his or her shares, as discussed below.
If the Trust engages in hedging transactions involving financial futures and options, these transactions will be subject to special tax rules, the effect of which may be to accelerate income to the Trust, defer the Trust's losses, cause adjustments in the holding periods of the Trust's securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to holders of common shares.
Prior to purchasing shares in the Trust, an investor should carefully consider the impact of dividends which are expected to be or have been declared, but not paid. Any dividend declared shortly after a purchase of such shares prior to the record date will have the effect of reducing the per share net asset value by the per share amount of the dividend.
Although dividends generally will be treated as distributed when paid, dividends declared in October, November or December, payable to holders of common shares of record on a specified date in one of those months and paid during the following January, will be treated as having been distributed by the Trust (and received by the holder of common shares) on December 31.
Federal income tax law imposes an alternative minimum tax with respect to both corporations and individuals based on certain items of tax preference. To the extent the Trust receives income treated as tax preference items for purposes of the alternative minimum tax, a portion of the dividends paid by it, although otherwise exempt from Federal income tax, will be taxable to holders of common shares to the extent that their tax liability is determined under the alternative minimum tax. The Trust will annually supply holders of common shares with reports indicating the amount and nature of all income distributed to them as well as the percentage of Trust income attributable to tax preference items subject to the alternative minimum tax.
The Trust intends to invest in sufficient tax-exempt municipal bonds to permit payment of "exempt-interest dividends" (as defined in the Code). 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.
The Internal Revenue Service's position in a published revenue ruling indicates that the Trust is required to designate distributions paid with respect to its common shares and its Preferred Shares as consisting of a portion of each type of income distributed by the Trust. The portion of each type of income deemed received by the holders of each class of shares will be equal to the portion of total Trust dividends received by such
class. Thus, the Trust will designate dividends paid as exempt-interest dividends in a manner that allocates such dividends between the holders of the common shares and the holders of Preferred Shares in proportion to the total dividends paid to each such class during or with respect to the taxable year, or otherwise as required by applicable law. Capital gain dividends and ordinary income dividends will similarly be allocated between the two classes.
Interest on certain "private-activity bonds" is an item of tax preference subject to the alternative minimum tax on individuals and corporations. The Trust may invest a portion of its assets in municipal bonds subject to this provision so that a portion of its exempt-interest dividends is an item of tax preference to the extent such dividends represent interest received from these private-activity bonds. Accordingly, investment in the Trust could cause a holder of common shares to be subject to, or result in an increased liability under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any, of a person's Social Security and railroad retirement benefits will be includable in gross income subject to Federal income tax.
Although exempt-interest dividends generally may be treated by holders of common shares as items of interest excluded from their gross income, each holder is advised to consult his tax advisor with respect to whether exempt- interest dividends retain their exclusion if the shareholder would be treated as a "substantial user," or a "related person" of a substantial user, of the facilities financed with respect to any of the tax-exempt obligations held by the Trust. "Substantial user" is defined under the Treasury Regulations to include a non-exempt person who regularly uses in his trade or business a part of the facilities financed with the tax-exempt obligations and whose gross revenues derived from such facilities exceed 5% of the useable area of the facilities or from whom the facilities or a part thereof were specifically constructed, reconstructed or acquired. "Related persons" include certain natural persons, affiliated corporations, a partnership and its partners and an S corporation and its shareholders.
For corporations, alternative minimum taxable income is increased by 75% of the difference between an alternative measure of income ("adjusted current earnings") and the amount otherwise determined to be the alternative minimum taxable income. Interest on municipal bonds, and therefore all exempt-interest dividends received from the Trust, are included in calculating adjusted current earnings.
The redemption, sale or exchange of common shares normally will result in capital gain or loss to the holders of common shares who hold their shares as capital assets. Generally, a shareholder's gain or loss will be long-term capital gain or loss if the shares have been held for more than one year even though the increase in value in such common shares is attributable to tax- exempt interest income. In addition, gain realized by the Trust from the disposition of a tax-exempt municipal obligation that is attributable to accrued market discount will be treated as ordinary income rather than capital gain, and thus may increase the amount of ordinary income dividends received by holders of common shares. Present law taxes both long- and short-term capital gains of corporations at the rates applicable to ordinary income. For non- corporate taxpayers, however, long-term capital gains will be taxed at a maximum rate of 20% (or 18% for capital assets that have been held for more than five years and whose ending periods began after December 31, 2001), while short-term capital gains and other ordinary income will currently be taxed at a maximum rate of 39.1%*. 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, sale or exchange of such shares within 90 days after
* The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for taxable years beginning after December 31, 2000, creates a new 10 percent income tax bracket and reduces the tax rate applicable to ordinary income over a six year phase-in period. Beginning in taxable year 2006, ordinary income will be subject to a 35% maximum rate.
their purchase to the extent common shares or shares of another fund are subsequently acquired without payment of a sales charge pursuant to the reinvestment or exchange privilege. Any disregarded portion of such charge will result in an increase in the shareholder's tax basis in the shares subsequently acquired. In addition, no loss will be allowed on the redemption, sale or exchange of common shares if the shareholder purchases other common shares of the Trust (whether through reinvestment of distributions or otherwise) or the shareholder acquires or enters into a contract or option to acquire securities that are substantially identical to common shares of the Trust within a period of 61 days beginning 30 days before and ending 30 days after such redemption, sale or exchange. If disallowed, the loss will be reflected in an adjustment to the basis of the shares acquired. Further, any losses realized on the redemption, sale or exchange of common shares held for six months or less 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 (or credited as undistributed capital gain) 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 its capital gain net income (the excess of its realized capital gains over its realized capital losses, generally computed on the basis of the one-year period ending on October 31 of such year) and 100% of any taxable ordinary income and capital gain net income for the prior year that was not distributed during such year and on which the Trust paid no Federal income tax. For purposes of the excise tax, a regulated investment company may reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year. The Trust intends to make timely distributions in compliance with these requirements and consequently it is anticipated that it generally will not be required to pay the excise tax.
If in any year the Trust should fail to qualify under Subchapter M for tax treatment as a regulated investment company, the Trust would incur a regular corporate Federal income tax upon its income for that year, and distributions to its shareholders would be taxable to shareholders as ordinary dividend income for Federal income tax purposes to the extent of the Trust's earnings and profits.
The Trust is required to withhold on 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. Backup withholding is not an additional tax and any amount withheld maybe credited against the shareholder's federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury Regulations presently in effect as they directly govern the taxation of the Trust and its shareholders. For complete provisions, reference should be made to the pertinent Code sections and Treasury Regulations. The Code and the Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Trust transactions. Holders of common shares are advised to consult their own tax advisors for more detailed information concerning the Federal taxation of the Trust and the income tax consequences to its holders of common shares.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
Municipal bonds can provide tax-free income. Because the Trust expects that a portion of its investments will pay interest that is taxable under the Federal alternative minimum tax, the Trust may not be a suitable investment for shareholders that are subject to the Federal alternative minimum tax.
The Trust may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services. Comparison of the Trust to an alternative investment should be
made with consideration of differences in features and expected performance. The Trust may obtain data from sources or reporting services, such as Bloomberg Financial and Lipper, that the Trust believes to be generally accurate.
Past performance is not indicative of future results. At the time common shareholders sell their shares, they may be worth more or less than their original investment.
Keep in mind, that on April 30, 2001, the Lehman Brothers Aggregate Bond Index*, which is considered to be a common measure of the taxable bond market, yielded 6.14%.
Municipal bonds have had the best after-tax return when compared to any other major fixed income category.
Tax Adjusted Returns vs. Volatility Fixed Income Classes Last 10 Years Ending 4/30/01
10 year Period
High Global
4/30/91--4/30/01 Muni Aggregate Treasury Agency Corporates Mortgages Yield Eurodollar Treasury
Annualized Return................ 11.55% 7.82% 7.69% 7.81% 8.27% 7.70% 9.19% 7.71% 6.53%
Annualized Standard Devaluation.. 4.28 3.76 4.16 3.85 4.72 3.05 5.62 3.56 5.84
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The chart above shows that over the past 10 years, on a tax-adjusted basis, municipal bonds have had higher annualized returns when compared to any other major fixed income category.
Source: Lehman Brothers**
* The Lehman Aggregate Index is an unmanaged index representative of intermediate-term government bonds, investment grade bonds, investment grade corporate debt securities and mortgage-backed securities. It is not possible to invest directly in an index.
** Past performance is no guarantee of future results. The tax equivalents return reflects an adjustment of 35% of the portion of the Lehman Brothers municipal Index attributable to coupon payment (to adjust for an assumed tax bracket of 35%) and no adjustment to the portion of the Lehman Brothers Municipal Index attributable to principal appreciation. Standard deviation measures performance fluctuations; generally the higher the standard deviation, the greater the expected volatility of returns. Standard deviation is not a complete measure of risk, and cannot predict future performance. Referenced Lehman Indices: Mortgage Back Securities, Euro- Aggregate Bond, Aggregate Bond, U.S. Agency, Credit Bond (Corporates), Global Treasury bond, Municipal Bond, High Yield and Treasury Bond.
Municipal Bonds May Be Attractively Valued Relative to Treasuries
AAA
AAA 30 Year 30 Year Muni/
Date 30 Year Muni Treasury 30 Year Treasury
---- ------------ -------- ----------------
2-Jan-90................................ 6.80 8.03 84.70%
30-Mar-90............................... 7.10 8.67 81.92%
29-Jun-90............................... 7.00 8.43 83.04%
28-Sep-90............................... 7.40 8.95 82.65%
31-Dec-90............................... 6.90 8.26 83.57%
29-Mar-91............................... 6.80 8.27 82.25%
28-Jun-91............................... 6.90 8.45 81.64%
30-Sep-91............................... 6.30 7.85 80.28%
31-Dec-91............................... 6.20 7.45 83.19%
31-Mar-92............................... 6.50 7.99 81.37%
30-Jun-92............................... 6.30 7.81 80.66%
30-Sep-92............................... 6.20 7.43 83.45%
31-Dec-92............................... 6.10 7.43 82.11%
31-Mar-93............................... 5.65 7.00 80.68%
30-Jun-93............................... 5.40 6.70 80.55%
30-Sep-93............................... 5.10 6.21 82.07%
31-Dec-93............................... 5.20 6.49 80.12%
31-Mar-94............................... 6.00 7.24 82.83%
30-Jun-94............................... 6.15 7.68 80.05%
30-Sep-94............................... 6.30 7.93 79.48%
30-Dec-94............................... 6.60 7.92 83.37%
31-Mar-95............................... 5.90 7.48 78.89%
30-Jun-95............................... 5.90 6.66 88.59%
29-Sep-95............................... 5.90 6.59 89.47%
29-Dec-95............................... 5.35 6.00 89.10%
29-Mar-96............................... 5.75 6.76 85.00%
28-Jun-96............................... 5.90 6.95 84.88%
30-Sep-96............................... 5.65 6.97 81.03%
31-Dec-96............................... 5.55 6.69 83.00%
31-Mar-97............................... 5.80 7.15 81.15%
30-Jun-97............................... 5.45 6.82 79.88%
30-Sep-97............................... 5.25 6.44 81.50%
31-Dec-97............................... 5.15 5.98 86.16%
31-Mar-98............................... 5.15 5.97 86.29%
30-Jun-98............................... 5.15 5.68 90.65%
30-Sep-98............................... 4.82 5.11 94.28%
31-Dec-98............................... 4.94 5.19 95.27%
31-Mar-99............................... 5.04 5.72 88.15%
30-Jun-99............................... 5.33 6.09 87.57%
30-Sep-99............................... 5.70 6.18 92.22%
31-Dec-99............................... 5.93 6.59 90.00%
31-Mar-00............................... 5.69 5.97 95.24%
30-Jun-00............................... 5.72 6.05 94.62%
29-Sep-00............................... 5.61 5.97 94.04%
29-Dec-00............................... 5.16 5.51 93.65%
30-Mar-01............................... 5.13 5.56 92.23%
18-May-01............................... 5.28 5.78 91.35%
------
10 year average percentage............. 85.41%
======
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The chart above shows that currently, municipal bonds are yielding over 90% of what treasuries are yielding. Since yields move in the opposite direction of price, BlackRock believes these higher yields are an indication that municipals may be attractively valued relative to treasury securities.
Source: Municipal Market Data/Delphis Hanover/Bloomburg***
*** Past performance is no guarantee of future results. Chart shows the relationship between the 30 Year AAA Municipal Index and the 30 Year AAA Treasury Index. The yields quoted above are a simple unweighted average of the estimated yields of the bonds in the index if those bonds were sold at par value. It is not possible to invest directly in an index. The Trusts have the ability to invest in securities rated below AAA, and do not intend to invest in a portfolio of securities equivalent to the 30 Year AAA Municipal Index.
EXPERTS
The Statement of Net Assets of the Trust as of July 16, 2001 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 Berkley Street, Boston, Massachusetts 02116, provides accounting and auditing services to the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the shares offered hereby, has been filed by the Trust with the Securities and Exchange Commission (the "Commission"), Washington, D.C. The prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Trust and the shares offered hereby, reference is made to the Registration Statement. Statements contained in the prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission.
Independent Auditors' Report
The Board of Trustees and Shareholder of
The BlackRock Municipal Income Trust
We have audited the accompanying statement of assets and liabilities of The BlackRock Municipal Income Trust (the "Trust") as of July 16, 2001 and the related statement of operations and changes in net assets for the period March 30, 2001 (date of inception) to July 16, 2001. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements presents fairly, in all material respects, the financial position of the Trust at July 16, 2001 and the results of its operations and changes in its net assets for the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Boston, Massachusetts
July 18, 2001
THE BLACKROCK MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
July 16, 2001
ASSETS:
Cash................................................................ $115,001
LIABILITIES:
Payable for organization costs...................................... 15,000
--------
Net Assets.......................................................... $100,001
========
Net assets were comprised of:
Common stock at par (Note 1)...................................... $ 8
Paid-in capital in excess of par.................................. 114,993
--------
115,001
Undistributed net investment loss................................. (15,000)
--------
Net assets, July 16, 2001........................................... $100,001
========
Net asset value per share:
Equivalent to 8,028 shares of common stock issued and outstanding,
par value $0.001, unlimited shares authorized...................... $ 12.46
========
THE BLACKROCK MUNICIPAL INCOME TRUST
STATEMENT OF OPERATIONS
For the period March 30, 2001 (date of inception) to July 16, 2001
Investment income................................................... $ --
Expenses
Organization expenses............................................. 15,000
--------
Net investment loss................................................. $(15,000)
========
THE BLACKROCK MUNICIPAL INCOME TRUST
STATEMENT OF CHANGES IN NET ASSETS
For the period March 30, 2001 (date of inception) to July 16, 2001
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss............................................... $(15,000)
--------
Net decrease in net assets resulting from operations.............. (15,000)
--------
Capital Stock Transactions
Net proceeds from the issuance of common shares................... 115,001
--------
Total increase.................................................. 100,001
--------
NET ASSETS
Beginning of year................................................... 0
--------
End of year......................................................... $100,001
========
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NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
The BlackRock Municipal Income Trust (the "Trust") was organized as a Delaware business trust on March 30, 2001 and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940. The Trust had no operations other than a sale to BlackRock Advisors, Inc. of 8,028 shares of common stock for $115,001 ($14,325 per share).
Note 2. Agreements
The Trust has entered into an Investment Advisory Agreement with BlackRock Advisors, Inc. The Trust will pay BlackRock Advisors, Inc. a monthly fee (the "Investment Management Fee") at an annual rate of 0.60% of the average weekly value of the Trust's Managed Assets. BlackRock Advisors has voluntarily agreed to waive receipt of a portion of the Investment Management Fee or other expenses of the trust in the amount of 0.25% of average weekly Managed Assets for the first 5 years of the Trust's operations, 0.20% in year 6, 0.15% in year 7, 0.10% in year 8 and 0.05% in year 9.
Note 3. Organization Expenses and Offering Costs
Organization expenses of $15,000 have been expensed. Offering costs, estimated to be approximately $491,200 will be charged to paid-in capital at the time shares of beneficial interest are sold.
Note 4. Cash & Cash Equivalents
The Trust considers all highly liquid debt instruments with a maturity of three months or less at time of purchase to be cash equivalents.
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; and
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
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Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation and "C" the highest. While such debt will likely have some quality and protective characteristics these are outweighed by major uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The "BB" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BBB" rating.
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it
is not likely to have the capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B" rating.
CC The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
C The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
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addition of a plus or minus sign to show relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is Federally insured by the Federal Savings & Loan Insurance Corporation or the Federal Deposit Insurance Corporation* and interest is adequately collateralized. In the case of certificates of deposit the letter "L" indicates that the deposit, combined with other deposits being held in the same right and capacity will be honored for principal and accrued pre-default interest up to the Federal insurance limits within 30 days after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
--Amortization schedule (the larger the final maturity relative to other maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
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A note rating is not a recommendation to purchase, sell or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is as signed to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A commercial rating is not a recommendation to purchase, sell or hold a
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security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information or based on other circumstances.
Moody's Investors Service, Inc.--A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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Con(...) Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a ) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating category from Aa to B in the public finance sectors. The modifier 1 indicates that the issuer is in the higher end of its letter rating category; the modifier 2 indicates a mid-range ranking; the modifier 3 indicates that the issuer is in the lower end of the letter ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
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Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structures with moderate reliance on debt and ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
--Well-established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exception ally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
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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.
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DDD, DD, and D Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. "DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. "DD' indicates potential recoveries in the range of 50%-90%, and "D' the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated "DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated "DD' and "D' are generally undergoing a formal reorganization or liquidation process; those rated "DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated "D' have a poor prospect for repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
D Default. De notes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA' long-term rating
category, to categories below "CCC', or to short-term ratings other than "F1'.
"NR' indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn': A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
Rating alert: Ratings are placed on Rating alert to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating alert is typically resolved over a relatively short period.
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:
2001 Federal Taxable vs. Tax-Free Yields
Federal Taxable Equivalent Estimate Current Return Tax -------------------------------------------------------------------------------- Bracket 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% ------- ----- ----- ----- ----- ----- ------ 15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 27.5% 5.52% 6.21% 6.90% 7.59% 8.28% 8.97% 30.5% 5.76% 6.47% 7.19% 7.91% 8.63% 9.35% 35.5% 6.20% 6.98% 7.75% 8.53% 9.30% 10.08% 39.1% 6.57% 7.39% 8.21% 9.03% 9.85% 10.67% |
2002-2003 Federal Taxable vs. Tax-Free Yields
Federal Taxable Equivalent Estimate Current Return Tax -------------------------------------------------------------------------------- Bracket 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% ------- ----- ----- ----- ----- ----- ------ 15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 27.0% 5.48% 6.16% 6.85% 7.53% 8.22% 8.90% 30.0% 5.71% 6.43% 7.14% 7.86% 8.57% 9.29% 35.0% 6.15% 6.92% 7.69% 8.46% 9.23% 10.00% 38.6% 6.51% 7.33% 8.14% 8.96% 9.77% 10.59% |
2004-2005 Federal Taxable vs. Tax-Free Yields
Federal Taxable Equivalent Estimate Current Return Tax -------------------------------------------------------------------------------- Bracket 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% ------- ----- ----- ----- ----- ----- ------ 15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 26.0% 5.41% 6.08% 6.76% 7.43% 8.11% 8.78% 29.0% 5.63% 6.34% 7.04% 7.75% 8.45% 9.15% 34.0% 6.06% 6.82% 7.58% 8.33% 9.09% 9.85% 37.6% 6.41% 7.21% 8.01% 8.81% 9.62% 10.42% |
2006 Federal Taxable vs. Tax-Free Yields
Federal Taxable Equivalent Estimate Current Return Tax -------------------------------------------------------------------------------- Bracket 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% ------- ----- ----- ----- ----- ----- ------ 15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 25.0% 5.33% 6.00% 6.67% 7.33% 8.00% 8.67% 28.0% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 33.0% 5.97% 6.72% 7.46% 8.21% 8.96% 9.70% 35.0% 6.15% 6.92% 7.69% 8.46% 9.23% 10.00% |
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, or to enhance income or gain as described in the prospectus, the Trust will engage in Additional Investment Management Techniques. The Trust will engage in such activities in the Advisor's or Sub-Advisor's discretion, and may not necessarily be engaging in such activities when movements in interest rates that could affect the value of the assets of the Trust occur. The Trust's ability to pursue certain of these strategies may be limited by applicable regulations of the CFTC. Certain Additional Investment Management Techniques may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and indices. A put option gives the purchaser of the option the right to sell and the writer the obligation to buy the underlying security at the exercise price during the option period. The Trust may also purchase and sell options on bond indices ("index options"). Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the bond index upon which the option is based is greater, in the case of a call, or less, in the case of a put, than the exercise price of the option. The purchase of a put option on a debt security could protect the Trust's holdings in a security or a number of securities against a substantial decline in the market value. A call option gives the purchaser of the option the right to buy and the seller the obligation to sell the underlying security or index at the exercise price during the option period or for a specified period prior to a fixed date. The purchase of a call option on a security could protect the Trust against an increase in the price of a security that it intended to purchase in the future. In the case of either put or call options that it has purchased, if the option expires without being sold or exercised, the Trust will experience a loss in the amount of the option premium plus any related commissions. When the Trust sells put and call options, it receives a premium as the seller of the option. The premium that the Trust receives for selling the option will serve as a partial hedge, in the amount of the option premium, against changes in the value of the securities in its portfolio. During the term of the option, however, a covered call seller has, in return for the premium on the option, given up the opportunity for capital appreciation above the exercise price of the option if the value of the underlying security increases, but has retained the risk of loss should the price of the underlying security decline. Conversely, a secured put seller retains the risk of loss should the market value of the underlying security decline be low the exercise price of the option, less the premium received on the sale of the option. The Trust is authorized to purchase and sell exchange-listed options and over-the-counter options ("OTC Options") which are privately negotiated with the counterparty. Listed options are issued by the Options Clearing Corporation ("OCC") which guarantees the performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller of an exchange-listed put or call option is dependent upon the existence of a liquid secondary market on option exchanges. Among the possible reasons for the absence of a liquid secondary market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (iv) interruption of the normal operations on an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been listed by the OCC as a result of trades on that exchange would generally continue to be exercisable in accordance with their terms. OTC Options are purchased from or sold to dealers, financial institutions or other counterparties which have entered into direct agreements with the Trust. With OTC Options, such variables as expiration date, exercise price and premium will be agreed upon between the Trust and the counterparty,
without the intermediation of a third party such as the OCC. If the counterparty fails to make or take delivery of the securities underlying an option it has written, or otherwise settle the transaction in accordance with the terms of that option as written, the Trust would lose the premium paid for the option as well as any anticipated benefit of the transaction. As the Trust must rely on the credit quality of the counterparty rather than the guarantee of the OCC, it will only enter into OTC Options with counterparties with the highest long-term credit ratings, and with primary United States government securities dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or purchase put and call options on such futures as a hedge against anticipated interest rate changes or other market movements. The sale of a futures contract creates an obligation by the Trust, as seller, to deliver the specific type of financial instrument called for in the contract at a specified future time for a specified price. Options on futures contracts are similar to options on securities except that an option on a futures contract gives the purchaser the right in return for the premium paid to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or sold, the Trust must allocate cash or securities as a deposit payment ("initial margin"). It is expected that the initial margin that the Trust will pay may range from approximately 1% to approximately 5% of the value of the securities or commodities underlying the contract. In certain circumstances, however, such as periods of high volatility, the Trust may be required by an exchange to increase the level of its initial margin payment. Additionally, initial margin requirements may be increased generally in the future by regulatory action. An outstanding futures contract is valued daily and the payment in case of "variation margin" may be required, a process known as "marking to the market." Transactions in listed options and futures are usually settled by entering into an offsetting transaction, and are subject to the risk that the position may not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use of futures and options on futures will in all cases be consistent with applicable regulatory requirements and in particular the rules and regulations of the CFTC. Under such regulations the Trust currently may enter into such transactions without limit for bona fide hedging purposes, including risk management and duration management and other portfolio strategies. The Trust may also engage in transactions in futures contracts or related options for non-hedging purposes to enhance income or gain provided that the Trust will not enter into a futures contract or related option (except for closing transactions) for purposes other than bona fide hedging, or risk management including duration management if, immediately thereafter, the sum of the amount of its initial deposits and premiums on open contracts and options would exceed 5% of the Trust's liquidation value, i.e., net assets (taken at current value); provided, however, that in the case of an option that is in-the-money at the time of the purchase, the in-the-money amount may be excluded in calculating the 5% limitation. Also, when required, a segregated account of cash equivalents will be maintained and marked to market on a daily basis in an amount equal to the market value of the contract. The Trust reserves the right to comply with such different standard as may be established from time to time by CFTC rules and regulations with respect to the purchase or sale of futures contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps, caps, floors and collars, short sales, reverse repurchase agreements and dollar rolls, and listed or OTC options on securities, indices and futures contracts sold by the Trust are generally subject to segregation and coverage requirements of either the
CFTC or the SEC, with the result that, if the Trust does not hold the security or futures contract underlying the instrument, the T rust will be required to segregate on an ongoing basis with its custodian, cash, U.S. government securities, or other liquid high grade debt obligations in an amount at least equal to the Trust's obligations with respect to such instruments. Such amounts fluctuate as the obligations increase or decrease. The segregation requirement can result in the Trust maintaining securities positions it would otherwise liquidate, segregating assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks. With respect to hedging and risk management, the variable degree of correlation between price movements of hedging instruments and price movements in the position being hedged create the possibility that losses on the hedge may be greater than gains in the value of the Trust's position. The same is true for such instruments entered into for income or gain. In addition, certain instruments and markets may not be liquid in all circumstances. As a result, in volatile markets, the Trust may not be able to close out a transaction without incurring losses substantially greater than the initial deposit. Although the contemplated use of these instruments predominantly for hedging should tend to minimize the risk of loss due to a decline in the value of the position, at the same time they tend to limit any potential gain which might result from an increase in the value of such position. The ability of the Trust to successfully utilize Additional Investment Management Techniques will depend on the Advisor's and the Sub-Advisor's ability to predict pertinent market movements and sufficient correlations, which cannot be assured. Finally, the daily deposit requirements in futures contracts that the Trust has sold create an on going greater potential financial risk than do options transactions, where the exposure is limited to the cost of the initial premium. Losses due to the use of Additional Investment Management Techniques will reduce net asset value.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A-- None.
Part B--Report of Independent Accountants.
Statement of Assets and Liabilities.
(2)Exhibits
(a) Amended and Restated Agreement and Declaration of Trust./3/ (b) By-Laws./1/ (c) Inapplicable. (d) Form of Specimen Certificate./2/ (e) Form of Dividend Reinvestment Plan./1/ (f) Inapplicable. (g)(1) Form of Investment Management Agreement./2/ (g)(2) Form of Waiver Reliance Letter./2/ (g)(3) Form of Sub-Investment Advisory Agreement./2/ (h) Form of Underwriting Agreement./2/ (i) Form of Deferred Compensation Plan for Independent Trustees./2/ (j) Form of Custodian Agreement./1/ (k) Form of Transfer Agency Agreement./2/ (l) Opinion and Consent of Counsel to the Trust./3/ (m) Inapplicable. (n) Consent of Independent Public Accountants./3/ (o) Inapplicable. (p) Form of Initial Subscription Agreement./1/ (q) Inapplicable. (r)(1) Code of Ethics of Trust./1/ (r)(2) Code of Ethics of Advisor and Sub-Advisor./1/ (r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons, Inc./3/ (s) Powers of Attorney/2/ |
/1/Previously filed in the initial filing on April 3, 2001
/2/Previously filed with Pre-Effective Amendment No. 1 to the Registration Statement on June 4, 2001.
/3/Filed herewith.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the Registrant's shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this registration statement:
Registration fees.............................................. $ 77,250 New York Stock Exchange listing fee............................ 125,000 Printing (other than certificates)............................. 377,405 Engraving and printing certificates............................ 21,126 Accounting fees and expenses................................... 5,000 Legal fees and expenses........................................ 212,290 NASD fee....................................................... 30,500 Miscellaneous.................................................. 276,080 Total........................................................ $1,249,651 |
Item 27. Persons Controlled by or under Common Control with the Registrant
None.
Item 28. Number of Holders of Shares
Number of
Title of Class Record Holders
-------------- --------------
Shares of Beneficial Interest............................... 1
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Item 29. Indemnification
Article V of the Registrant's Amended and Restated Agreement and Declaration of Trust, as amended and restated, provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of
the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a private
corporation for profit incorporated under the Delaware General Corporation Law.
No Trustee or officer of the Trust shall be subject in such capacity to any
personal liability whatsoever to any Person, save only liability to the Trust
or its Shareholders arising from bad faith, willful misfeasance, gross
negligence or reckless disregard for his duty to such Person; and, subject to
the foregoing exception, all such Persons shall look solely to the Trust
Property for satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If any Shareholder, Trustee or officer, as such, of
the Trust, is made a party to any suit or proceeding to enforce any such
liability, subject to the foregoing exception, he shall not, on account
thereof, be held to any personal liability. Any repeal or modification of this
Section 5.1 shall not adversely affect any right or protection of a Trustee or
officer of the Trust existing at the time of such repeal or modification with
respect to acts or omissions occurring prior to such repeal or modification.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to indemnify each person who at any time serves as a Trustee or officer of the Trust (each such person being an "indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and
reasonable counsel fees reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth in this Article V by reason of his having acted in any such capacity, except with respect to any matter as to which he shall not have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct"). Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee (1) was authorized by a majority of the Trustees or (2) was instituted by the indemnitee to enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth in this Declaration shall continue as to a person who has ceased to be a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. No amendment or restatement of this Declaration or repeal of any of its provisions shall limit or eliminate any of the benefits provided to any person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (1) a majority vote of a quorum of those Trustees who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in a written opinion concludes that the indemnitee should be entitled to indemnification hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of
defending any action with respect to which indemnification might be sought
hereunder if the Trust receives a written affirmation by the indemnitee of the
indemnitee's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Trust
unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the Trustees determine that the applicable
standards of conduct necessary for indemnification appear to have been met. In
addition, at least one of the following conditions must be met: (i) the
indemnitee shall provide adequate security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not exclude any other right which any person may have or hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of stockholders or Trustees who are "disinterested persons" (as defined in Section 2(a)(19) of the 1940 Act) or any other right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons, provided that such indemnification has been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated to give any bond or other security for the performance of any of his duties hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No purchaser, lender, transfer agent or other person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, undertaking, instrument, certificate, Share, other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of its duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of the Trust's officers or employees or by any advisor, administrator, manager, distributor, selected dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
Insofar as indemnification for liabilities arising under the Act, may be terminated to Trustees, officers and controlling persons of the Trust, pursuant to the foregoing provisions or otherwise, the Trust has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Reference is made to Article 8 of the underwriting agreement attached as Exhibit (h), which is incorporated herein by reference.
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100 Bellevue Parkway, Wilmington, Delaware 19809 and at the offices of State Street Bank and Trust Company, the Registrant's Custodian, and EquiServe Trust Company, N.A., the Registrant's Transfer Agent and Dividend Disbursing Agent.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its units
until it amends its prospectus if (a) subsequent to the effective date of its
registration statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities Act of 1933, the information omitted form the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497 (h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery within two business days of receipt of a written or oral request, any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 24th day of July, 2001.
/s/ Ralph L. Schlosstein
__________________________________________
Ralph L. Schlosstein
President, Chief Executive Officer and
Chief Financial Officer
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Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities set forth below on the 24th day of July, 2001.
Name Title
---- -----
* Trustee, President,
___________________________________________ Chief Executive Officer and
Ralph L. Schlosstein Chief Financial Officer
* Treasurer
___________________________________________
Henry Gabbay
* Trustee
___________________________________________
Andrew F. Brimmer
* Trustee
___________________________________________
Richard E. Cavanagh
* Trustee
___________________________________________
Kent Dixon
* Trustee
___________________________________________
Frank J. Fabozzi
* Trustee
___________________________________________
Laurence D. Fink
* Trustee
___________________________________________
James Clayburn La Force, Jr.
* Trustee
___________________________________________
Walter F. Mondale
/s/ Ralph L. Schlosstein
*By: ______________________________________
Ralph L. Schlosstein
Attorney-in-fact
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INDEX TO EXHIBITS
(a) Amended and Restated Declaration of Trust (l) Opinion and Consent of Counsel to the Trust (n) Consent of Independent Accountants (r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons, Inc. |
BLACKROCK MUNICIPAL INCOME TRUST
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
Dated as of May 31, 2001
Page
----
ARTICLE I The Trust.................................................................................. 1
1.1 Name....................................................................................... 1
1.2 Definitions................................................................................ 2
ARTICLE II Trustees................................................................................... 3
2.1 Number and Qualification................................................................... 3
2.2 Term and Election.......................................................................... 4
2.3 Resignation and Removal.................................................................... 4
2.4 Vacancies.................................................................................. 5
2.5 Meetings................................................................................... 5
2.6 Trustee Action by Written Consent.......................................................... 6
2.7 Officers................................................................................... 6
ARTICLE III Powers and Duties of Trustees.............................................................. 6
3.1 General.................................................................................... 6
3.2 Investments................................................................................ 7
3.3 Legal Title................................................................................ 7
3.4 Issuance and Repurchase of Shares.......................................................... 7
3.5 Borrow Money or Utilize Leverage........................................................... 8
3.6 Delegation; Committees..................................................................... 8
3.7 Collection and Payment..................................................................... 8
3.8 Expenses................................................................................... 9
3.9 By-Laws.................................................................................... 9
3.10 Miscellaneous Powers....................................................................... 9
3.11 Further Powers............................................................................. 10
ARTICLE IV Advisory, Management and Distribution Arrangements......................................... 10
4.1 Advisory and Management Arrangements...................................................... 10
4.2 Distribution Arrangements................................................................. 11
4.3 Parties to Contract....................................................................... 11
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ARTICLE V Limitations of Liability and Indemnification.............................................. 11 5.1 No Personal Liability of Shareholders, Trustees, etc...................................... 11 5.2 Mandatory Indemnification................................................................. 12 5.3 No Bond Required of Trustees.............................................................. 14 5.4 No Duty of Investigation; Notice in Trust Instruments, etc................................ 14 5.5 Reliance on Experts, etc.................................................................. 15 ARTICLE VI Shares of Beneficial Interest............................................................. 15 6.1 Beneficial Interest....................................................................... 15 6.2 Other Securities.......................................................................... 15 6.3 Rights of Shareholders.................................................................... 16 6.4 Trust Only................................................................................ 16 6.5 Issuance of Shares........................................................................ 16 6.6 Register of Shares........................................................................ 16 6.7 Transfer Agent and Registrar.............................................................. 17 6.8 Transfer of Shares........................................................................ 17 6.9 Notices................................................................................... 17 ARTICLE VII Custodians................................................................................ 18 7.1 Appointment and Duties.................................................................... 18 7.2 Central Certificate System................................................................ 19 ARTICLE VIII Redemption................................................................................ 19 8.1 Redemptions............................................................................... 19 8.2 Disclosure of Holding..................................................................... 19 ARTICLE IX Determination of Net Asset Value Income and Distributions................................. 19 9.1 Net Asset Value........................................................................... 19 9.2 Distributions to Shareholders............................................................. 20 9.3 Power to Modify Foregoing Procedures...................................................... 20 |
ARTICLE X Shareholders.............................................................................. 21 10.1 Meetings of Shareholders.................................................................. 21 10.2 Voting.................................................................................... 21 10.3 Notice of Meeting and Record Date......................................................... 21 10.4 Quorum and Required Vote.................................................................. 22 10.5 Proxies, etc.............................................................................. 22 10.6 Reports................................................................................... 23 10.7 Inspection of Records..................................................................... 23 10.8 Shareholder Action by Written Consent..................................................... 23 ARTICLE XI Duration; Termination of Trust; Amendment; Mergers, Etc................................... 24 11.1 Duration.................................................................................. 24 11.2 Termination............................................................................... 24 11.3 Amendment Procedure....................................................................... 25 11.4 Merger, Consolidation and Sale of Assets.................................................. 26 11.5 Subsidiaries.............................................................................. 26 11.6 Conversion................................................................................ 27 11.7 Certain Transactions...................................................................... 27 ARTICLE XII Miscellaneous............................................................................. 29 12.1 Filing.................................................................................... 29 12.2 Resident Agent............................................................................ 30 12.3 Governing Law............................................................................. 30 12.4 Counterparts.............................................................................. 30 12.5 Reliance by Third Parties................................................................. 30 12.6 Provisions in Conflict with Law or Regulation............................................. 30 |
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made as of the 31st day of May, 2001, by the Trustees hereunder, and by the holders of shares of beneficial interest issued hereunder as hereinafter provided.
WHEREAS, this Trust has been formed to carry on business as set forth more particularly hereinafter;
WHEREAS, this Trust is authorized to issue an unlimited number of its shares of beneficial interest all in accordance with the provisions hereinafter set forth;
WHEREAS, the Trustees have agreed to manage all property coming into their hands as Trustees of a Delaware business trust in accordance with the provisions hereinafter set forth; and
WHEREAS, the parties hereto intend that the Trust created by this Declaration and the Certificate of Trust filed with the Secretary of State of the State of Delaware on March 30, 2001 shall constitute a business trust under the Delaware Business Trust Act and that this Declaration shall constitute the governing instrument of such business trust.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities, and other assets which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of shares of beneficial interest in this Trust as hereinafter set forth.
ARTICLE I
conduct the business of the Trust under that name or any other name or names as they may from time to time determine.
------ ---------------------
1940 Act.
"By-Laws" shall mean the By-Laws of the Trust as amended from time to
-------
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time by the Trustees.
who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office.
ARTICLE II
date of the third annual meeting of Shareholders or special meeting in lieu thereof following such expiration to succeed the Trustees whose terms of office expire. The Trustees shall be elected at an annual meeting of the Shareholders or special meeting in lieu thereof called for that purpose, except as provided in Section 2.3 of this Article and each Trustee elected shall hold office until his or her successor shall have been elected and shall have qualified. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, removal, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or removal, of a Trustee.
further, that if the Shareholders of any class or series of Shares are entitled separately to elect one or more Trustees, a majority of the remaining Trustees or the sole remaining Trustee elected by that class or series may fill any vacancy among the number of Trustees elected by that class or series. Any vacancy created by an increase in Trustees may be filled by the appointment of an individual having the qualifications described in this Article made by a written instrument signed by a majority of the Trustees then in office. No vacancy shall operate to annul this Declaration or to revoke any existing agency created pursuant to the terms of this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided herein, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration.
Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be one-third, but not less than two, of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a
meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of all of the members.
With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent not prohibited by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other; participation in a meeting pursuant to any such communications system shall constitute presence in person at such meeting.
ARTICLE III
business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court.
(1) manage, conduct, operate and carry on the business of an investment company;
(2) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of any and all sorts of property, tangible or intangible, including but not limited to securities of any type whatsoever, whether equity or non-equity, of any issuer, evidences of indebtedness of any person and any other rights, interests, instruments or property of any sort and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons to exercise any of said rights, powers and privileges in respect of any of said investments. The Trustees shall not be limited by any law limiting the investments which may be made by fiduciaries.
The right, title and interest of the Trustees in the Trust Property shall vest automatically in each
person who may hereafter become a Trustee upon his due election and qualification. Upon the ceasing of any person to be a Trustee for any reason, such person shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.
expedient or necessary in order to effect the purpose hereof. The Trustees may designate an executive committee which shall have all authority of the entire Board of Trustees except such committee cannot declare dividends except to the extent specifically delegated by the Board of Trustees and cannot authorize removal of a trustee or any merger, consolidation or sale of substantially all of the assets of the Trust.
by that number of full and/or fractional Shares which represents the outstanding amount of such charges due from such Shareholder.
carry on its operations in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with the Trust Property.
ARTICLE IV
ARTICLE V
action was in the best interest of the Trust or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified hereunder against any liability to any person or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct"). Notwithstanding the foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee (1) was authorized by a majority of the Trustees or (2) was instituted by the indemnitee to enforce his or her rights to indemnification hereunder in a case in which the indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth in this Declaration shall continue as to a person who has ceased to be a Trustee or officer of the Trust and shall inure to the benefit of his or her heirs, executors and personal and legal representatives. No amendment or restatement of this Declaration or repeal of any of its provisions shall limit or eliminate any of the benefits provided to any person who at any time is or was a Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of any act or omission that occurred prior to such amendment, restatement or repeal.
(1) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has been a determination (i) by a final decision on the merits by a court or other body of competent jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that such indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a decision, by (1) a majority vote of a quorum of those Trustees who are neither "interested persons" of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2) if such quorum is not obtainable or even if obtainable, if such majority so directs, independent legal counsel in a written opinion concludes that the indemnitee should be entitled to indemnification
hereunder. All determinations to make advance payments in connection with the expense of defending any proceeding shall be authorized and made in accordance with the immediately succeeding paragraph (c) below.
(2) The Trust shall make advance payments in connection
with the expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by the
indemnitee of the indemnitee's good faith belief that the standards of conduct
necessary for indemnification have been met and a written undertaking to
reimburse the Trust unless it is subsequently determined that the indemnitee is
entitled to such indemnification and if a majority of the Trustees determine
that the applicable standards of conduct necessary for indemnification appear to
have been met. In addition, at least one of the following conditions must be
met: (i) the indemnitee shall provide adequate security for his undertaking,
(ii) the Trust shall be insured against losses arising by reason of any lawful
advances, or (iii) a majority of a quorum of the Disinterested Non-Party
Trustees, or if a majority vote of such quorum so direct, independent legal
counsel in a written opinion, shall conclude, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is
substantial reason to believe that the indemnitee ultimately will be found
entitled to indemnification.
(3) The rights accruing to any indemnitee under these provisions shall not exclude any other right which any person may have or hereafter acquire under this Declaration, the By-Laws of the Trust, any statute, agreement, vote of stockholders or Trustees who are "disinterested persons" (as defined in Section 2(a)(19) of the 1940 Act) or any other right to which he or she may be lawfully entitled.
(4) Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall have the power and authority to indemnify and provide for the advance payment of expenses to employees, agents and other Persons providing services to the Trust or serving in any capacity at the request of the Trust to the full extent corporations organized under the Delaware General Corporation Law may indemnify or provide for the advance payment of expenses for such Persons, provided that such indemnification has been approved by a majority of the Trustees.
ARTICLE VI
rights (except as specified in this Section 6.3, in Section 11.4 or as specified by the Trustees when creating the Shares, as in preferred shares).
to have notice given to him as herein provided, until he has given his address to a transfer agent or such other officer or agent of the Trustees as shall keep the register for entry thereon. It is not contemplated that certificates will be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate fees therefore and rules and regulations as to their use.
Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the applicable register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such for all purposes hereof, and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law.
ARTICLE VII
(1) to hold the securities owned by the Trust and deliver the same upon written order;
(2) to receive any receipt for any moneys due to the Trust and deposit the same in its own banking department (if a bank) or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income or net asset value of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees and the custodian.
The Trustees may also authorize each custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian
and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall meet the qualifications for custodians contained in the 1940 Act.
ARTICLE VIII
ARTICLE IX
determined at such time or times on such days as the Trustees may determine, in accordance with the 1940 Act. The method of determination of net asset value shall be determined by the Trustees and shall be as set forth in the Prospectus or as may otherwise be determined by the Trustees. The power and duty to make the net asset value calculations may be delegated by the Trustees and shall be as generally set forth in the Prospectus or as may otherwise be determined by the Trustees.
(1) Distributions pursuant to this Section 9.2 may be among the Shareholders of record of the applicable class or series of Shares at the time of declaring a distribution or among the Shareholders of record at such later date as the Trustees shall determine and specify.
(2) The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they otherwise may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business.
(3) Inasmuch as the computation of net income and gains for Federal income tax purposes may vary
from the computation thereof on the books, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes.
ARTICLE X
Shares voting together as a single class; provided, however, that as to any matter with respect to which a separate vote of any class or series of Shares is required by the 1940 Act, such requirement as to a separate vote by that class or series of Shares shall apply in addition to a vote of all the affected classes and series voting together as a single class. Shareholders of a particular class or series of Shares shall not be entitled to vote on any matter that affects only one or more other classes or series of Shares. There shall be no cumulative voting in the election or removal of Trustees.
(1) Subject to any provision of applicable law, this Declaration or a resolution of the Trustees specifying a greater or a lesser vote requirement for the transaction of any item of business
at any meeting of Shareholders, (i) the affirmative vote of a majority of the Shares present in person or represented by proxy and entitled to vote on the subject matter shall be the act of the Shareholders with respect to such matter, and (ii) where a separate vote of one or more classes or series of Shares is required on any matter, the affirmative vote of a majority of the Shares of such class or series of Shares present in person or represented by proxy at the meeting shall be the act of the Shareholders of such class or series with respect to such matter.
exchange on which Trust Shares are listed a report of operations containing a balance sheet and statement of income and undistributed income of the Trust prepared in conformity with generally accepted accounting principles and an opinion of an independent public accountant on such financial statements. Copies of such reports shall be mailed to all Shareholders of record within the time required by the 1940 Act, and in any event within a reasonable period preceding the meeting of Shareholders. The Trustees shall, in addition, furnish to the Shareholders at least semi-annually to the extent required by law, interim reports containing an unaudited balance sheet of the Trust as of the end of such period and an unaudited statement of income and surplus for the period from the beginning of the current fiscal year to the end of such period.
ARTICLE XI
unless such resolution has been approved by 80% of the Trustees, in which case approval by a Majority Shareholder Vote shall be required. Upon the dissolution of the Trust:
(1) The Trust shall carry on no business except for the purpose of winding up its affairs.
(2) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, merge where the Trust is not the survivor, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more Persons at public or private sale for consideration which may consist in whole or in part in cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, merger in which the Trust is not the survivor, transfer or other disposition of all or substantially all the Trust Property of the Trust shall require approval of the principal terms of the transaction and the nature and amount of the consideration by Shareholders with the same vote as required to open-end the Trust.
(3) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among the Shareholders according to their respective rights.
(2) After the winding up and termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in
writing setting forth the fact of such termination and shall execute and file a certificate of cancellation with the Secretary of State of the State of Delaware. Upon termination of the Trust, the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease.
(1) No amendment may be made to Section 2.1, Section 2.2,
Section 2.3, Section 3.9, Section 5.1, Section 5.2, Section 11.2(a), this
Section 11.3, Section 11.4, Section 11.6 or Section 11.7 of this Declaration and
no amendment may be made to this Declaration which would change any rights with
respect to any Shares of the Trust by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto (except that this provision shall not limit the ability of
the Trustees to authorize, and to cause the Trust to issue, other securities
pursuant to Section 6.2), except after a majority of the Trustees have approved
a resolution therefor, by the affirmative vote of the holders of not less than
seventy-five percent (75%) of the Shares of each affected class or series
outstanding, voting as separate classes or series, unless such amendment has
been approved by 80% of the Trustees, in which case approval by a Majority
Shareholder Vote shall be required. Nothing contained in this Declaration shall
permit the amendment of this Declaration to impair the
exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders.
(2) An amendment duly adopted by the requisite vote of the Board of Trustees and, if required, the Shareholders as aforesaid, shall become effective at the time of such adoption or at such other time as may be designated by the Board of Trustees or Shareholders, as the case may be. A certification in recordable form signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Trustees and, if required, the Shareholders as aforesaid, or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust or at such other time designated by the Board.
Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of Shares of the Trust shall have become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees.
or a portion of the Trust Property to any such corporation, trust, limited liability company, association or organization in exchange for the shares or securities thereof, or otherwise, and to lend money to, subscribe for the shares or securities of, and enter into any contracts with any such corporation, trust, limited liability company, partnership, association or organization, or any corporation, partnership, trust, limited liability company, association or organization in which the Trust holds or is about to acquire shares or any other interests.
consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any class or series of preferred stock, whether now or hereafter authorized, or any agreement between the Trust and any national securities exchange.
(1) The term "Principal Shareholder" shall mean any corporation,
Person or other entity which is the beneficial owner, directly or indirectly, of
five percent (5%) or more of the outstanding Shares of any class or series and
shall include any affiliate or associate, as such terms are defined in clause
(ii) below, of a Principal Shareholder. For the purposes of this Section, in
addition to the Shares which a corporation, Person or other entity beneficially
owns directly, (a) any corporation, Person or other entity shall be deemed to be
the beneficial owner of any Shares (i) which it has the right to acquire
pursuant to any agreement or upon exercise of conversion rights or warrants, or
otherwise (but excluding share options granted by the Trust) or (ii) which are
beneficially owned, directly or indirectly (including Shares deemed owned
through application of clause (i) above), by any other corporation, Person or
entity with which its "affiliate" or "associate" (as defined below) has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of Shares, or which is its "affiliate" or "associate" as
those terms are defined in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, and (b) the outstanding Shares shall
include Shares deemed owned through application of clauses (i) and (ii) above
but shall not include any other Shares which may be issuable pursuant to any
agreement, or upon exercise of conversion rights or warrants, or otherwise.
(2) This Section shall apply to the following transactions:
(1) The merger or consolidation of the Trust or any subsidiary of the Trust with or into any Principal Shareholder.
(2) The issuance of any securities of the Trust to any Principal Shareholder for cash (other than pursuant to any automatic dividend reinvestment plan).
(3) The sale, lease or exchange of all or any substantial part of the assets of the Trust to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period.)
(4) The sale, lease or exchange to the Trust or any subsidiary thereof, in exchange for securities of the Trust, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period).
(3) The provisions of this Section shall not be applicable to (i) any of the transactions described in paragraph (c) of this Section if 80% of the Trustees shall by resolution have approved a memorandum of understanding with such Principal Shareholder with respect to and substantially consistent with such transaction, in which case approval by a Majority Shareholder Vote shall be the only vote of Shareholders required by this Section, or (ii) any such transaction with any entity of which a majority of the outstanding shares of all classes and series of a stock normally entitled to vote in elections of directors is owned of record or beneficially by the Trust and its subsidiaries.
(4) The Board of Trustees shall have the power and duty to determine
for the purposes of this Section on the basis of information known to the Trust
whether (i) a corporation, person or entity beneficially owns five percent (5%)
or more of the outstanding Shares of any class or series, (ii) a corporation,
person or entity is an "affiliate" or "associate" (as defined above) of another,
(iii) the assets being acquired or leased to or by the Trust or any subsidiary
thereof constitute a substantial part of the assets of the Trust and have an
aggregate fair market value of less than $1,000,000, and (iv) the memorandum of
understanding referred to in paragraph (d) hereof is substantially consistent
with the transaction covered thereby. Any such determination shall be conclusive
and binding for all purposes of this Section.
ARTICLE XII
(1) The Trustees hereby authorize and direct a Certificate of Trust, in the form attached hereto as Exhibit A, to be executed and filed with the Office of the Secretary of State of the State of Delaware in accordance with the Delaware Business Trust Act.
and any ambiguity shall be viewed in favor of such powers.
(1) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any
other jurisdiction or any other provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written.
Dr. Andrew F. Brimmer Richard E. Cavanagh
Kent Dixon Frank J. Fabozzi
Laurence D. Fink James Clayburn La Force, Jr.
Walter F. Mondale Ralph L. Schlosstein
July 25, 2001
BlackRock
Municipal Income Trust
345 Park Avenue
New York, New York 10154
Ladies and Gentlemen:
We have acted as special counsel to BlackRock Municipal Income 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 43,333,333 shares (including shares subject to an over-allotment option) (the "Shares") of the Trust's common shares of beneficial interest, par value $0.001 per share (the "Common Shares").
This opinion is being furnished in accordance with the requirements of Item 24 of the Form N-2 Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended (the "1940 Act").
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 1940 Act, on Form N-8A, dated April 3, 2001 as filed with the Securities and Exchange Commission (the "Commission") on April 3, 2001, (ii) the Registration Statement of the Trust on Form N-2 (File Nos. 333-58224 and 811-10339), as filed with the Commission on April 3, 2001, and as amended by Pre-Effective Amendment No. 1 on June 4, 2001, Pre-Effective Amendment No. 2 on June 20, 2001 and Pre-Effective Amendment No. 3 on July 25 2001, under the 1933 Act (such Registration Statement, as so amended and proposed to be amended, being hereinafter referred to as the
BlackRock
Municipal Income Trust
July 25, 2001
"Registration Statement"); (iii) the form of the Underwriting Agreement (the
"Underwriting Agreement") proposed to be entered into between the Trust, as
issuer, and Salomon Smith Barney Inc. and Merrill Lynch, Pierce, Fenner & Smith
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 Amended and Restated Agreement and Declaration of Trust of the Trust,
as amended to dated and currently in effect; (vi) the By-Laws of the Trust, as
currently in effect; (vii) certain resolutions of the Board of Trustees of the
Trust relating to the issuance and sale of the Shares and related matters and
(viii) certain resolutions of the shareholders of the Trust relating to the
Amended and Restated Declaration of Trust. We also have 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, we have assumed that the parties thereto, other than the Trust, its directors and officers, 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 on such parties. In rendering the opinion set forth below, we have assumed that the share certificates representing the Shares 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. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Trust and others.
BlackRock
Municipal Income Trust
July 25, 2001
Members of our firm are admitted to the bar in the State of New York and we do not express any opinion as to the laws of any jurisdiction other than the Delaware Business Trust Act.
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; (iii) certificates representing the Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Shares and registered by such transfer agent and registrar; and (iv) the Shares have been delivered to and paid for by the Underwriters at a price per share not less than the per share par value of the Common Shares as contemplated by 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 (except as provided in the last sentence of Section 3.8 of the Amended and Restated Agreement and Declaration of Trust).
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,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP |
Exhibit (n)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation in this Pre-Effective Amendment No. 3 to the Registration Statement of the BlackRock Municipal Income Trust (Investment Company Registration No. 811-10339) of our report dated July 16, 2001, relating to the financial statements of the BlackRock Municipal Income Trust as of July 16, 2001 and for the period then ended 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 "Experts" in the Registration Statement.
Deloitte & Touche LLP
Boston, Massachusetts
July 23, 2001
Exhibit (R)
J. J. B Hilliard, W. L. Lyons, Inc. is an affiliate of Black Rock. It has adopted PNC Bank Corp.'s Code of Ethics
PNC Code of Ethics
Introduction
The PNC Bank Code of Ethics ("Code") conveys key information to assist you in discharging your responsibilities on behalf of PNC Bank Corp. and its subsidiaries ("PNC Bank" or "PNC") in an ethical and legally proper manner.
The PNC Code of Ethics (formerly known as the Guidelines for Corporate Conduct at PNC Bank) is based on the principles that PNC Bank believes in:
. We conduct business with the highest ethical standards;
. We obey the law;
. We follow the policies and procedures of PNC Bank;
. We maintain confidentiality;
. We have a work environment that is fair and bias-free; and
. We are honest and trustworthy.
The Code applies to all employees and directors as well as to agents when acting on behalf of PNC. Certain provisions of the Code also apply to others (such as family members).
Supervisors and managers should help their staff understand and apply the above principles and comply with the standards in the Code.
The conduct of each of us reflects on our organization and affects how we are perceived. Whether inside or outside of work, your personal conduct should be an asset to PNC Bank.
Use your good judgment, follow the standards set forth in the Code, and report your concerns as provided in the Code. By doing so, we can ensure that PNC Bank continues to stand for honesty, integrity and fairness.
Responsibilities and Standards of Conduct
1.00 RESPONSIBILITIES
As part of your responsibilities, you must:
. understand and comply with the Code, other PNC policies and procedures, and applicable laws and regulations;
. provide the required notifications and obtain the necessary approvals in accordance with the Code; and
. report any possible violations of the Code of which you are aware.
You are not permitted to act in a way that violates the Code. Lines of business or departments may have supplemental policies or procedures with which employees also must comply.
1.01 Administration
The PNC Code of Ethics is administered by PNC's Director of Compliance or a designee (referred to in the Code as "Director of Compliance"). A PNC Code of Ethics Policy Committee ("Ethics Policy Committee") has been established to determine policy issues relating to the Code, oversee resolution of major ethical issues, and receive and review reports relating to the Code's administration.
1.02 Notifications/Approvals
You should become familiar with the following situations in the Code that require you to provide notification or obtain prior approval:
Situation Code
Section
Insider Trading 2.02
Corporate Property 2.04
Inventions 2.04
Conflicts of Interest 2.05
Gifts and Entertainment 2.05.1
Gifts to Public Officials 2.05.2
Inheritances; Fiduciary Compensation and Fees for Personal Services 2.05.7
Outside Activities 2.05.9
Other Employment 2.05.9a
Officer or Directorships 2.05.9b/
Exhibit 7
2.05.10
Public Office 2.05.11
Expert Witnesses 2.07
Antitrust 2.08
Fair Competition 2.10
Political Contributions
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You can provide notification or obtain approval either (i) by contacting the Director of Compliance or (ii) through submission of the Code of Ethics Notification/Approval Form ("Notification/Approval Form")to your supervisor and market Human Resources ("HR") representative, as designated in the Code. A sample of the Notification/Approval Form is attached as Exhibit 1; the form is available from your Human Resources Department. If employees have any questions regarding how to provide notification or obtain approval, they should contact their market HR representative. Directors and agents should contact the Director of Compliance regarding notifications or approvals, questions or any other matters under the Code.
1.03 Reporting Procedures
Reports of any possible violations of the Code, including dishonest or fraudulent acts, or questions or concerns regarding matters covered by the Code, should be made immediately to any of the following people:
. your supervisor;
. your market HR representative;
. the Security Services representative;
. the Director of Compliance; or
. the General Counsel.
You have been provided with several alternative people to whom you can report a possible violation so that you can choose a person with whom you feel comfortable. You may make an anonymous report if you wish.
Note: Any supervisor who receives a report of a possible violation should refer it immediately to the market HR representative, the Security Services representative, the Director of Compliance, or the General Counsel.
When you report a possible violation, you will be protected from any employment discrimination, retaliation, or retribution for good faith reporting.
1.04 Key Contacts
Market HR representatives, the Security Services representative, the Director of Compliance, the General Counsel and others referenced in the Code are Key Contacts to assist you on Code matters for PNC Bank. Their telephone numbers can be found in the Key Contacts and Reference Guide attached as an Addendum to the Code or on the PNC intranet.
1.05 Exceptions/Questions
Exceptions to the Code and certain approvals will need to be made by the Ethics Policy Committee. If you would like to ask for an exception or have a question about any part of the Code, you should first discuss it with your supervisor and your market HR representative who will process your request, or you may contact the Director of Compliance. The Director of Compliance, as appropriate, will present requests for exceptions or approvals to the Ethics Policy Committee.
1.06 Enforcement
If an employee violates the Code, PNC policies and procedures or any applicable laws or regulations, the employee may be subject to disciplinary action, which may include termination of employment. Violation of laws could also result in legal proceedings and penalties, including, in some circumstances, criminal penalties.
You are required to cooperate fully with investigations, audits, monitoring procedures, and other inquiries regarding Code matters, including requests to provide documentation. Refusal to comply may result in disciplinary action, which may include termination of employment.
1.07 Written Acknowledgement
When you are hired, and at certain times during your employment, you will be required to sign a written acknowledgment certifying that you have received, have read, understand, and will comply with the Code. Refusal to complete the acknowledgment may result in disciplinary action, which may include termination of employment.
2.00 STANDARDS OF CONDUCT
The following are standards of conduct for some specific issues that may
arise in our business. We may amend or change these standards from time
to time.
2.01 Confidentiality
Fundamental Principle
Confidentiality is a fundamental principle in PNC Bank's business. You
may deal with confidential, non-public information concerning PNC Bank,
its clients, shareholders, employees and suppliers. You must protect all
confidential information from unauthorized disclosure.
Definitions
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The term "confidential information" includes, but is not limited to:
. PNC's business information, records, activities and plans;
. The identity, business information, records, activities and plans of clients and prospective clients;
. the identity of, or information relating to, merger and acquisition candidates;
. PNC's sources of supply, sales methods and sales proposals;
. PNC's computer programs, system documentation, special hardware, product hardware, software and technology developments;
. manuals, formulae, processes, methods, machines, compositions, ideas, improvements, inventions, or other confidential or proprietary information belonging to PNC or related to PNC's affairs;
. security information such as passwords, personal identification numbers (PIN's), and electronic keys;
. reports written to and by regulatory agencies; and
. any additional confidential information described in PNC's Insider Trading Policy (attached as Exhibit 2).
Your Responsibilities
Your responsibilities with regard to confidential information are:
[] You must not disclose confidential information to any person within PNC, unless that person has a need to know such information in connection with his or her employment responsibilities.
[] You must not disclose confidential information to anyone outside of PNC, unless:
. such person is employed by an outside firm (i.e., a law, accounting or other firm) retained by PNC and that person needs to know the information in connection with the service to be provided by the firm to PNC;
. pursuant to proper legal process or regulation. (PNC's Legal Department has written guidelines for handling legal process. If you receive a request for confidential information, or subpoena or other legal process, you must immediately inform your supervisor who will contact the Legal Department.); or
. the individual or organization to which the information relates gives written consent, and release of the information is approved by the Legal Department.
[] You must never use confidential information for personal financial gain or to compete with PNC.
[] You must keep in a secure way all files, records, or inquiries regarding clients and employees, and other records that contain confidential information.
[] You must keep all identification and access codes, security equipment, security programs, and security procedures confidential.
[] You must avoid discussing confidential information in public places (for example, elevators, restaurants or at social events).
[] You must avoid discussing confidential information on cellular or car phones.
[] You must be sensitive to whether information is confidential when using E-mail, or facsimile machines.
[] You must not disclose confidential information, whether it is in written form or in your memory, even after you leave your employment or position with PNC.
In addition, you must comply with all other PNC policies and procedures relating to confidentiality, including those that have been adopted for your line of business or department. All employees should also become familiar with and follow the standards relating to confidentiality of information set forth in the Information Security Policy Manual, available on the PNC Intranet and from Information Security.
2.02 Insider Trading
PNC has adopted an Insider Trading Policy which is attached as Exhibit
2 to this Code. You should become familiar with the requirements of the
Policy and must comply with its rules and standards.
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2.03 Clients' Property
Fundamental Principle
You must maintain the highest standards of honesty and integrity in
handling clients' money and other property. You are not permitted to
make unauthorized use of any client's money or property.
2.04 Corporate Property
Fundamental Principle
Corporate property may be used and removed from PNC premises only for
business purposes, unless approved by your supervisor, or in accordance
with policies adopted by the Board of Directors of PNC or a committee
of the Board.
Corporate property includes, but is not limited to:
information;
files;
products;
office supplies and furnishings;
services;
automobiles;
technologies;
concepts;
client lists;
policies and procedures manuals;
computer and other equipment, such as facsimile machines;
computer data bases, programs and software;
data processing systems;
voice mail;
E-Mail; and
any other electronic messaging systems or information about PNC's
business.
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Inspections
Corporate property and personal possessions that you may bring onto PNC premises
are subject to inspection.
Inventions
If you invent something, make a discovery, improve something or write something
during your employment which is related to PNC's business or activities, you are
required to:
. disclose your work to your supervisor;
. assign any rights to the work to PNC, if appropriate; and
. assist PNC, either during or after your employment, in getting the use and benefits of the work, including anything necessary for PNC to get a patent or copyright or obtain other protection for the work.
2.05 Conflicts of Interest
Fundamental Principle
You owe PNC Bank and its clients undivided loyalty. You should not have
an interest that conflicts with, or may reasonably appear to conflict
with PNC Bank or its clients, unless approved as set forth in this
Code.
Definition
A conflict of interest exists when:
. you engage in a personal activity or have a personal interest that
may influence your decisions when acting for PNC or that may be at
odds wiith PNC's interests; or
. you use your position with PNC or use PNC's confidential
information to benefit yourself rather than PNC.
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A conflict of interest may be based on your financial, business, family or other personal relationships with clients, suppliers, competitors or others, or on some other factor.
Appearance Of Conflict
The appearance of a conflict can be as damaging as an actual conflict and can
erode trust and confidence in PNC. When faced with a situation involving a
potential conflict of interest, you should ask yourself whether public
disclosure of the matter would embarrass PNC or lead an outside observer to
believe a conflict exists.
Disclosure Requirements
You must disclose in writing to your supervisor and your market HR
representative all known or potential conflicts of interest by submitting a
Notification/Approval Form. The Director of Compliance should be contacted on
how to handle a situation, if necessary.
Illustrations
Some illustrations of areas where potential conflicts of interests could occur
and PNC's policies are:
2.05.1 Gifts and Entertainment
Fundamental Principle
You may not ask for or accept a gift or anything of value from anyone (before or after a transaction is discussed or concluded or a business decision is made) if you intend to be influenced or rewarded, or you believe the giver intends to exert influence, in connection with any business decision or transaction involving PNC. Where this is not the case, under certain circumstances, you may accept gifts or something of value from someone doing or seeking to do business with PNC. Examples of such circumstances are:
Permissible Gifts
. accepting a gift that is based on obvious family or personal relationships (such as between you and your parents, children, spouse or close friend) and it is clear that the gift is being accepted because of the relationship rather than any PNC business;
. letting someone else occasionally pay for meals, refreshments, travel arrangements, accommodations, or entertainment to discuss business or foster business relationships if the expense is of reasonable value. In general, such items are of "reasonable value" if they involve a level of expense that customarily would be reimbursed by PNC as a reasonable business expense if not paid for by the other party;
. accepting loans from other banks or financial institutions on normal terms to finance usual activities, such as home mortgage loans, except where prohibited by law;
. occasionally accepting advertising or promotional material having a value not in excess of $100, such as pens, pencils, note pads, key chains, calendars and similar items;
. accepting discounts or rebates on merchandise or services that is not more than those available to other clients;
. accepting gifts having a value not in excess of $100 that are related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, holiday, birthday, or bar or bat mitzvah; and
. accepting civic, charitable, educational or religious organizational awards for recognition of service and accomplishment.
Disclosure Requirements
You must make every effort to refuse or return a gift or something of value that
goes beyond those permissible circumstances listed above. In the following
circumstances, you must promptly notify your supervisor and market HR
representative, or the Director of Compliance, to discuss how to handle the
situation:
. if you are offered a gift or something of value that goes beyond those permissible circumstances above and you cannot refuse or return it; or
. you have any doubts about whether it is permissible to accept a gift or something of value.
Only the Ethics Policy Committee can give approval to accept a gift or something of value outside of the permissible circumstances listed above.
You can provide notification or obtain approval by submitting the Notification/ Approval Form to your supervisor and market HR representative, or you may contact the Director of Compliance.
Giving Gifts
The above standards for accepting gifts also apply to giving gifts, except that
giving gifts to public officials is addressed separately in the next section.
2.05.2 Gifts to Public Officials
Monetary Gifts Prohibited
You may not give a gift of money to a public official, except for legitimate
personal campaign contributions to candidates for public office. (Certain
employees must obtain prior written approval before making political
contributions. See Section 2.10)
Gifts Of Value To Influence Particular Acts Prohibited You may not give anything of value (including, for example, gifts, meals, recreation, entertainment, flowers, transportation, lodging or sporting event tickets, which will be referred to in this section as "gifts") to a public official for the purpose of influencing a particular act by the official or his or her agency.
Limitations On Other Types Of Gifts
Limitations on giving items of value are discussed below with respect to
different types of public officials with whom PNC employees are likely to have
contact. These limitations, which should be interpreted as applying also to the
spouse or family members of the public official, do not apply to gifts based on
obvious family or close personal relationships.
Limitations for Different Types of Public Officials
. Federal Officials -- Gifts of over $20 in value may not be offered to officials in the executive branch of the federal government ("executive branch official"). For example, the value of an executive branch official's meal paid for by PNC may not be greater than $20. If all of the gifts to an executive branch official are added together in any calendar year, they may not be greater than $50. Any gift to an executive branch official must receive advance written approval from the Director of Compliance so that the $50 limit can be monitored. Advance approval of each gift, regardless of amount, is important because gifts given by all PNC officers to one executive branch official will be aggregated.
Members of Congress and Congressional staff are subject to restrictions on gifts they may accept. Any gift to a member of Congress or to Congressional staff members must receive advance written approval from the Director of Compliance.
. Pennsylvania State Officials -- Gifts of more than nominal value may not be offered to officials in the executive branch of Pennsylvania government. Although nominal value does not have a specific dollar limit, you should be guided by the principles set forth in Section 2.05.1 above concerning PNC employees' receipt of gifts. Any gift to a Pennsylvania State official must receive advance written approval from the Director of Compliance so that reporting requirements imposed by the Lobbying Disclosure Act may be satisfied.
. Pennsylvania County Officials -- In counties in which PNC employees are likely to have significant activity, the rules for Pennsylvania state officials apply, except as follows. In Erie County, all gifts -D even of nominal value -D are prohibited. In Philadelphia County, the aggregate value of gifts may not exceed $100 annually. However, in Philadelphia County, gifts of food and beverage consumed at an event or meeting at which the official is attending are not restricted as to dollar amount and do not count against the aggregate annual limit.
. Kentucky State and Jefferson County Officials -- Gifts, even of nominal value, may not be given to Kentucky state officials. Gifts to Jefferson County officials are prohibited if they are
based on an understanding that they are given for the purpose of influencing the officer, directly or indirectly, in the discharge of his/her official duties.
. Ohio State and County Officials -- Gifts of more than $20 in value may not be offered to Ohio state or county officials. Gifts of $20 or less in value (for example, business lunches) may not be offered on a regular basis.
. Delaware State and New Castle County Officials -- Gifts of more than nominal value may not be offered to officials in the executive branch of Delaware government. Although nominal value does not have a specific dollar limit, you should be guided by the principles set forth in Section 2.05.1 above concerning PNC employees' receipt of gifts.
. Massachusetts State and County Officials -- Gifts of $50 or more may not be offered to Massachusetts state, county or municipal officials. Gifts of less than $50 in value (for example, business lunches) may not be offered on a regular basis or in a pattern.
. New Jersey State Officials -- Gifts, even of nominal value, may not be given to officials in the executive branch of New Jersey government.
. Indiana State Officials -- Gifts of more than $25 in value may not be offered to officials in the executive branch of Indiana government; in certain cases, the official may be required to obtain written approval from a designated state official before accepting the gift.
In preparing this section, the laws and regulations of only the states and counties which are referred to above were reviewed. Check with the Director of Compliance before offering gifts to other public officials.
The restrictions discussed above apply to gifts given to public officials directly or indirectly (for example, through another person).
Questions
If you have doubts about whether a gift to a public official is allowed under
the Code, you should either not give the gift or you should contact the Director
of Compliance for an interpretation or to obtain approval from the Ethics Policy
Committee.
2.05.3 Borrowing from Clients or Suppliers/Lending
Fundamental Principle
Employees cannot accept a loan from clients, suppliers or any other business
contact of PNC unless the client, supplier or business contact is an immediate
family member, or:
. the loan is given by those who lend money in the usual course of their business; and
. then only in accordance with the law and on terms offered to others who have similar credit standing, without special arrangements on interest rates, security, repayment terms and other conditions.
Additional Restrictions
Employees must not lend personal funds to, or cosign, endorse, or guarantee, or
otherwise assume responsibility for the borrowing of any client, supplier or any
other business contact of PNC unless the client, supplier or business contact is
an immediate family member.
2.05.4 Self-Dealing
Self-dealing means using your employment or position for personal gain. Whether you are acting individually, through a business, or in a fiduciary capacity (a position of trust for another person), you are prohibited from self-dealing.
Prohibitions
. You may not accept from someone either doing business or trying to do business with PNC a business opportunity that is not available to other people on similar terms, or that is made available to you because of your position with PNC.
. You may not take for yourself a business opportunity that belongs to PNC Bank. An opportunity belongs to PNC when the company has pursued the opportunity, it has been offered to PNC, it is the kind of business PNC competes in, PNC has funded it, or PNC has devoted time, facilities, personnel, or other corporate resources to develop it.
2.05.5 Sales/Purchases of Property Services to/from Employees
You may not purchase property or services from PNC other than products or services offered:
. to the general public; and
. on terms that are available to all employees or similarly situated clients.
Further, you may not sell any property or services to PNC.
2.05.6 Dealing with Suppliers
Merit Based Awards
Awards of orders, contracts and commitments for goods and services should always
be made in the best interests of PNC. In your dealings with suppliers, you may
not request or accept any kick-backs or other inducements.
2.05.7 Inheritances; Fiduciary Compensation and Fees for Personal Services
Fundamental Principle
Neither you nor any member of your immediate family may accept any inheritance
from any PNC client or the immediate family of any PNC client, unless the person
giving you the inheritance is your relative or a relative of someone in your
immediate family (through blood, marriage or adoption).
Application of Rule
This rule applies only if the relationship between the client and you or your immediate family was established through your employment or position with PNC.
Prohibited Appointments
Also, neither you nor any member of your immediate family may accept appointment
as:
. executor;
. administrator;
. personal representative;
. attorney-in-fact;
. guardian;
. custodian under any Uniform Transfer or Gifts to Minors Act; or
. Trustee
for any PNC client or the immediate family of any PNC client if the relationship between that person and you or your immediate family was established through your employment or position with PNC and you are to be compensated for the appointment through payment of fees or otherwise.
If the appointment is to be uncompensated, you must receive prior approval from the Ethics Policy Committee. You should contact the Director of Compliance to obtain approval.
Client Relations
If you have advance knowledge of any inheritance or appointment that may violate
this rule, you must try to discourage the client from making the gift or
appointment. You must also notify the Director of Compliance.
2.05.8 Use of Position or Authority
Fundamental Principles
You may not act on behalf of PNC in any transaction involving a member of your
immediate family or in any situation where you or a member of your immediate
family has a personal or financial interest. You also may not act on behalf of
PNC in connection with an organization with which you or a member of your
immediate family is associated or has a personal or financial interest.
Note: This section does not apply to your actions related to publicly held PNC subsidiaries in which you own stock where your acquisition of the stock was approved by the Ethics Policy Committee or PNC's Board of Directors and you comply with the Stock Ownership Policy adopted by the Ethics Policy Committee which is attached to this policy as exhibit #6.
2.05.9 Outside Activities
Limits on Outside Activities
PNC encourages employees to participate in charitable or community activities
outside of the company. These activities must not interfere with your ability to
meet your employment responsibilities nor cause harm to PNC's reputation in the
community or business interests.
Some typical examples of outside activities are described below:
A. Other Employment
Restrictions on Outside Employment/Positions You may not have any outside employment with a competitor or hold a position with a competitor while an employee of PNC. Nor may you be self-employed in competition with PNC.
In addition, you may not engage in any outside employment (including self-employment) or hold any position which PNC determines may interfere with your PNC employment responsibilities. PNC may also determine that you are legally prohibited from or restricted in such outside employment while an employee of PNC, such as in the securities industry. You should be aware of your department's supplemental policies and procedures in this regard, if any.
Notification/Approval
All outside employment (including self-employment) for PNC employees
must be approved in advance and in writing by submitting the
Notification/Approval form to your supervisor and your market HR
representative.
In some instances where approval to engage in outside employment has been given, it may be necessary to revisit the issue. In particular, where PNC determines that the outside activity is interfering with your PNC responsibilities, or where PNC determines that the outside activity or position is in competition with PNC, authorization to continue such outside employment or in such position may be withdrawn.
B. Officer or Directorships Importance to PNC PNC has adopted a Policy for Employees Holding Director and Officer Positions in Outside Profit and Non-Profit Organizations which is attached as Exhibit #7 to the Code. You must become familiar and comply with this Policy.
2.05.10 Public Office
Guidelines
PNC has adopted a Public Office Policy which is attached as Exhibit #8 to this
Code. You must become familiar and comply with this Policy.
Except for lobbyists and other officers authorized to act on behalf of PNC, employees participating in political activities do so as individuals and not at the request of or as representatives of PNC.
2.05.11 Expert Witnesses
Handling Request To Serve
You may be asked to serve as an expert witness or to provide technical
assistance in litigation or other proceedings not involving PNC. These
activities generally take a lot of time and may be in conflict with PNC's
policies and practices or with positions PNC has taken in other lawsuits. For
these reasons, if you are asked to serve as an expert witness or provide
technical assistance for a party other than PNC, you must receive advance
written approval. You should submit the Notification/Approval Form to your
supervisor and market HR representative to request such approval.
2.05.12 Insider Lending
Regulatory Requirements
No PNC bank, under the requirements of Regulation O, may extend credit on
preferential terms to:
. any of PNC's directors or executive officers; or
. any related interest of these individuals.
Reviewing Regulation O Policy
PNC has adopted a Regulation O Policy to implement the provisions of the
regulation in all PNC markets. You should contact your Compliance Department
representative to obtain a copy of the policy if applicable to your line of
business or department.
2.05.13 Interest on Deposits of Directors, Officers, Attorneys and Employees
Fundamental Principle
PNC Banks are not permitted to pay any of their directors, officers, attorneys
or employees a greater rate of interest on their deposits than that paid to
other depositors on similar deposits with such bank.
2.05.14 Sales/Purchases of Property and Services to/from Non-Officer Directors
Unless pre-approved by a majority of disinterested members of the Board of Directors of PNC Bank Corp. or the appropriate subsidiary PNC Bank, non- officer directors and their firms may not:
. purchase property or services from PNC unless such property or services are offered in the regular course of PNC's business, and on terms not more favorable to the director or his or her firm than those offered to other similarly situated clients who are not directors; or
. sell any property or services to PNC other than property or services that are sold in the regular course of the director's (or firm's) business and are sold upon terms not less favorable to PNC than those offered to similarly situated clients of the director (or firm).
2.06 Discrimination, Bias and Harassment
2.06.1 Equal Employment Opportunity Policy
It is the policy of PNC affirmatively to implement equal opportunity for all qualified applicants and existing employees without regard to race, religion, color, national origin, sex, age (over 40), disability, status as a Vietnam-era veteran or any other basis which would be in violation of any applicable ordinance or law. All personnel actions, including recruitment, selection, hiring, training, transfer, promotion, termination, compensation and benefits conform to this policy.
A copy of the full Equal Employment Opportunity (EEO) policy may be obtained from your market HR representative.
What To Do
If you believe you have been denied equal employment opportunity
because of discrimination, bias or harassment, you should report it to
your supervisor or market HR representative or you may contact the
Director of Compliance or the General Counsel. You will be protected
from any employment discrimination, retaliation or retribution for good
faith reporting.
2.06.2 Bias and Harassment
You are entitled to a work environment free of racial, sexual, ethnic, and religious bias and harassment. Racial, sexual, ethnic or religious jokes or comments are subject to individual interpretation and may be offensive to some employees. Intimidation, coercion and threats, or actions leading to bodily harm are also unacceptable.
2.06.3 Sexual Harassment
Definition
Sexual harassment is any unwelcome conduct of a sexual nature that is
sufficiently severe or pervasive so as to unreasonably interfere with
an individual's work performance or create an intimidating, hostile or
offensive working environment.
Forms Of Sexual Harassment
Sexual harassment can take various forms, including:
. verbal (for example, sexual innuendo, sexual propositions, threats, suggestive or insulting comments or sounds and jokes of a sexual nature);
. non-verbal (sexually suggestive pictures or objects, graphic commentaries and obscene gestures); and
. physical (unwelcome physical contact).
Criteria Of Sexual Harassment
Any one or a combination of three basic criteria determines whether conduct is
sexual harassment:
. If you are required to submit to the conduct as either an express or implied qualification for a job or a requirement of your employment relationship;
. If submission to, or rejection of, the conduct is used as a basis for employment decisions affecting you; or
. If the conduct has the purpose or effect of unreasonably interfering with your work performance, or creating an intimidating, hostile or offensive working environment.
Compliance Requirement
Sexual harassment by a manager/supervisor, or other employee, or client,
supplier or visitor will not be tolerated within PNC. All employees must comply
with this policy and take appropriate measures to ensure that sexual harassment
does not occur.
What To Do
If you are confronted with actions that may be sexual harassment, you should
report it to your supervisor or your market HR representative, or you may
contact the Director of Compliance or the General Counsel.
2.07 Antitrust
What are the Antitrust Laws?
You must obey the antitrust laws. The antitrust laws, which contain criminal and
civil penalties, prohibit unfair methods of competition and agreements that
restrain the way companies compete. The antitrust laws are most often enforced
against agreements between separate businesses (for example, agreements between
PNC and other companies) that limit competition. These agreements need not be in
writing to raise a concern.
As a general matter, all of PNC strategies and other decisions should be made independently, without consultation with PNC's competitors. You may not enter into any of the following three types of arrangements or agreements:
Types of Arrangements
. Price-Fixing Agreements are agreements with competitors about the prices, terms, or conditions to be charged clients. To avoid even an allegation of price fixing, you should not discuss our prices, terms or conditions with a competitor, except as noted below.
Note: Where we are openly working jointly with our competitors to provide a loan or other product or service to a client (for example, loan syndications), agreements with such competitors on the price to be charged to the client generally do not constitute price fixing. You should only enter into such agreements if we have legitimate business reasons for working jointly with our competitors rather than providing the product or service on our own (for example, in loan syndications, because of undue credit risk to PNC).
. Group Boycott Agreements are agreements among two or more companies to "boycott" or otherwise not do business with another company.
. Market, Client, Territory or Location Allocation Agreements Among Competitors are agreements with competitors not to compete in a particular line of business or product, not to "poach" competitors' clients, or not to compete in a particular geographic area.
Because the following arrangements may raise antitrust concerns under certain circumstances, you should consult with the General Counsel before entering into any of them:
. Tying Arrangements arise when a seller has a product or service buyers need, and requires buyers of that product or service to purchase a second product or service from the seller.
. Banking laws also prohibit certain ties. PNC Bank has adopted a Policy Statement on Product Tying Restrictions that you can obtain from your Compliance Department representative.
Note: Most tying arrangements that are long established in banking (such as compensating balances) that facilitate reasonable arrangements intended to assure the soundness of credit do not pose a problem under either the banking or antitrust laws.
. Predatory pricing is pricing at an unfairly low price for the purpose of driving all competitors out of the marketplace to reap the benefits of higher prices after the competitors are gone.
. Exclusive Dealing involves agreements to do business with one supplier or client that preclude PNC from doing business with other suppliers or clients. You should consult with the Director of Compliance if PNC's purchases or sales account for a substantial portion of the market for the product or service being purchased or sold.
. Reciprocity involves a company conditioning the purchase of products or services from suppliers on those suppliers' purchases of services from the company.
Other Instances in Which You Should Consult With The General Counsel You should always consult the General Counsel:
. before a PNC unit that you manage merges with or acquires another company (including a division of another company or substantial assets of another company outside of the ordinary course of business); or
. if you believe that any activity that may be undertaken by PNC could be viewed as restraining fair or open competition, or if you have any questions about whether any such activities may fall within any of the categories of conduct described above.
2.08 Fair Competition
Fundamental Principle
PNC Bank expects you to engage in vigorous, but fair competition with our
competitors. Unfair ways to compete are not permitted. For example, you must
never direct or encourage any applicant or new employee to violate any
contractual or legal obligations to a former employer, such as a responsibility
to protect confidential business information, technical information or trade
secrets.
Requirements
Also, you are required to notify your supervisor and market HR representative by
submitting a Notification/Approval Form if you have any obligations that may
interfere with your ability to perform your job duties at PNC Bank. These
obligations may include an agreement with a former employer, business partner or
other person or entity that says:
. you may not compete with them for a certain time or in a specific location;
. you may not ask their employees if they are interested in working for PNC;
. you may not ask their clients to do business with PNC;
. you may not take work-related inventions, developments, or writings to use at another business or place of employment;
. you may be limited in your use of trade secrets, business information, materials, training or techniques that you learned there; or
. you may have to notify them of any new employment or business venture.
2.09 Personal Responsibilities of Employees
2.09.1 Drug Abuse
Drug-Free Workplace
PNC Bank is committed to promoting and maintaining a drug-free
workplace. The illegal use of drugs interferes with effective and safe
job performance. For this reason, PNC Bank has adopted a Drug Abuse
Policy to prohibit employees from illegally using, possessing,
distributing, or manufacturing drugs, or being under the illegal
influence of drugs, while working or while on PNC property.
Consequence of violation Employees who violate the Drug Abuse Policy (including the refusal to take a drug screening test) will be subject to disciplinary action.
A summary of the Drug Abuse Policy is attached as Exhibit 3. PNC's Drug Abuse Policy is available from your market HR representative.
2.09.2 Alcohol Abuse
Fundamental Principle
The use of alcohol can have wide-ranging effects in the workplace,
including declining job performance and diminished safety of co-workers
and clients. For this reason, PNC prohibits any use of alcohol that may
affect your fitness for work, the safety of co-workers or the public,
your job performance or any operation of PNC.
2.09.3 Personal Finances
Employee Responsibilities
Because one of the primary functions of PNC Bank is the efficient and
effective management of money, you must demonstrate trustworthiness and
financial responsibility. You are expected to maintain your personal
account relationships and financial affairs in the same responsible
manner that is expected of clients and to manage debts in relation to
income and net worth. Abuse of employee checking accounts, credit cards
or loans obtained through PNC Bank is not in the best interest of PNC
Bank and may result in revocation of these privileges.
In addition, you must use your expense account in accordance with the guidelines set forth in the Employee Expense Reimbursement Guide, available from your market HR representative, as well as the standards set forth in the Code.
2.09.4 Solicitation
Fundamental Principle
You are prohibited from soliciting other employees on behalf of any
cause or organization during working time (that is, when the soliciting
employee or the receiving employee is required to be performing work
duties) or in client areas. Examples of prohibited solicitation include
raffles, lotteries or memberships. You are also prohibited from
distributing advertising materials, handbills, literature or other
materials which are not prepared, supplied or approved by PNC, on PNC
premises during working time or in any work area or any area where
clients are routinely present to transact any business with PNC.
It will not be a violation of this policy, however, if the solicitation or distribution is part of a campaign officially approved or sponsored by PNC, such as United Way.
Non-employees of PNC are prohibited from soliciting or distributing literature on behalf of any cause or organization at any time on any of PNC's premises.
2.10 Political Contributions
Prohibitions
PNC cannot make direct or indirect contributions to political
candidates or office holders.
You should abide by the following:
. no payment or thing of value may be made or given by or on behalf of PNC to any political party, candidate for public office in relation to his or her candidacy, or to any committee or group formed to support a party or candidate.
. PNC will not reimburse you for personal political contributions.
. you may not use PNC facilities or equipment in connection with any federal, state, or local election.
. you may not participate in political activities during your working hours or on PNC property. For example, branch offices may not be used by candidates running for election for fund raisers or other activities related to running for office.
. if you are a foreign national, you may not make a contribution in connection with any election (federal, state or local) or make a contribution to a PNC-affiliated political action committee. This prohibition does not apply to U.S. citizens living outside the United States. If you are not a U.S. citizen and if you have not been lawfully admitted for permanent residence in the United States, you should not make any political contributions, directly or indirectly, without first checking with the Director of Compliance.
Permitted Activities
Except as prohibited by Rule G-37 of the Municipal Securities Rulemaking Board
("MSRB") and other related policies of PNC discussed below, the following
activities are permissible:
. you may use your own funds to make contributions to political parties, candidates, or political action committees;
. you may participate in volunteer political activities during non- working time and away from PNC premises, as long as you do not use any PNC resources in connection with your activities; and
. PNC may make its facilities available to an affiliated political action committee ("PAC") for PAC-related functions, including speeches by political candidates. In addition, PNC may absorb administrative or other expenses incurred by an affiliated PAC.
Additional Rules For Certain Employees
Employees of PNC Securities Corp, PNC Brokerage Corp, and certain other PNC
employees associated with municipal securities or municipal finance, are subject
to the following rules by MSRB Rule G-37 and PNC policies:
. you may not make contributions to PACs affiliated with PNC or PACs controlled by any municipal finance professional.
. you may not participate in the management of any PACs affiliated with PNC.
. you must obtain prior written approval for any political contributions to candidates or PACs. Contact your Compliance Department or consult the PNC policy implementing Rule G-37 for more information on obtaining approval.
. you must limit any contributions to $250 per election and per candidate, and you may only make contributions to candidates for whom you are eligible to vote.
. you may not make any direct or indirect political contribution for the purpose of influencing the award of municipal securities business to PNC.
A copy of the PNC policy implementing MSRB Rule G-37 is located in the PNC Securities Corp and PNC Brokerage Corp Compliance Manuals.
2.11 Lobbying
Specific laws apply to lobbying activities undertaken on behalf of PNC. You may obtain a summary of these laws and a copy of PNC's lobbying policy from the Director of Compliance.
2.12 Other Matters
Crimes, Suspected Crimes, and Dishonest Acts Reporting Requirements
PNC Bank must file information with law enforcement agencies under certain
circumstances when criminal acts involving PNC Bank have occurred or are
suspected. If you have knowledge of a mysterious disappearance or loss or an
unexplained shortage, or know or suspect that any criminal, dishonest, or
fraudulent act has occurred that may affect PNC, its employees, officers or
clients, you should immediately use any of the Reporting Procedures set forth in
Section 1.03 of the Code.
Fidelity Bond Coverage
PNC holds a fidelity bond that covers all employees of PNC. The bond coverage
for any employee may end as soon as PNC learns of any dishonest or fraudulent
act that was or may have been committed by the employee at any time, whether or
not the act was committed while in PNC's employment.
Bonding Requirement
If an employee does not meet the standard for bonding, employment usually must
be terminated. To comply with the bonding requirements and other requirements
imposed by law, PNC reserves the right to investigate the personal history of
any applicant or employee, including any law enforcement records.
Convictions Involving Dishonesty or Breach of Trust Any person who at any time:
. has been convicted of or plead guilty to any criminal offense involving dishonesty or breach of trust or money laundering; or
. has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such an offense is prohibited from participating, directly or indirectly, in any manner in the conduct of the affairs of any PNC bank without prior written consent from the appropriate regulatory agency.
Consequences Of Violation
If any employee or officer of a PNC Bank is convicted of or pleads guilty to
such an offense or enters into a pretrial diversion or similar program to avoid
such a conviction, employment will be terminated in the absence of consent from
the appropriate regulatory agency.
2.13 Media Inquiries
Media Inquiries
You may be contacted by the media for information concerning PNC's position on various matters. You must always direct these inquiries to the Public Relations Department.
Prohibitions
You also may not give information to the media about PNC activities, the
activities of other employees, PNC clients or suppliers without the consent of
the Public Relations Department. PNC (through the Public Relations Department)
will speak out on issues of importance to PNC when appropriate. PNC will not,
nor should you, without the consent of the Public Relations Department, identify
clients or provide client information or do the following:
. comment on actions of any other company, entity or person;
. comment on issues that are in litigation or under governmental review;
. discuss financial projections;
. discuss plans, programs, products, or operations that have not been announced publicly;
. provide testimonials or endorsements; or
. describe the content of regulatory examination reports.
2.14 Recordkeeping Policy
PNC maintains a record retention policy in accordance with legal, regulatory, and appropriate business requirements.
Prohibitions
You may not dispose of or destroy any records that document or record the
business of PNC, except in accordance with PNC's record retention policy.
If there is threatened or pending litigation, an administrative charge, a subpoena or other legal process, or if a government audit or review is in process, you must not dispose of or destroy any relevant records.
Intentional destruction of records to avoid disclosure is prohibited.
Questions
If you have questions about record retention, ask your supervisor. Supervisors
may direct their questions to the Corporate Records Retention Coordinator.
2.15 Accounting Practices/Foreign Corrupt Practices Act
Requirements
PNC has established internal accounting controls and recordkeeping policies to
meet legal and business requirements, including the following:
. all business transactions and payments will be recorded accurately in supporting records;
. no unrecorded fund or asset of PNC will be established or maintained for any reason;
. the use or transfer of PNC funds for any purpose that would be in violation of any law or regulation or that would be improper is prohibited; and
. the accounting records of PNC, and any public record, must be complete, accurate, and in reasonable detail, and no false, artificial, or misleading entries will be made for any reason.
Foreign Corrupt Practices Act of 1977
Any dealings that you may have with an official of a foreign government, a
foreign political party or party official, or candidate for foreign political
office, must comply with the requirements of the Foreign Corrupt Practices Act
of 1977, as amended. The Act also applies to officials of public international
organizations.
. This law requires the use of proper accounting procedures.
. You are prohibited from giving or promising anything of value to such foreign officials for the purpose of influencing any act or decision of the official in his/her official capacity, or to obtain or retain business, or direct business to, any person. Violations may result in criminal penalties.
All laws of the applicable foreign country must be obeyed.
2.16 Bank Secrecy/Money Laundering Control Act
Policy
It is the policy of PNC Bank to have an effective Bank Secrecy Act (BSA) and
anti-money laundering program. You are responsible for knowing and carrying out
your responsibilities under the company's BSA polices and procedures. In
particular, you must be aware of your responsibility regarding:
. requirements to report cash transactions on Currency Transaction Reports (CTRs);
. the company's systems and procedures to avoid being used by persons who are laundering money through the bank from drug activities and other illegal activities;
. "Know Your Customer" procedures; and
. the procedures to identify a client's suspicious activities and transactions and to report such matters to Security Services.
Your market's BSA Compliance Officer should be contacted regarding any BSA questions or concerns.
2.17 Community Reinvestment Act/Fair Lending
Policy
It is the policy of PNC to respond to the credit needs of the communities in
which it has facilities, including those of low and moderate income
neighbor-hoods. In addition, each PNC Bank is expected to devote human and
financial resources, consistent with safe and sound banking practices, to the
solution of community problems.
It is the policy of PNC Bank to conduct its business in accordance with fair lending laws. It is your responsibility to treat all clients fairly.
A copy of the Corporate Community Reinvestment Act (CRA) and Fair Lending Compliance Statements may be obtained from your Compliance Department representative or market CRA Officer.
2.18 Safety, Health and Environment
Compliance Requirement
You must comply with safety and health requirements governed by federal, state,
and local laws. You have a responsibility:
. to follow safe operating procedures;
. to promote your own and your co-workers' health; and
. to encourage regard for the environment among fellow employees and in the community.
Firearms Prohibition
You are not permitted to possess firearms or other dangerous weapons on PNC
premises, in PNC-owned vehicles or on work time, unless this is required as part
of your job.
How To Report
Reports of any actual or potential safety, health, or environmental problems
should be reported using the Reporting Procedures set forth in Section 1.03 of
the Code.
This Code reflects principles PNC intends to abide by. It is not necessarily a statement of the law and in many instances may go beyond what the law and industry practice require. This Code is not intended to result in the imposition of legal liability on PNC, or on any employee or any person who becomes subject to provisions of the Code, if such liability would not exist under law or regulations in the absence of the Code.
You are responsible for complying with the Code. This Code, however, does not, nor should it be construed to, imply an employment contract between you and PNC.
Exhibit 1: Forms
Copy of the Notification/Approval Form
Exhibit 2: Insider Trading
SUMMARY OF REQUIREMENTS
This chart summarizes certain rules described in PNC Financial Services Group, Inc.'s Insider Trading Policy (the "Policy"). It is intended to be used as a reference to help you in your compliance with the Policy. However, you should not use this summary in place of the Policy because, in addition to
containing more detailed information on the rules summarized below, the Policy contains other rules and standards on topics that are not included in the summary. The Policy also applies to the following members of your immediate family: your spouse, minor children, older children who live in your household or who rely primarily on you for financial support, and any other relatives (by blood, marriage, or otherwise) living in your household. You are responsible for these family members' compliance with the Policy, and you must seek approval of and report their personal securities transactions in accordance with this Policy as if such transactions were for your own account.
[] transactions in any derivative of a PNC security, including but not limited to puts, calls, and options (other than stock options granted by PNC), subject to certain exceptions for employees who received PNC securities in connection with an acquisition day trading (buying and selling the same security during one calendar day)
PNC INSIDER TRADING POLICY
Introduction
The purpose of this Insider Trading Policy ("Policy") is to further compliance by PNC Financial Services Group, Inc. ("PNC") and its subsidiaries, employees, and directors with the federal securities laws and regulations. The Policy is designed not only to protect us from civil or criminal liability under these laws, but also to protect our reputation for integrity.
The Code of Ethics contains additional standards with respect to confidential information, and should be read in conjunction with this Policy. Further, your business unit may impose additional requirements. You may also be subject to Office of the Comptroller of the Currency requirements for fiduciary activities, Securities and Exchange Commission requirements, and other requirements of various self-regulatory organizations.
Certain of the following standards and rules are, of necessity, general in nature. In practice, there may be situations that warrant exceptions or interpretations that must be approved by the General Counsel's office of PNC ("General Counsel").
If you have questions regarding the Policy, you should contact the Director of Corporate Compliance or the General Counsel. Further, if you suspect a violation of this Policy, you should contact the Director of Corporate Compliance or the General Counsel, or use any of the reporting procedures set forth in the PNC Code of Ethics.
You are required to be familiar with and abide by this Policy. You must read it carefully and retain it. New employees will be required to certify in writing that they understand and will comply with the Policy. From time to time employees may also be asked to re-certify in writing that they have followed the Policy.
References to "PNC" apply to PNC Financial Services Group, Inc. and all organizations directly or indirectly under its control. References to an "affiliate" apply to the organization under the control of PNC with which an employee or director is associated.
What is "Insider Trading"?
"Insider trading" generally involves the purchase or sale of securities while aware of material, non-public information ("inside information"). A person who communicates inside information (a "tipper") to another person (a "tippee") may also be liable if the tippee purchases or sells a security while aware of such information.
Penalties for insider trading violations are substantial. Civil penalties may be as high as three times the profit gained or loss avoided as a result of an unlawful purchase or sale of a security. For controlling persons who knowingly or recklessly fail to take appropriate measures designed to prevent the occurrence of insider trading violations, civil penalties of up to the greater of three times the profit gained or loss avoided or $1,000,000 may be imposed. In addition, criminal fines and jail terms may be imposed.
What is "Material Information"?
Material information generally means information relating to a company that issues securities (an "issuer"), such as information about its business operations or securities, the public dissemination of which would likely affect the market price of any of its securities, or which would likely be considered important by a reasonable investor in determining whether to buy, sell, or hold such securities.
What is "Non-Public Information"?
Information that has not been disclosed to the public is generally non-public. To show that information is public, there must be evidence that it is widely disseminated. Information would generally be considered widely disseminated if it has been disclosed, for example on the Dow Jones broad tape, news wire services such as AP or Reuters, radio or television; or in newspapers or magazines, or public disclosure documents filed with the Securities and Exchange Commission, such as prospectuses, proxy statements, and periodic reports.
Examples of Inside Information
It is impossible to provide a complete list of information that may constitute inside information, but it may include:
. Unpublished financial reports or projections;
. Information about current, proposed, or contemplated transactions, business plans, financial restructurings, or acquisition targets;
. Dividend increases or decreases;
. Extraordinary borrowings or liquidity problems;
. Material defaults under agreements or actions by creditors, clients, or suppliers relating to a company's credit standing;
. Proposed or contemplated issuance, redemption, or repurchase of securities or stock splits;
. Significant expansions or contractions of operations, including acquisitions, mergers, divestitures, and joint ventures, and purchases or sales of substantial assets;
. Major new product developments;
. Significant increase or decrease in business or information about major contracts;
. Institution of, or developments in, major litigation, investigations, or regulatory actions or proceedings; and
. Developments regarding a company's senior management.
Statement of General Policy Applicable to All Employees and Directors
The following rules relate to your personal securities transactions. For purposes of these rules, your personal securities transactions include the securities transactions of your immediate family members, and the securities transactions of accounts in which you or your immediate family members have a beneficial interest or over which you or your immediate family members exercise investment discretion or control. If you or an immediate family member exercises investment discretion or control over non-related customer accounts in the normal course of employment responsibilities, those accounts are not subject to the pre- clearance and reporting requirements described below. However, transactions in such accounts may be subject to review by audit or compliance personnel.
Immediate family members consist of your spouse, any minor children, older children living in your household, older children who rely primarily on you for financial support, and any other relatives (by blood, marriage, or otherwise) living in your household. The personal securities transactions of your immediate family members are subject to this Policy. You are responsible for their transactions being in compliance with these rules, and you must pre-clear and report their personal securities transactions as if such transactions were for your own account.
1. General prohibition on insider trading:
. If you are aware of inside information concerning an issuer or its securities, including but not limited to PNC, you are prohibited from buying, selling, or recommending securities of that issuer. You also may not disclose such information to any other person, unless:
[] that person is employed by PNC and has a need to know such information in connection with his or her employment or supervisory responsibilities;
[] that person is employed by an outside firm (such as a law, accounting, or investment banking firm) retained by PNC and needs to know the information in connection with the service to be provided by the firm to PNC; or
[] disclosure is otherwise authorized by the General Counsel.
. Once the inside information is released to the public and has been widely disseminated, then you may buy, sell, or recommend securities of that issuer unless otherwise restricted in this Policy.
. Unless you are sure that information is not inside information, you should presume that it is or consult with the General Counsel.
2. Special rules regarding PNC Financial Services Group, Inc. securities:
. You are prohibited from purchasing or selling PNC securities beginning 15 days before the end of a calendar quarter until the second business day after PNC releases its earnings results for
that
quarter (the "Blackout Period"). This prohibition does not include exercising with cash or already-owned PNC securities an option on PNC securities granted by PNC and holding the underlying securities received as a result of the option exercise. All pending purchase and sale orders regarding PNC securities that could be executed during a Blackout Period must be canceled before the beginning of the Blackout Period.
. You are prohibited from engaging in transactions in any derivative of PNC securities, including but not limited to puts, calls, and options. You are also prohibited from day trading (buying and selling the same securities during one calendar day) and short selling (selling the securities at a specified price on a specified date without owning the securities on the trade date) PNC securities. The receipt or exercise of an option grant or other derivative security pursuant to a PNC compensation plan is not a violation of the Policy.
Note: There is a limited exception to the prohibition on derivative transactions for employees who have received PNC securities in connection with an acquisition. This exception is not available to PNC executive officers who are subject to Section 16 of the Securities Exchange Act of 1934. You will be informed if this exception applies to you. If this exception applies:
[] You may sell or "write" covered call options, or purchase protective puts (either alone or in combination, as, for example, in establishing a collar), provided that such derivative instruments relate only to the number of PNC shares you originally acquired in connection with the acquisition.
[] You may not enter into these transactions during a Blackout Period
or at any time when you are aware of inside information regarding
PNC.
[] You must remain "covered" (that is, you must not sell the underlying PNC shares with respect to which you have entered into the derivative transaction) at all times during the term of the derivative instrument.
[] You may not exercise any such instrument during a Blackout Period or at any time when you are aware of inside information regarding PNC. (The exercise by a counterparty to such a derivative transaction would not be deemed to violate this restriction.)
. If you fail to meet a margin call or otherwise default on a loan secured by PNC securities, and the PNC securities are liquidated during a Blackout Period or while you are aware of inside information, you may be deemed to be in violation of this Policy.
Pre-Clearance and Reporting Requirements
Restricted Employees and Directors (each as defined below) are subject to additional pre-clearance and reporting requirements. If you are subject to these requirements, under no circumstance may you effect a transaction in any securities while you are aware of inside information, even if you have received pre-clearance. The ultimate responsibility for determining whether you have inside information rests with you. Pre-clearance of any particular transaction under this Policy will not necessarily protect you from liability under the laws prohibiting insider trading.
Restricted Employees include members of PNC's senior officer committee (the Marketing Committee, as of the effective date of this Policy), executive officers who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, designated employees of Mergers and Acquisitions,
and other employees designated by the Director of Corporate Compliance. You will be informed if you have been designated a Restricted Employee.
If you are a Restricted Employee, you must obtain the approval of the Corporate Secretary or designate before:
. buying or selling PNC securities and securities issued by PNC affiliates that are publicly traded companies,
. making changes in elections or intra-plan transfers involving PNC securities or phantom shares under any PNC compensation or benefit plan,
. using PNC securities to secure a loan (including a margin account), or
. making a gift of PNC securities.
You must also pre-clear through the Insider Transaction Authorization System before buying or selling any publicly traded security other than securities issued by PNC or a PNC affiliate.
If you are a Restricted Employee, you must have your broker(s) send periodic statements at least quarterly of all of your purchases and sales of publicly traded securities to Corporate Compliance at the same time the broker sends such statements to you. In addition, you must provide periodic statements at least quarterly to Corporate Compliance of all of your purchases and sales of publicly traded securities other than through a broker-dealer.
The pre-clearance and reporting requirements do not apply to security transactions involving open-end mutual funds (such as money market funds), unit investment trusts, and U.S. government or federal agency obligations; reinvestment of dividends pursuant to an issuer's dividend reinvestment plan (but do apply to additional voluntary purchases or sales effected through such a plan); purchases of PNC securities under the Employee Stock Purchase Plan; or other situations where the Director of Corporate Compliance determines that pre-clearance or reporting is not necessary.
Members of the Boards of Directors of PNC and PNC Bank, National Association must obtain the approval of the Corporate Secretary before:
. buying or selling PNC securities and securities issued by PNC affiliates that are publicly traded companies,
. using PNC securities to secure a loan (including a margin account),
. making a gift of PNC securities, or
. reallocating investments within the Directors Deferred Compensation Plan.
If you are a director, you must have your broker(s) send duplicate copies of trade confirmations of all of your purchases and sales of PNC securities (and PNC affiliates' publicly traded securities) to the Corporate Secretary at the same time the broker sends confirmations to you. In addition, you must report to the Corporate Secretary any transaction in PNC securities other than through a broker-dealer not later than 7 calendar days after such transaction.
The pre-clearance and reporting requirements do not apply to the reinvestment of dividends pursuant to PNC's dividend reinvestment plan (but do apply to additional voluntary purchases or sales effected through the plan).
Other Pre-clearance and Reporting Requirements
A business unit may have or adopt policies governing the personal securities transactions of some or all of the employees of that business unit. For example, certain fiduciary, investment advisory, securities brokerage, and similar business units have supplemental policies governing the personal securities transactions of their employees. Such additional restrictions may include the pre-clearance of securities transactions or reporting requirements. You will be informed if you are in a business unit that has special policies applicable to you, and you will be required to be familiar with and abide by these policies.
Securities of Clients
Employees of certain business units ("Designated Units") are prohibited from purchasing or selling securities of their clients. Employees will be informed if they are in a Designated Unit to which this restriction applies.
If you are in a designated unit and acquired securities of a client in a transaction permitted by the Insider Trading Policy in effect before this Policy, or before commencing employment in your business unit, you may continue to hold such securities, but may not acquire any additional securities of that client. You must disclose this investment to your business unit manager and Corporate Compliance, and must obtain clearance from your business unit manager and Corporate Compliance before selling any such client securities.
Securities of Affiliates
Certain PNC employees may be subject to different or additional restrictions with respect to their transactions in securities issued by PNC affiliates that are publicly-traded companies. You will be informed of any such restrictions if they are applicable to you.
Information Barriers
Because PNC is a diversified financial institution, one business unit may have inside information about an issuer while another business unit that does not have such information may wish to buy or sell that issuer's securities or recommend a purchase or sale of such securities. Information Barriers are policies and procedures designed to separate business units that are likely to receive inside information from business units that purchase, sell, or recommend the purchase or sale of securities. Information Barrier policies and procedures will be implemented for each applicable business unit.
Policy Presentation
A video tape that includes a summary of insider trading laws and review of this Policy will be shown to each new employee of PNC. All new employees will be required to certify in writing that they have seen or listened to the video tape, understand this Policy, and will comply with the rules and standards set forth in this Policy. Existing employees may from time to time also be required to provide a written certification
that they have followed this Policy. Periodically, the rules set forth in this Policy will be reviewed with all employees through meetings, internal communications and publications, or other means.
Audit
The General Auditor of PNC has the authority to audit compliance with this Policy and the policies of the business units. Each employee must cooperate with such an audit, including requests to provide documentation.
Noncompliance
If you fail to comply with this Policy (including the refusal to re-certify compliance with it upon request or cooperate with an audit), you will be subject to disciplinary action, which could include termination of employment. In addition, apparent or suspected violations of laws applicable to PNC's business may be reported to appropriate authorities.
This Policy is not intended to result in the imposition of legal liability that would not exist in the absence of the Policy.
Exhibit 3: Drug Abuse Policy Summary
Summary
We are committed to promoting and maintaining a drug-free workplace. An
employee's illegal use of drugs interferes with effective and safe job
performance, which is a matter of company concern. For this reason, it is our
policy to prohibit employees from illegally using, possessing, distributing,
selling or manufacturing, or being under the illegal influence of drugs while
working or while on company property.
"Drugs" refer to, but are not limited to, controlled substances and any potentially mind-altering chemicals. This includes, but is not limited to, depressants (barbiturates); stimulants (amphetamines); cocaine; narcotics (opiates, such as heroin, morphine and codeine); hallucinogens (PCP, LSD); methadone, marijuana and other cannabinoids; legally obtainable drugs, with prescriptions (Darvon, Valium, Librium); and over-the-counter drugs.
According to the PNC Bank Drug Abuse Policy, a job applicant who is offered employment must successfully pass a drug screening test as a condition of employment. Failure to pass the test will render the offer null and void. In addition, an employee may be asked to submit to a drug screening test where there is reason to believe that he or she may have violated the Drug Abuse Policy. Further, in the future, drug screening tests may be conducted on those employees whose jobs are of a sensitive nature and whose use of drugs, therefore, would pose a risk to the company or the security or safety of co-workers and the public.
We have developed procedures and guidelines for determining whether to require an employee to take a drug test. The procedures include possible consultation with designated legal and Human Resources personnel and/or a medical evaluation. Because employees will only be required to take a test when there is reasonable cause to believe that the employee may have violated the Drug Abuse Policy, and after specified procedures have been followed, the employment of an employee who refuses to take a drug test will be terminated.
All drug screening tests will be conducted by an independent, certified toxicology laboratory, and all test results will be reviewed by an independent Medical Review Officer.
We have the right to search all company property assigned to employees and personal possessions brought onto company property or premises. The privacy of employees will be preserved to the extent possible.
Employees who violate the Drug Abuse Policy will be subject to disciplinary action up to and including employment termination.
Employees are encouraged to seek help with any drug abuse problem and are reminded of the availability of the various corporate benefit programs. Any eligible employee may voluntarily participate in a recognized drug rehabilitation and/or other appropriate counseling program to treat an existing drug use problem provided that he or she has not previously violated the Drug Abuse Policy. In that event, admitting to drug use and participating in a drug rehabilitation and/or other appropriate counseling program will not be considered a violation of the Drug Abuse Policy as long as the employee successfully completes the program and agrees to be subject to random drug screening tests for a period of two years and one month following initiation of the program.
Any employee who participates in a drug rehabilitation and/or counseling program, whether voluntarily or as a result of disciplinary action, will be subject to random drug screening tests for a period of two years and one month following initiation of the program.
Employees who are convicted in a court of law or plead guilty to the use, possession, manufacture, distribution and/or sale of drugs occurring on company premises are required to notify us in writing within five days of such conviction or plea.
Notwithstanding the foregoing, management has the right to take whatever disciplinary action it deems advisable, and deny any or all benefits under the Drug Abuse Policy, if such employee has violated any other PNC Bank and/or company policy or procedure.
Any employee who wishes to review the PNC Bank Drug Abuse Policy should contact his or her market Human Resources representative.
Exhibit 4: PNC Bank Electronic Media Policy
Introduction
PNC Bank ("PNC") employees have access to and use one or more forms of electronic media, for example, e-mail products such as OfficeVision and Lotus Notes, online services, the Internet, the World Wide Web, PNC Intranet, and electronic devices such as cellular phones and facsimile machines. PNC encourages proper use of these media because they make communication more efficient and effective and because they are valuable sources of information.
The purpose of this Electronic Media Policy ("Policy") is to summarize key elements of what constitutes the proper use of electronic media by PNC employees. The Policy applies to your use of all electronic media and services when:
. accessed on, or from, company premises;
. accessed using company computers, facsimile machines or other equipment;
. using PNC's leased or purchased services (e.g., the PNC corporate network, the company's Internet connection or external service providers); or
. the media is used in a manner that identifies the employee with PNC Bank (e.g., you join a chat room or publish a comment on the Internet referencing PNC).
You should be aware that the Policy applies even when using your own personal computer, cellular phone or other resources, if one of the above factors applies.
This Policy is part of the PNC Bank Code of Ethics. Other PNC policies and procedures may also be applicable and should be considered.
Electronic Media: Company Property and Business Use
Electronic media and services are resources provided by the company to facilitate company-related business. Employees need to demonstrate a sense of responsibility and good judgment, just as with any company resource.
. You may not create, scan, fax, download, copy, or send articles, jokes, stories, chain letters and other similar items of personal interest to another employee, person or entity.
. You may not use e-mail products for any purpose unrelated to performance of your job duties, such as to sell raffle tickets or tickets to personal dinner events, unless directed by your supervisor or manager. Solicitations are governed by PNC's solicitation policy (ss.2.09.4, Code of Ethics)
. You may never use electronic (or any other) media to communicate offensive, harassing, pornographic or other inappropriate material.
Should you have questions on what is appropriate business use of electronic media, please contact your supervisor, your Human Resources representative or any other Key Contact as set forth in the Addendum to PNC's Code of Ethics.
Software and Copyrights
Only software developed, owned or licensed by PNC Bank may be installed on PNC computing resources and used for the purpose of promoting PNC's business. All employees are required to comply with software copyright laws and licensing agreements. Unauthorized duplication of licensed software and documentation is strictly prohibited.
Electronic Media Privacy
PNC Bank does not guarantee the privacy of communications transmitted over company established electronic media links. You should assume such communications are not private, and you should observe the Confidentiality section of the PNC Bank Code of Ethics (ss. 2.01). Especially with cellular phones, you should assume that a third party may have the opportunity to overhear your conversation. Your use of electronic media, and the content of your communications, is subject to monitoring by PNC for operational, maintenance, security, business, legal or regulatory reasons.
System Security
PNC policies regarding system security are set forth in PNC's Information Security Policy Manual; detailed Internet security controls and design requirements are provided at ss.1100, No. 1104. Important considerations you should be aware of:
. Any business requirement resulting in file transfers over the Internet must be approved by your cost center manager. All files downloaded from the Internet must be from "known" reliable sources and must be scanned with PNC Bank standard anti-virus software.
. You may not use the Internet to communicate sensitive or confidential information unless management approved encryption standards are implemented. The Confidentiality section of the Code of Ethics (ss.2.01) should be observed in any communications using electronic media.
. Access to the Internet from company resources (i.e., from PNC equipment or through PNC employees) must be approved through secured corporate gateways, approved and configured in accordance with PNC Information Technology Services standards. Passwords maintained on Internet-based systems must be different from passwords used on PNC Bank systems.
. Certain Internet browsers and other similar technologies which are used to access World Wide Web-based resources and services, include the ability to store information locally in files that can be retained for an indefinite period. Browsers must be configured to ensure that any "temporary" information used during online sessions is not permanently stored on local user computers.
You should be aware that the network services and World Wide Web sites can identify individuals and companies accessing their services, and can and do monitor access and usage.
PNC Products and Services: Public Relations and Customer Interaction
Products and services provided by PNC, regardless of the media used, are subject to a variety of legal and regulatory restrictions applicable to such matters as advertising, product and service availability, costs and fees, and disclosures and descriptions. Existing guidelines regarding product functions and features need to be complied with by all employees. The policies and procedures that govern employee behavior regarding customer contact are applicable to all interactions via electronic media.
. Employees should not use their status as PNC employees to set forth opinions, comments or information that may be contrary to PNC's interests. Therefore, participation in online chat rooms and publication of information involving PNC must be conducted with care. You may not use company resources to create your own pesonal Web site.
. Any negative or misleading information found on electronic media concerning PNC Bank should be referred to Public Relations immediately. Individual employees should not respond to such items.
. The standards for the Internet apply the same basic, corporate identity standards as those used in print which meet the objectives of visual clarity and consistency.
. Lines of business creating a PNC Intranet must observe corporate standards, including those defined for the PNC logo.
The Public Relations Department should be consulted if you have any questions.
Enforcement
In today's business environment, electronically distributed information can be transmitted much more quickly than in the past, so it is important to use caution and abide by the above principles in all stages of the use of electronic media.
Any employee found to be abusing the privilege of company-facilitated access to electronic media or devices is subject to disciplinary action, which may include termination of employment. Please speak to your supervisor or manager if you have any questions or contact the resources identified above. You may also use your Key Contacts and Reference Guide in your Code of Ethics Addendum to help you reach the appropriate person at PNC to assist you.
(Note - there is no Exhibit 5)
Exhibit 6: PNC Stock Ownership Policy
(POLICY REGARDING OWNERSHIP OF STOCK IN PUBLICLY HELD SUBSIDIARIES)
Purpose
This is the stock ownership policy contemplated by Section 2.05.8 of the PNC Code of Ethics. The purpose of this policy is to avoid conflicts of interest or the appearance of conflicts of interest on the part of PNC personnel who are responsible for the relationship or transactions between PNC and its publicly held subsidiaries, while promoting ownership of stock in PNC and its publicly held subsidiaries.
Scope
This policy applies to PNC personnel who act, and exercise decision-making authority, on behalf of PNC with respect to the relationship or transactions between PNC and its publicly held subsidiaries. This policy does not apply to directors, officers and employees of a publicly held subsidiary whose principal employment or relationship is with that subsidiary.
Definitions
1. For purposes of this policy, PNC includes PNC Financial Services Group,
Inc. and its subsidiaries other than the publicly held subsidiary in
question.
2. PNC personnel includes directors, officers and employees of PNC Financial
Services Group, Inc. and any of its subsidiaries other than persons whose
principal employment or relationship is with the publicly held subsidiary
in question.
3. Publicly held subsidiary means any entity in which PNC Financial Services
Group, Inc. directly or indirectly owns at least 25% of the outstanding
capital stock or other equity interest and that is subject to periodic
reporting requirements under the federal securities laws.
Relative Ownership Requirement
PNC personnel within the scope of this policy shall not acquire or hold an equity interest in a publicly held subsidiary of PNC that materially exceeds in value such person's equity interest in PNC Financial Services Group, Inc.
Your equity interest will be based for this purpose on the fair market value of securities (including phantom stock units) owned directly or indirectly through employee benefit or deferred compensation plans, owned beneficially through trusts or other vehicles, or that may be acquired upon exercise of stock options, whether exercisable or not.
Your equity interest includes securities owned by your spouse, any minor children, older children living in your household, older children who rely primarily on you for financial support, and other relatives (by marriage or otherwise) living in your household.
Monitoring Requirements
PNC personnel within the scope of this policy should monitor their compliance with this Policy.
PNC personnel subject to this policy have 90 days from discovering an instance of noncompliance to reestablish compliance with this policy, unless an exception is granted or, under applicable insider trading policy or law, securities transactions to reestablish compliance are restricted in this time frame. In the latter event, compliance must be reestablished promptly after such restriction lapses.
Questions
Questions regarding this policy should be directed to PNC's General Counsel or Corporate Secretary.
Exhibit 7: PNC Policy for Employees Holding Director and Officer Positions in Outside Profit and Non-Profit Organizations
Introduction
The purpose of the PNC Policy for Employees Holding Director and Officer Positions in Outside Profit and Non-Profit Organizations ("Policy") is to establish certain rules and procedures for employees who hold or are considering taking a position as a director, trustee, officer or other similar position in a for-profit or non-profit corporation or other organization outside of PNC ("director/officer positions"). This Policy applies to all outside director/officer positions you currently hold as well as to any future positions and should be read together with the entire PNC Code of Ethics. It is your responsibility to understand and comply with this Policy and the PNC Code of Ethics.
If you have any questions regarding this Policy, you should contact your manager, your Human Resources (HR) representative, the Corporate Ethics Office, or any of the Key Contacts identified in the Addendum to the PNC Code of Ethics. References to "PNC" apply to The PNC Financial Services Group, Inc. and/or its subsidiaries.
Serving at the Request of PNC
Employees will be deemed to be serving in a director/officer position in an organization outside of PNC at the request of PNC only if they obtain written approval from the CEO or the Vice Chairman of The PNC Financial Services Group, Inc. (or in the case of the CEO or the Vice Chairman, from the Board of Directors or its Corporate Governance Committee).
Note: "At the request of PNC" means at the request of the PNC entity by which the employee is employed unless otherwise specified on the written approval form.
Approval Requirements if You are Serving at the Request of PNC
Employees who are asked to serve in a director/officer position in an outside organization at the request of PNC must submit the "Form for Approval to Serve at the Request of PNC" to the Corporate Ethics Office. Prior to submission for final approval by the CEO or the Vice Chairman, the request must first be approved by the employee's Manager, Business CEO or Director of Staff Function, and Business HR Manager (as applicable). You can obtain a copy of this Form from PNC's internal website, from your HR representative, or from the Corporate Ethics Office.
The CEO or the Vice Chairman will be deemed to be serving at the request of PNC if the outside director/officer position is approved by The PNC Financial Services Group, Inc. Board of Directors or its Corporate Governance Committee.
Approvals for all such requests will be based on the best interest of PNC. Approvals will be reviewed annually by the CEO or Vice Chairman or, in the case of the CEO or the Vice Chairman, by the Corporate Governance Committee, and may be modified or withdrawn at any time.
Employees will be considered for possible coverage in their capacity as outside directors/officers under PNC's directors and officers liability insurance policy and for possible indemnification by the applicable PNC entity only with respect to outside director/officer positions approved as being at the request of PNC in accordance with this Policy, subject in each case to applicable law and governing documents. Any exceptions must be approved by the CEO or the Vice Chairman of The PNC Financial Services Group, Inc. (or, in the case of the CEO or the Vice Chairman, by the Board of Directors or its Corporate Governance Committee).
Public Office Directors/Officers
Employees considering or accepting a director/officer position that is also a public office position (such as school board director) must comply with the PNC Public Office Policy, which is Exhibit 8 to the PNC Code of Ethics.
All Other Outside Director/Officer Positions
Employees otherwise wishing to serve in a director/officer position in an outside organization are not required to provide notification or to obtain approval from PNC. However, the following rules apply:
1. You may not serve if the outside organization is a PNC competitor.
Note: For purposes of this Policy, a competitor means any organization, wherever located, that engages in any of the same businesses as PNC. Further, if an outside organization is or has a bank, thrift or other depository organization anywhere within its group of affiliates, all members of that group are considered competitors.
2. You may not serve if your involvement with the outside organization would interfere with or impede your ability to perform your job duties and responsibilities at PNC.
3. You may not serve if your involvement with the outside organization would create a conflict with, or be reasonably perceived as conflicting with, the interests of PNC. If you accept a director/officer position in
an outside organization and a conflict of interest (actual or perceived) develops, you may be required to leave the outside organization or to resign your position with PNC.
4. Under certain circumstances, you may not serve if PNC holds an equity interest in the outside organization. It is your responsibility to ask the outside organization if PNC holds such an interest. If so, you must contact the Corporate Ethics Office to determine whether or not you may accept the director/officer position.
Note: Equity held by PNC includes equity held for PNC's own account and equity PNC holds as a trustee or other fiduciary. Equity interests may also include options, convertible debt and other instruments.
Certain Additional Responsibilities
By serving as a director/officer in an outside organization, you will also have certain responsibilities to that organization. You should be sure that you understand and comply with those responsibilities.
There may be occasions where contracts or transactions involving PNC are discussed or decided by that outside organization (e.g., the outside organization is interested in obtaining a loan from PNC or in engaging PNC as a trustee of a plan, program or fund, such as a pension plan or an endowment fund). In these instances, after disclosing your relationship with PNC, you should not participate in such discussions or in the decision-making process. If you are a director of the outside organization, you should ask the Board secretary to reflect in the meeting minutes that you did not participate in the discussions and did not vote on that matter because of your relationship with PNC.
Data Collection
PNC may collect information related to director/officer positions held by PNC employees in outside organizations from you for marketing or other business purposes. Neither a request for information related to outside director/officer positions nor an employee response to such a request will mean or imply that the employee is serving in such position(s) at the request of PNC.
Exceptions
Any exceptions or amendments to this Policy must be approved by the PNC Ethics Policy Committee or the Director of Compliance or as otherwise provided in this Policy.
Exhibit 8: PNC Public Office Policy
Introduction
The purpose of the PNC Public Office Policy ("Policy") is to establish certain rules for employees who campaign for or seek appointment to a public office, who serve as public officials, or who serve as members of another candidate's political campaign committee ("public office positions"). This Policy applies to all public office positions you currently hold as well as to any future positions and should be read together with the entire PNC Code of Ethics. It is your responsibility to understand and comply with this Policy and the PNC Code of Ethics.
If you have any questions regarding this Policy, you should contact your manager, your Human Resources (HR) representative, the Corporate Ethics Office, or any of the Key Contacts identified in the Addendum to the PNC Code of Ethics. References to "PNC" apply to The PNC Financial Services Group, Inc. and/or its subsidiaries.
General Rules
Service in a public office position is not at the request of PNC. Employees wishing to serve in a public office position are not required to provide notification to or obtain approval from PNC. However, the following rules apply.
. General
[] You may not serve if your involvement would interfere with or impede your ability to perform your job duties and responsibilities at PNC.
[] You may not serve if your involvement would create a conflict with, or be reasonably perceived as conflicting with, the interests of PNC. If you accept a public office position and a conflict of interest (actual or perceived) develops, you may be required to leave your public office position or to resign your position with PNC.
[] You may not represent or act on behalf of PNC in connection with any matter or transaction between PNC and your campaign, the governmental entity you serve, or the campaign of any other political candidate for which you are a member of the political campaign committee.
. While You are Campaigning for or Seeking Appointment To a Public Office or Serving as a Member Of Another Candidate's Political Campaign Committee
Before beginning a campaign for public office or accepting such position, you must receive confirmation from the solicitor or other counsel for the governmental entity that your service as a public official would not prevent PNC from doing business with that governmental entity. All correspondence concerning campaign business, including but not limited to, campaign fundraising, must be on campaign letterhead exclusively and may not contain any reference to your status as a PNC employee other than to factually state your employment history.
[] You may not engage in campaign business during working hours. To avoid any appearance of sponsorship or endorsement, PNC's name may not be used in any campaign material or in any fundraising activities, other than to factually state your employment history.
[] You may not take a paid leave of absence to work on your or another candidate's campaign, except earned vacation time. If you take an unpaid leave of absence, either you or the campaign must promptly reimburse PNC for any benefits (e.g., insurance) provided by PNC to you during that leave of absence.
[] You may not solicit contributions from any employee of PNC Capital Markets or any other PNC employee without first obtaining preclearance from the PNC Legal Department.
[] Your campaign (or the campaign you are serving) may not use PNC's facilities, equipment, supplies or personnel in connection with the campaign effort. Volunteer efforts conducted after working hours off PNC premises are permitted, but PNC equipment and supplies may not be used in such efforts.
[] You may not direct or coerce any PNC employee to provide services to a campaign, or make the provision of such services a condition of employment. You may not ask PNC employees to work on your or another candidate's campaign, even on a volunteer basis, unless you have obtained preclearance from the PNC Legal Department.
[] PNC does not make political contributions to any candidate or campaign committee. You must therefore avoid any circumstance involving the use of PNC facilities or personnel that could be interpreted as an in-kind corporate contribution to the campaign.
. While Serving as a Public Official
[] You may not solicit business between PNC and any governmental entity of which you are a public official.
[] If at any time you are contemplating a change in your PNC duties that would involve the municipal securities business undertaken by a PNC affiliate, you must have your situation reviewed by the PNC Legal Department before accepting any such position.
Certain Additional Responsibilities
By serving as a public official, you will also have certain responsibilities to the governmental entity you serve. You should be sure that you understand and comply with those responsibilities.
There may be occasions where contracts or transactions involving PNC are discussed or decided by the governmental entity you serve. In these instances, after disclosing your relationship with PNC, you should not participate in such discussions or in the decision making process.
Data Collection
PNC may collect information related to public office positions held by PNC employees from you for various business purposes. Neither a request for information related to public office positions nor an employee response to such a request will mean or imply that the employee is serving in such position(s) at the request of PNC.
Exceptions
Any exceptions or amendments to this Policy must be approved by the PNC Ethics Policy Committee or the Director of Compliance.
Key Contacts and Reference Guide
Under the PNC Bank Code of Ethics, the Reporting Procedures outlined in the Code provide a number of individuals to contact to assist you regarding notifications, prior approvals, report a potential Code violation or a concern, or any questions regarding the Code. The Key Contacts and Reference Guide lists those persons you will be dealing with most frequently regarding Code matters and how to contact them, as well as resource materials and how to obtain them. You are encouraged to call anyone with whom you feel comfortable.
KEY CONTACTS
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BUSINESS NAME PHONE FAX MAILSTOP
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Human Resources/ Employee Relations Representatives
Employees working in:
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BlackRock Robert P. Connolly (212) 409-3743 (212) 409-3744 XX-R345-30-1
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Corporate Jim Popp (412) 768-2378 (412) 762-3985 P2-PTPP-02-1
Bank/Treasury
Management
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Employees in Other Linda K. Williamson (412) 762-5413 (412) 762-2256 P2-PTPP-02-1
Areas
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Regional Community Bank Theresa Kiwior 570-961-6174 570-961-6340 N1-NADM-04-A
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PNC Advisors Vic Orriola 412-768-5983 412-762-3142 P1-POPP-29-1
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TPS
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Staff Services Marilyn Crump (412) 762-2193 (412) 762-2256 P2-PTPP-02-1
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SECURITY SERVICES
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PNC Bank Helpline: 1-800-937-4445 When calling, select option #2 (Security Services), then select #4
(Incident Reporting)
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Director of Corporate John P.Ericksen (412) 762-7761 (412) 762-0726 P2-PTPP-06-1
Security Services
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CORPORATE COMPLIANCE: For Any Matter Under the Code
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Director, Corporate
Compliance/Risk Eva T. Blum (412) 762-2748 (412) 705-0829 P1-POPP-22-2
Management &
Administrator
of the Code
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Senior Compliance Michelle O. Manning (412) 762-8234 (412) 705-0829 P1-POPP-22-2
Manager
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Code of Ethics Manager Peg Holmes (412) 762-8205 (412) 705-0829 P1-POPP-22-2
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GENERAL COUNSEL: For Any Matter Under the Code
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General Counsel Helen P. Pudlin (412) 762-7987 (412) 762-5920 P1-POPP-21-1
(215) 585-5174 (215) 585-8564 F5-F012-02-7
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REFERENCE GUIDE
PNC Bank Code of Ethics Forms
All Code Forms are available on PNC's Intraweb, Lotus Notes, or from your Human Resources Department. Sample copies of the Forms are attached as Exhibit 1 to the Code.
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Form Description
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Notification/Approval Form This Form is used to provide notification or obtain
(Exhibit 1A) approval under the Code. You should follow the
instructions on the reverse side. Matters which require
notification or prior approval are summarized in Section
1.02 of the Code.
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Form for Approval to Serve at the Request of This Form is used to obtain all necessary approvals in
necessary approvals in PNC (Exhibit 1-B) accordance with the PNC Policy for Employees Holding Director
and Officer Positions in Outside Profit and Non-Profit
Organizations (attached as Exhibit 7 to the Code).
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