As filed with the Securities and Exchange Commission on July 19, 2006
Securities Act Registration No. 333-
Investment Company Registration No. 811-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. |_|
and/or
REGISTRATION STATEMENT UNDER
INVESTMENT COMPANY ACT OF 1940 |_|
AMENDMENT NO. |_|
BlackRock Real Asset Trust
(Exact Name of Registrant As Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(800) 882-0052
(Registrant's Telephone Number, Including Area Code)
Anne F. Ackerley, President
BlackRock Real Asset Trust
40 East 52nd Street
New York, New York 10022
(Name and Address of Agent for Service)
Copies to:
Michael K. Hoffman, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
_______________________
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
========================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered per Unit Offering Price Fee
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Common Shares, $.001 par value............. 100,000 shares $15.00 $1,500,000(1) $160.50
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(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section
8(a), may determine.
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BlackRock Real Asset Trust
CROSS REFERENCE SHEET
Part A--Prospectus
Items in Part A of Form N Location in Prospectus
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Item 1. Outside Front Cover Cover Page
Item 2. Cover Pages; Other Offering Information Cover Page
Item 3. Fee Table and Synopsis Prospectus Summary; Summary of Trust Expenses
Item 4. Financial Highlights Not Applicable
Item 5. Plan of Distribution Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; The Trust's Investments
Item 8. General Description of the Registrant The Trust; The Trust's Investments; Risks; Description of
Shares; Anti-Takeover Provisions in the Agreement and
Declaration of Trust; Closed-End Trust Structure;
Item 9. Management Management of the Trust; Custodian and Transfer Agent;
Summary of Trust Expenses
Item 10. Capital Stock, Long-Term Debt, and Other Description of Shares; Distributions; Dividend Reinvestment
Securities Plan; Anti-Takeover Provisions in the Agreement and
Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Legal Opinions
Item 13. Table of Contents of the Statement of Table of Contents for the Statement of Additional Information
Additional Information
Part B--Statement of Additional Information
Item 14. Cover Page Cover Page
Item 15. Table of Contents Cover Page
Item 16. General Information and History Not Applicable
Item 17. Investment Objective and Policies Investment Objective and Policies; Investment Policies and
Techniques; Other Investment Policies and Techniques;
Portfolio Transactions and Brokerage
Item 18. Management Management of the Trust; Portfolio Transactions and Brokerage
Item 19. Control Persons and Principal Holders of Not Applicable
Securities
Item 20. Investment Advisory and Other Services Management of the Trust; Experts
Item 21. Portfolio Managers Management of the Trust
Item 22. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 23. Tax Status Tax Matters
Item 24. Financial Statements Financial Statements; Independent Auditors' Report
Part C--Other Information
Items 25-34 have been answered in Part C of this Registration Statement
The information contained 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 it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated July 19, 2006
[GRAPHIC OMITTED]
PROSPECTUS
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BlackRock Real Asset Trust
Common Shares
$15.00 per Share
_______________
Investment Objective. BlackRock Real Asset Trust (the "Trust") is a
newly organized, non-diversified, closed-end management investment company. The
Trust's investment objective is to provide total return through a combination
of current income and capital appreciation. The Trust attempts to achieve this
objective by investing primarily in equity securities of companies engaged in
the energy, natural resources and basic materials industries and equity
derivatives with exposure to companies in the energy, natural resources and
basic materials industries.
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 anticipates that its
common shares will be listed on the New York Stock Exchange under the Symbol
" ."
Investment Advisor. The Trust's investment advisor is BlackRock
Advisors, Inc. ("BlackRock Advisors" or the "Advisor") and the Trust's
sub-advisor is BlackRock Capital Management, Inc. ("Sub-Advisor"). We sometimes
refer to the Advisor and the Sub-Advisor collectively as the "Advisors".
(continued on next page)
Investing in the common shares involves certain risks. See "Risks" on
page of this prospectus.
_______________________
Per Share Total(1)
--------- --------
Public offering price........................
Sales load(2)................................
Estimated offering expenses(3)...............
Proceeds, after expenses, to the Trust(4)....
(1) The Trust has granted the underwriters an option to purchase up to
additional common shares at the price to public, less the sales
load, within 45 days of the date of this prospectus solely to cover
overallotments, if any. If such option is exercised in full, the
public offering price, sales load, estimated offering expenses and
proceeds, after expenses, to the Trust will be $ , $ , $
and $ , respectively. See "Underwriting."
(2) BlackRock Advisors may pay certain qualifying underwriters a sales
incentive fee, structuring fee or, alternatively, additional
compensation in connection with the offering. BlackRock Advisors may
pay commissions to employees of its affiliates that participate in the
marketing of the Trust's common shares. See "Underwriting."
(3) The Trust will pay organizational and offering expenses of the Trust
(other than the sales load) up to an aggregate of $. per share of the
Trust's common shares sold in this offering. This $. per common share
amount includes a $. per common share partial reimbursement of
expenses to the underwriters and may include a reimbursement of
BlackRock Advisors', expenses incurred in connection with this
offering. BlackRock Advisors has agreed to pay such offering expenses
of the Trust to the extent offering expenses (other than sales load)
and organizational expenses exceed $. per share of the Trust's common
shares. The aggregate offering expenses (other than sales load) to be
incurred by the Trust are estimated to be $ (including amounts
incurred by BlackRock Advisors on behalf of the Trust).
(4) The Trust will pay its organizational expenses out of its seed capital
prior to completion of this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The common shares will be ready for delivery on or about , 2006.
____________________
(continued from previous page)
Investment Policies. Under normal market conditions, the Trust will
invest at least 80% of its total assets in equity securities of energy, natural
resources and basic materials companies and companies in associated businesses
and equity derivatives with exposure to companies in the energy, natural
resources and basic materials industries. Energy, natural resources and basic
materials companies include those companies that own, produce, refine, process,
transport and market natural resources, and companies that provide related
services. This sector includes, but is not limited to, industries such as
integrated oil, oil and gas exploration and production, gold and other precious
metals, steel and iron ore production, energy services, and technology, metal
production, forest products, paper products, chemicals, building materials,
coal, alternative energy sources and environmental services, as well as related
transportation companies and equipment manufacturers. Equity securities held by
the Trust may include common stocks, preferred stocks, convertible securities,
warrants, depository receipts, equity interests in Canadian Royalty Trusts, and
equity interests in master limited partnerships ("MLPs"). The Trust will not
invest more than 25% of the value of its total assets in MLPs. The Trust may
invest in companies located anywhere in the world. The Trust expects to invest
primarily in companies located in developed countries, but may invest in
companies located in emerging markets. In selecting investments, the Trust
looks for equity securities of companies that appear to have potential for
above average performance. These may include companies that the Advisors expect
to show above average growth over the long term as well as those that appear to
the Advisors to be trading below their true net worth. The Trust may invest in
companies of any size market capitalization including small capitalization and
mid-capitalization companies. As part of its investment strategy, the Trust
currently intends to employ a strategy of writing (selling) covered call
options on a portion of the common stocks in its portfolio, writing (selling)
covered put options and, to a lesser extent, writing (selling) covered call and
put options on indices of securities and sectors of securities. This option
strategy is intended to generate current gains from option premiums as a means
to enhance distributions payable to the Trust's shareholders. The Trust may use
strategic transactions for hedging purposes or to enhance total return and may
engage in short sales of securities. The Trust may invest up to 20% of its
total assets in U.S. and non-U.S. investments, including stocks and debt
securities of companies not associated with energy, natural resources, or basic
materials. The Trust reserves the right to invest up to 10% of its total assets
in non-investment grade debt securities, commonly known as "junk bonds." The
Trust does not intend to invest directly in physical commodities such as gold
and other metals.
You should read this prospectus, which contains important information
about the Trust, before deciding whether to invest in the common shares, and
retain it for future reference. A Statement of Additional Information, dated
, 2006, containing additional information about the Trust, has been
filed with the Securities and Exchange Commission and, as amended from time to
time, is incorporated by reference in its entirety into this prospectus. You
can review the table of contents of the Statement of Additional Information on
page of this prospectus. You may request a free copy of the Statement of
Additional Information by calling (800) 882-0052 or by writing to the Trust, or
obtain a copy (and other information regarding the Trust) from the Securities
and Exchange Commission's Public Reference Room in Washington, D.C. Call
1-202-551-8090 for information. The Securities and Exchange Commission charges
a fee for copies. You can get the same information free from the Securities and
Exchange Commission's web site (http://www.sec.gov). You may also e-mail
requests for these documents to publicinfo@sec.gov or make a request in writing
to the Securities and Exchange Commission's Public Reference Section, 100 F
Street, N.E., Washington, D.C. 20549-0102. The Trust does not post a copy of
the Statement of Additional Information on its web site because the Trust's
common shares are not continuously offered, which means the Statement of
Additional Information will not be updated after completion of this offering
and the information contained in the Statement of Additional Information will
become outdated. The Trust's annual and semi-annual reports, when produced,
will be available at the Trust's web site (http://www.blackrock.com).
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.
ii
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY...........................................................1
SUMMARY OF TRUST EXPENSES...................................................17
THE TRUST...................................................................19
USE OF PROCEEDS.............................................................19
THE TRUST'S INVESTMENTS.....................................................19
RISKS ...................................................................27
MANAGEMENT OF THE TRUST.....................................................33
NET ASSET VALUE.............................................................35
DIVIDEND REINVESTMENT PLAN..................................................36
DESCRIPTION OF SHARES.......................................................37
ANTI-TAKEOVER PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST.........38
CLOSED-END TRUST STRUCTURE..................................................39
REPURCHASE OF COMMON SHARES.................................................40
TAX MATTERS.................................................................40
UNDERWRITING................................................................43
CUSTODIAN AND TRANSFER AGENT................................................44
LEGAL OPINIONS..............................................................44
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION...............45
____________________
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information in this prospectus is accurate only as
of the date of this prospectus. Our business, financial condition and prospects
may have changed since that date.
PROSPECTUS SUMMARY
This is only a summary of certain information contained in this
prospectus relating to BlackRock Real Asset Trust. 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 Real Asset Trust is a newly organized, non-diversified,
closed-end management investment company. Throughout the
prospectus, we refer to BlackRock Real Asset 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 $ per share through a group of underwriters
(the "Underwriters") led by . The
common shares of beneficial interest are called "common shares"
in the rest of this prospectus. You must purchase at least 100
common shares ($ ) in order to participate in this
offering. The Trust has given the Underwriters an option to
purchase up to additional common shares to cover
overallotments. BlackRock Advisors, Inc. ("BlackRock Advisors" or
the "Advisor") has agreed to pay offering costs (other than sales
load) to the extent that offering costs (other than sales load)
and organizational expenses exceed $ per common share.
See "Underwriting."
Investment Objective...................... The Trust's investment objective is to provide total return
through a combination of current income and capital
appreciation. The Trust attempts to achieve this objective by
investing primarily in equity securities of companies engaged in
the energy, natural resources and basic materials businesses and
equity derivatives with exposure to companies in the energy,
natural resources and basic materials industries. There can be
no assurance that the Trust's investment objective will be
achieved. See "The Trust's Investments--Investment Objective and
Policies."
Investment Policies....................... Investment Philosophy. The Advisors believe inefficient pricing
in the energy, natural resources and basic materials industries
provides the opportunity for enhanced investment returns. The
Advisors seek to take advantage of value dislocations through the
combination of top-down macro analysis and bottom-up security
selection. The knowledge and experience of the Advisors' energy,
natural resources and basic materials portfolio management teams
are used to evaluate the macro environment and assess its impact
on the various industries within the energy, natural resources
and basic materials industries. Within this framework, the
Advisors seek to identify attractively valued securities with
strong growth prospects through rigorous bottom-up fundamental
research.
The top-down component of the investment process is designed to
assess the various interrelated macro variables affecting the
energy, natural resources and basic materials industries as a
whole. These variables generally include the supply, demand,
inventory, raw material and transportation factors for crude oil,
natural gas, coal, electricity, gold, precious metals, base
metals and industrial metals on a worldwide basis. By comparing
the market's perception of these factors relative to the
Advisors' outlook, the Advisors seek to identify value
dislocations. The greater the conviction and value dislocation,
the greater the potential investment returns.
Risk/reward analysis is a key component of the Advisors' macro
view. The Advisors evaluate energy natural resources and basic
materials sub-sectors (i.e., oil, gas, coal, pipes, gold, etc.)
to seek to determine optimal portfolio positioning. Industry
selection is a direct result of the Advisors' sub-sector
analysis. Once the evaluation of the various energy, natural
resources and basic materials industries is complete, the
Advisors identify those sub-sectors that are most attractive
based on their long-term macro view.
Bottom-up security selection is focused on identifying the most
compelling investment opportunities within each industry. The
Advisors seek to identify reasonably-priced companies with
attractive long-term prospects, quality management and strong
cash-flow growth.
Investment Strategy. Under normal market conditions, the Trust
will invest at least 80% of its total assets in equity securities
of energy, natural resources and basic materials companies and
equity derivatives with exposure to the energy, natural resources
and basic materials industries. Energy, natural resources and
basic materials companies include those companies that own,
produce, refine, process, transport and market natural resources,
and companies that provide related services. This sector
includes, but is not limited to, industries such as integrated
oil, oil and gas exploration and production, gold and other
precious metals, steel and iron ore production, energy services,
and technology, metal production, forest products, paper
products, chemicals, building materials, coal, alternative energy
sources and environmental services, as well as related
transportation companies and equipment manufacturers. Equity
securities held by the Trust may include common stocks, preferred
shares, convertible securities, warrants, depository receipts,
equity interests in Canadian Royalty Trusts, and master limited
partnerships ("MLPs"). The Trust will not invest more than 25% of
the value of its total assets in MLPs. The Trust may invest in
companies located anywhere in the world. The Trust expects to
invest primarily in companies located in developed countries, but
may invest in companies located in emerging markets. In selecting
investments, the Trust looks for equity securities of companies
that appear to have potential for above-average performance.
These may include companies that the Advisors expect to show
above-average growth over the long term as well as those that
appear to the Advisors to be trading below their true net worth.
The Trust may invest in companies of any size market
capitalization, including small capitalization and
mid-capitalization companies. The Trust does not intend to invest
directly in physical commodities such as gold or other metals.
The Trust may invest up to 20% of its total assets in other U.S.
and other non-U.S. investments. These investments may include
equity and debt securities of companies not engaged in the
energy, natural resources and basic materials businesses. The
Trust reserves the right to invest up to 10% of its total assets
in non-investment grade debt securities, commonly known as "junk
bonds." See "Investment Policies and Techniques--Non-Investment
Grade Securities" in the Statement of Additional Information.
As part of its strategy, the Trust currently intends to employ a
strategy of writing (selling) covered call and put options on
individual common stocks. In addition to its covered option
strategy, the Trust may, to a lesser extent, pursue a strategy
that includes the sale (writing) of both covered call and put
options on indices of securities and sectors of securities. This
option strategy is intended to generate current gains from option
premiums as a means to enhance distributions payable to the
Trust's shareholders. As the Trust writes covered calls over more
of its portfolio, its ability to benefit from capital
appreciation becomes more limited. A substantial portion of the
options written by the Trust may be over-the-counter options
("OTC options").
A call option written by the Trust on a security is "covered" if
the Trust owns the security underlying the call or has an
absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash
consideration is required, cash or other assets determined to be
liquid by the Advisors (in accordance with procedures established
by the board of trustees) in such amount are segregated by the
Trust's custodian) upon conversion or exchange of other
securities held by the Trust. A call option is also covered if
the Trust holds a call on the same security as the call written
where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than
the exercise price of the call written, provided the difference
is maintained by the Trust in segregated assets determined to be
liquid by the Advisors as described above.
A put option written by the Trust on a security is "covered" if
the Trust segregates or earmarks assets determined to be liquid
by the Advisors (in accordance with procedures established by the
board of trustees) equal to the exercise price. A put option is
also covered if the Trust holds a put on the same security as the
put written where the exercise price of the put held is (i) equal
to or greater than the exercise price of the put written, or (ii)
less than the exercise price of the put written, provided the
difference is maintained by the Trust in segregated or earmarked
assets determined to be liquid by the Advisors as described
above.
An index or sector orientated option is considered "covered" if
the Trust maintains with its custodian assets determined to be
liquid in an amount equal to the contract value of the applicable
basket of securities. An index or sector put option also is
covered if the Trust holds a put on the same basket of securities
as the put written where the exercise price of the put held is
(i) equal to or more than the exercise price of the put written,
or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Trust in segregated assets
determined to be liquid. An index or sector call option also is
covered if the Trust holds a call on the same basket of
securities as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the
call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Trust in
segregated assets determined to be liquid. Because index and
sector options both refer to options on baskets of securities and
generally have similar characteristics, we refer to these types
of options collectively as "index" options.
The Trust generally intends to write covered put and call options
with respect to approximately % to % of its total assets,
although this percentage may vary from time to time with market
conditions. Under current market conditions, the Trust
anticipates initially writing covered put and call options with
respect to approximately % of its total assets. As the Trust
writes covered calls over more of its portfolio, its ability to
benefit from capital appreciation becomes more limited. The
number of covered put and call options on securities the Trust
can write is limited by the total assets the Trust holds, and
further limited by the fact that all options represent 100 share
lots of the underlying common stock. In connection with its
option writing strategy, the Trust will not write "naked" or
uncovered put and call options. Furthermore, the Trust's
exchange-listed option transactions will be subject to
limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded.
These limitations govern the maximum number of options in each
class that may be written or purchased by a single investor or
group of investors acting in concert, regardless of whether the
options are written or purchased on the same or different
exchanges, boards of trade or other trading facilities or are
held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Trust may write or
purchase may be affected by options written or purchased by other
investment advisory clients of the Advisor. An exchange, board of
trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may
impose certain other sanctions.
In addition to the option strategies discussed above, the Trust
may engage in strategic transactions for hedging purposes or to
enhance total return. See "The Trust's Investments--Portfolio
Composition--Strategic Transactions." The Trust may also engage
in short sales of securities.
The Trust does not intend to utilize leverage or issue preferred
shares.
Investment Advisors....................... BlackRock Advisors will be the Trust's investment advisor and
BlackRock Capital Management, Inc. ("BlackRock Capital
Management" or the "Sub-Advisor") will provide certain day-to-day
investment management services to the Trust. Throughout the
prospectus, we sometimes refer to BlackRock Advisors and
BlackRock Capital Management, collectively as the "Advisors."
BlackRock Advisors will receive an annual fee, payable monthly,
in a maximum amount equal to % of the average weekly value
of the Trust's net assets. BlackRock Advisors has agreed to
waive receipt of a portion of the management fee or other
expenses of the Trust in the amount of % of average weekly
net assets attributable to common shares for the first five years
of the Trust's operations, % in year six, % in year
seven and % in year eight. BlackRock Advisors will pay a
sub-advisory fee to the BlackRock Capital Management, equal to
% of the management fee, after giving effect to any waiver. See
"Management of the Trust."
Distributions............................. Commencing with the Trust's initial dividend, the Trust intends
to make regular monthly cash distributions of all or a portion of
its investment company taxable income to common shareholders. We
expect to declare the initial monthly dividend on the Trust's
common shares within 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.
The Trust will pay common shareholders at least annually all or
substantially all of its investment company taxable income. The
Trust intends to pay any capital gains distributions annually.
Various factors will affect the level of the Trust's income, such
as its asset mix 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
income earned in a particular period. The undistributed 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 income
actually earned by the Trust during that period. Undistributed
income will add to the Trust's net asset value and,
correspondingly, distributions from undistributed income will
deduct from the Trust's net asset value. See "Distributions."
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."
Listing................................... The Trust anticipates that its common shares will be listed on
the New York Stock Exchange under the Symbol " ."
Custodian and Transfer Agent.............. The Bank of New York will serve as the Trust's Custodian and
Transfer Agent. See "Custodian and Transfer Agent."
Market Price of Shares.................... Common shares of closed-end investment companies frequently trade
at prices lower than their net asset value. Common shares of
closed-end investment companies, such as the Trust, that invest
primarily in equity securities 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 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
interest rates, expenses, call protection for portfolio
securities, dividend stability, portfolio credit quality,
liquidity and market supply and demand. See "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 non-diversified, closed-end
management investment company with 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 offering.
Industry Concentration Risk. The Trust's investments will be
concentrated in the energy, natural resources and basic materials
industries. Because the Trust is focused in specific industries,
it may present more risks than if it were broadly diversified
over numerous industries and sectors of the economy. A downturn
in any one of the energy, natural resources or basic materials
industries would have a larger impact on the Trust than on an
investment company that does not concentrate in such industries,
which can be significantly affected by the supply of and demand
for specific products and services, exploration and production
spending, government regulation, world events and economic
conditions. The energy, natural resources and basic materials
industries can also be significantly affected by events relating
to international political developments, energy conservation, the
success of exploration projects, commodity prices, and tax and
government regulations. At times, the performance of securities
of companies in the energy, natural resources and basic materials
industries will lag behind the performance of other industries or
the broader market as a whole. The Trust will not invest, under
normal market conditions, less than 25% of its total assets in
securities of energy, natural resources and equity derivatives
with exposure to the energy, natural resources and basic
materials industries without shareholder approval.
Other risks inherent in investing in energy, natural resources
and basic materials companies include:
Supply and Demand Risk. A decrease in the production of a
physical commodity or a decrease in the volume of such commodity
available for transportation, mining, processing, storage or
distribution may adversely impact the financial performance of an
energy, natural resources or basic materials company that devotes
a portion of its business to that commodity. Production declines
and volume decreases could be caused by various factors,
including catastrophic events affecting production, depletion of
resources, labor difficulties, environmental proceedings,
increased regulations, equipment failures and unexpected
maintenance problems, import supply disruption, increased
competition from alternative energy sources or commodity prices.
Alternatively, a sustained decline in demand for such commodities
could also adversely affect the financial performance of energy,
natural resources and basic materials companies. Factors that
could lead to a decline in demand include economic recession or
other adverse economic conditions, higher taxes on commodities or
increased governmental regulations, increases in fuel economy,
consumer shifts to the use of alternative commodities or fuel
sources, changes in commodity prices, or weather.
Depletion and Exploration Risk. Many energy, natural resources
and basic materials companies are either engaged in the
production of one or more physical commodities, or are engaged in
transporting, storing, distributing and processing these items on
behalf of shippers. To maintain or grow their revenues, these
companies or their customers need to maintain or expand their
reserves through exploration of new sources of supply, through
the development of existing sources, through acquisitions, or
through long-term contracts to acquire reserves. The financial
performance of energy, natural resources and basic materials
companies may be adversely affected if they, or the companies to
whom they provide the service, are unable to cost-effectively
acquire additional reserves sufficient to replace the natural
decline.
Operational and Geological Risk. Energy, natural resources and
basic materials companies are subject to specific operational and
geological risks in addition to normal business and management
risks. Some examples of operational risks include mine rock
falls, underground explosions and pit wall failures. Geological
risk would include faulting of the ore body and misinterpretation
of geotechnical data.
Regulatory Risk. Energy, natural resources and basic materials
companies are subject to significant federal, state and local
government regulation in virtually every aspect of their
operations, including how facilities are constructed, maintained
and operated, environmental and safety controls, and the prices
they may charge for the products and services they provide.
Various governmental authorities have the power to enforce
compliance with these regulations and the permits issued under
them, and violators are subject to administrative, civil and
criminal penalties, including civil fines, injunctions or both.
Stricter laws, regulations or enforcement policies could be
enacted in the future which would likely increase compliance
costs and may adversely affect the operations and financial
performance of energy, natural resources and basic materials
companies.
Commodity Pricing Risk. The operations and financial performance
of energy, natural resources and basic materials companies may be
directly affected by commodity prices, especially those energy,
natural resources and basic materials companies that own the
underlying commodity. Commodity prices fluctuate for several
reasons, including changes in market and economic conditions, the
impact of weather on demand, levels of domestic production and
imported commodities, energy conservation, domestic and foreign
governmental regulation and taxation and the availability of
local, intrastate and interstate transportation systems.
Volatility of commodity prices, which may lead to a reduction in
production or supply, may also negatively impact the performance
of energy, natural resources and basic materials companies that
are solely involved in the transportation, processing, storing,
distribution or marketing of commodities. Volatility of commodity
prices may also make it more difficult for energy, natural
resources and basic materials companies to raise capital to the
extent the market perceives that their performance may be
directly or indirectly tied to commodity prices.
Precious Metals Pricing Risk. The Trust may invest in companies
that have a material exposure to precious metals, such as gold,
silver and platinum and precious metals related instruments and
securities. The price of precious metals can fluctuate widely and
is affected by numerous factors beyond the Trust's control
including: global or regional political, economic or financial
events and situations; investors' expectations with respect to
the future rates of inflation and movements in world equity,
financial and property markets; global supply and demand for
specific precious metals, which is influenced by such factors as
mine production and net forward selling activities by precious
metals producers, central bank purchases and sales, jewelry
demand and the supply of recycled jewelry, net investment demand
and industrial demand, net of recycling; interest rates and
currency exchange rates, particularly the strength of and
confidence in the U.S. dollar; and investment and trading
activities of hedge funds, commodity funds and other speculators.
The Trust does not intend to hold physical precious metals.
Distress Gold Sale Risk. The possibility of large-scale distress
sales of gold in times of crisis may have a short-term negative
impact on the price of gold and adversely affect companies in
which the Trust may invest. For example, economic, political or
social conditions or pressures may require central banks, other
governmental agencies and multi-lateral institutions that buy,
sell and hold gold as part of their reserve assets, to liquidate
their gold assets all at once or in an uncoordinated manner. The
demand for gold might not be sufficient to accommodate the sudden
increase in the supply of gold to the market.
Precious Metals in Emerging Markets. The Trust is likely to
invest in precious metals companies that are located in emerging
markets. It should be noted that some governments exercise
substantial influence over the private sector, and the political
risk for many developing countries is a significant factor. See
also "Emerging Markets Risk" below.
Commodity and Currency Risk. The use of commodity and currency
derivative instruments by producers has increased in recent
years. There have been examples of companies that have mismanaged
their exposures resulting, in extreme cases, in financial
distress or even bankruptcy.
Interest Rate Risk. Rising interest rates could adversely impact
the financial performance of energy, natural resources and basic
materials companies by increasing their costs of capital. This
may reduce their ability to execute acquisitions or expansion
projects in a cost-effective manner.
Investment and Market Risk. An investment in the Trust's common
shares is subject to investment risk, including the possible loss
of the entire amount that you invest. Your investment in common
shares represents an indirect investment in the securities owned
by the Trust, a majority of which are traded on a national
securities exchange or in the over-the-counter markets. The value
of these securities, like other market investments, may move up
or down, sometimes rapidly and unpredictably. Your common shares
at any point in time may be worth less than your original
investment, even after taking into account the reinvestment of
Trust dividends and distributions.
Common Stock Risk. The Trust will have exposure to common stocks.
Although common stocks have historically generated higher average
total returns than fixed-income securities over the long term,
common stocks also have experienced significantly more volatility
in those returns and in certain periods have significantly
underperformed relative to fixed-income securities. An adverse
event, such as an unfavorable earnings report, may depress the
value of a particular common stock held by the Trust. Also, the
price of common stocks is sensitive to general movements in the
stock market and a drop in the stock market may depress the price
of common stocks to which the Trust has exposure. Common stock
prices fluctuate for several reasons including changes in
investors' perceptions of the financial condition of an issuer or
the general condition of the relevant stock market, or when
political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to
rising interest rates, as the cost of capital rises and borrowing
costs increase. Interest rates recently have been rising and it
is possible that they will rise further.
Non-U.S. Securities Risk. Investing in non-U.S. securities
involves certain risks not involved in domestic investments,
including, but not limited to: (1) fluctuations in foreign
exchange rates; (2) future foreign economic, financial, political
and social developments; (3) different legal systems; (4) the
possible imposition of exchange controls or other foreign
governmental laws or restrictions; (5) lower trading volume; (6)
much greater price volatility and illiquidity of certain non-U.S.
securities markets; (7) different trading and settlement
practices; (8) less governmental supervision; (9) changes in
currency exchange rates; (10) high and volatile rates of
inflation; (11) fluctuating interest rates; (12) less publicly
available information; and (13) different accounting, auditing
and financial recordkeeping standards and requirements.
Certain countries in which the Trust may invest, especially
emerging market countries, historically have experienced, and may
continue to experience, high rates of inflation, high interest
rates, exchange rate fluctuations, large amounts of external
debt, balance of payments and trade difficulties and extreme
poverty and unemployment. Many of these countries are also
characterized by political uncertainty and instability. These
risks are especially evident in the Middle East and West Africa.
The cost of servicing external debt will generally be adversely
affected by rising international interest rates because many
external debt obligations bear interest at rates that are
adjusted based upon international interest rates. In addition,
with respect to certain foreign countries, there is a risk of:
(1) the possibility of expropriation or nationalization of
assets; (2) confiscatory taxation; (3) difficulty in obtaining or
enforcing a court judgment; (4) economic, political or social
instability; and (5) diplomatic developments that could affect
investments in those countries.
Because the Trust may invest in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign
currency exchange rates may affect the value of securities in the
Trust and the unrealized appreciation or depreciation of
investments. Currencies of certain countries may be volatile and
therefore may affect the value of securities denominated in such
currencies, which means that the Trust's net asset value or
current income could decline as a result of changes in the
exchange rates between foreign currencies and the U.S. dollar.
Certain investments in non-U.S. securities also may be subject to
foreign withholding taxes. Dividend income from non-U.S.
corporations may not be eligible for the reduced rate for
qualified dividend income. These risks often are heightened for
investments in smaller, emerging capital markets. In addition,
individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as: (1) growth of gross
domestic product; (2) rates of inflation; (3) capital
reinvestment; (4) resources; (5) self-sufficiency; and (6)
balance of payments position.
As a result of these potential risks, the Advisors may determine
that, notwithstanding otherwise favorable investment criteria, it
may not be practicable or appropriate to invest in a particular
country. The Trust may invest in countries in which foreign
investors, including the Advisors, have had no or limited prior
experience.
Canadian Royalty Trust Risk. The Trust anticipates initially
investing approximately 20% of its total assets in units issued
by Canadian Royalty Trusts. Canadian Royalty Trusts are exposed
to many of the same risks as energy and natural resources
companies, such as commodity pricing risk, supply and demand risk
and depletion and exploration risk.
Emerging Markets Risk. Investing in securities of issuers based
in underdeveloped emerging markets entails all of the risks of
investing in securities of non-U.S. issuers to a heightened
degree. "Emerging market countries" generally include every
nation in the world except developed countries, that is the
United States, Canada, Japan, Australia, New Zealand and most
countries located in Western Europe. These heightened risks
include: (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and
economic stability; (ii) the smaller size of the market for such
securities and a lower volume of trading, resulting in lack of
liquidity and an increase in price volatility; and (iii) certain
national policies that may restrict the Trust's investment
opportunities including restrictions on investing in issuers or
industries deemed sensitive to relevant national interests.
Liquidity Risk. In some circumstances, investments may be
relatively illiquid making it difficult to acquire or dispose of
them at the prices quoted on relevant exchanges or at all.
Accordingly, the Trust's ability to respond to market movements
may be impaired and the Trust may experience adverse price
movements upon liquidation of its investments. Settlement of
transactions may be subject to delay and administrative
uncertainties.
Foreign Currency Risk. Because the Trust may invest in securities
denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value
of securities in the Trust and the unrealized appreciation or
depreciation of investments. Currencies of certain countries may
be volatile and therefore may affect the value of securities
denominated in such currencies, which means that the Trust's net
asset value could decline as a result of changes in the exchange
rates between foreign currencies and the U.S. dollar. In
addition, the Trust may enter into foreign currency transactions
in an attempt to enhance total return which may further expose
the Trust to the risks of foreign currency movements and other
risks. See "Risks-Strategic Transactions."
Small and Mid-Cap Stock Risk. While the Trust generally will
invest primarily in large capitalization companies, the Trust may
invest in companies with small or medium capitalizations. Smaller
and medium company stocks can be more volatile than, and perform
differently from, larger company stocks. There may be less
trading in a smaller or medium company's stock, which means that
buy and sell transactions in that stock could have a larger
impact on the stock's price than is the case with larger company
stocks. Smaller and medium companies may have fewer business
lines; changes in any one line of business, therefore, may have a
greater impact on a smaller and medium company's stock price than
is the case for a larger company. As a result, the purchase or
sale of more than a limited number of shares of a small or medium
company may affect its market price. The Trust may need a
considerable amount of time to purchase or sell its positions in
these securities. In addition, smaller or medium company stocks
may not be well known to the investing public.
MLP Risk. An investment in MLP units involves some risks that
differ from an investment in the common stock of a corporation.
Holders of MLP units have limited control and voting rights on
matters affecting the partnership. In addition, there are certain
tax risks associated with an investment in MLP units and
conflicts of interest may exist between common unit holders and
the general partner, including those arising from incentive
distribution payments.
Short Sales Risk. Short selling involves selling securities that
may or may not be owned and borrowing the same securities for
delivery to the purchaser, with an obligation to replace the
borrowed securities at a later date. Short selling allows the
short seller to profit from declines in market prices to the
extent such declines exceed the transaction costs and the costs
of borrowing the securities. A short sale creates the risk of an
unlimited loss in that the price of the underlying security could
theoretically increase without limit, thus increasing the cost of
buying those securities to cover the short position. There can be
no assurance that the securities necessary to cover a short
position will be available for purchase. Purchasing securities to
close out the short position can itself cause the price of the
securities to rise further, thereby exacerbating the loss.
Risks Associated with the Trust's Option Strategy. The ability of
the Trust to achieve its investment objective of providing total
return through a combination of current income and capital
appreciation is partially dependent on the successful
implementation of its option strategy. Risks that may adversely
affect the ability of the Trust to successfully implement its
option strategy include the following:
Risks Associated with Options on Securities. There are several
risks associated with transactions in options on securities used
in connection with the Trust's option strategy. For example,
there are significant differences between the securities and
options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a
well conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events.
As the writer of a covered call option, the Trust forgoes, during
the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above
the sum of the premium and the strike price of the call, but has
retained the risk of loss should the price of the underlying
security decline. As the Trust writes covered calls over more of
its portfolio, its ability to benefit from capital appreciation
becomes more limited. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction
in order to terminate its obligation under the option and must
deliver the underlying security at the exercise price.
When the Trust writes covered put options, it bears the risk of
loss if the value of the underlying stock declines below the
exercise price minus the put premium. If the option is exercised,
the Trust could incur a loss if it is required to purchase the
stock underlying the put option at a price greater than the
market price of the stock at the time of exercise plus the put
premium the Trust received when it wrote the option. While the
Trust's potential gain in writing a covered put option is limited
to distributions earned on the liquid assets securing the put
option plus the premium received from the purchaser of the put
option, the Trust risks a loss equal to the entire exercise price
of the option minus the put premium.
Exchange-Listed Option Risks. There can be no assurance that a
liquid market will exist when the Trust seeks to close out an
option position on an options exchange. Reasons for the absence
of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that
class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. If the Trust were unable to close out a covered call
option that it had written on a security, it would not be able to
sell the underlying security unless the option expired without
exercise.
The hours of trading for options on an exchange may not conform
to the hours during which the underlying securities are traded.
To the extent that the options 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 options markets. Call options are marked to
market daily and their value will be affected by changes in the
value and dividend rates of the underlying common stocks, an
increase in interest rates, changes in the actual or perceived
volatility of the stock market and the underlying common stocks
and the remaining time to the options' expiration. Additionally,
the exercise price of an option may be adjusted downward before
the option's expiration as a result of the occurrence of certain
corporate events affecting the underlying equity security, such
as extraordinary dividends, stock splits, merger or other
extraordinary distributions or events. A reduction in the
exercise price of an option would reduce the Trust's capital
appreciation potential on the underlying security.
Over-the-Counter Option Risk. The Trust may write (sell) unlisted
("OTC" or "over-the-counter") options, and options written by the
Trust with respect to non-U.S. securities, indices or sectors
generally will be OTC options. OTC options differ from
exchange-listed options in that they are two-party contracts,
with exercise price, premium and other terms negotiated between
buyer and seller, and generally do not have as much market
liquidity as exchange-listed options. The counterparties to these
transactions typically will be major international banks,
broker-dealers and financial institutions. The Trust may be
required to treat as illiquid securities being used to cover
certain written OTC options. The OTC options written by the Trust
will not be issued, guaranteed or cleared by the Options Clearing
Corporation. In addition, the Trust's ability to terminate the
OTC options may be more limited than with exchange-traded
options. Banks, broker-dealers or other financial institutions
participating in such transaction may fail to settle a
transaction in accordance with the terms of the option as
written. In the event of default or insolvency of the
counterparty, the Trust may be unable to liquidate an OTC option
position.
Index Option Risk. The Trust may sell index put and call options
from time to time. The purchaser of an index put option has the
right to any depreciation in the value of the index below the
exercise price of the option on or before the expiration date.
The purchaser of an index call option has the right to any
appreciation in the value of the index over the exercise price of
the option on or before the expiration date. Because the exercise
of an index option is settled in cash, sellers of index call
options, such as the Trust, cannot provide in advance for their
potential settlement obligations by acquiring and holding the
underlying securities. The Trust will lose money if it is
required to pay the purchaser of an index option the difference
between the cash value of the index on which the option was
written and the exercise price and such difference is greater
than the premium received by the Trust for writing the option.
The value of index options written by the Trust, which will be
priced daily, will be affected by changes in the value and
dividend rates of the underlying common stocks in the respective
index, changes in the actual or perceived volatility of the stock
market and the remaining time to the options' expiration. The
value of the index options also may be adversely affected if the
market for the index options becomes less liquid or smaller.
Distributions paid by the Trust on its common shares may be
derived in part from the net index option premiums it receives
from selling index put and call options, less the cost of paying
settlement amounts to purchasers of the options that exercise
their options. Net index option premiums can vary widely over the
short term and long term.
Non-Investment Grade Securities Risk. The Trust may invest up to
10% of its total assets in securities that are below investment
grade. Non-investment grade securities are commonly referred to
as "junk bonds." Investments in lower grade securities will
expose the Trust to greater risks than if the Trust owned only
higher grade securities. Because of the substantial risks
associated with lower grade securities, you could lose money on
your investment in common shares of the Trust, both in the short
term and the long term. Lower grade securities, though high
yielding, are characterized by high risk. They may be subject to
certain risks with respect to the issuing entity and to greater
market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated
securities. Adverse conditions could make it difficult at times
for the Trust to sell certain securities or could result in lower
prices than those used in calculating the Trust's net asset
value.
Dividend Risk. Dividends on common stocks are not fixed but are
declared at the discretion of an issuer's board of directors.
There is no guarantee that the issuers of the common stocks in
which the Trust invests will declare dividends in the future or
that if declared they will remain at current levels or increase
over time. As described further in "Tax Matters," "qualified
dividend income" received by the Trust will generally be eligible
for the reduced tax rate applicable to individuals for taxable
years beginning on or after December 31, 2010. There is no
assurance as to what portion of the Trust's distributions will
constitute qualified dividend income.
Non-Diversification. The Trust has registered as a
"non-diversified" investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). For
federal income tax purposes, the Trust, with respect to up to 50%
of its total assets, will be able to invest more than 5% (but not
more than 25%, except for investments in United States government
securities and securities of other regulated investment
companies, which are not limited for tax purposes) of the value
of its total assets in the obligations of any single issuer or
the securities of one or more qualified publicly traded
partnerships. To the extent the Trust invests a relatively high
percentage of its assets in the obligations of a limited number
of issuers, the Trust may be more susceptible than a more widely
diversified investment company to any single economic, political
or regulatory occurrence.
Strategic Transactions. Strategic transactions in which the Trust
may engage for hedging purposes, risk management, or to enhance
total return, including engaging in transactions, such as
options, futures, swaps, foreign currency transactions, such as
forward foreign currency contracts, currency swaps or options on
currency and currency futures and other derivatives transactions
("Strategic Transactions") also involve certain risks and special
considerations. Strategic Transactions have risks, including the
imperfect correlation between the value of such instruments and
the underlying assets, the possible default of the other party to
the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic
Transactions depends on the Advisors' ability to predict
pertinent market movements, which cannot be assured. Thus, the
use of Strategic Transactions may result in losses greater than
if they had not been used, may require the Trust to sell or
purchase portfolio securities at inopportune times or for prices
other than current market values, may limit the amount of
appreciation the Trust can realize on an investment, or may cause
the Trust to hold a security that it might otherwise sell. The
use of foreign currency transactions can result in the Trust
incurring losses as a result of the imposition of exchange
controls, suspension of settlements or the inability of the Trust
to deliver or receive a specified currency. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in
margin accounts with respect to Strategic Transactions are not
otherwise available to the Trust for investment purposes.
Market Disruption and Geopolitical Risk. The aftermath of the war
in Iraq and the continuing occupation of Iraq, instability in the
Middle East and terrorist attacks in the U.S. and around the
world may have resulted in market volatility and may have
long-term effects on the U.S. and worldwide financial markets and
on energy, natural resources and basic materials companies and
may cause further economic uncertainties in the U.S. and
worldwide. The Trust does not know how long the securities
markets will continue to be affected by these events and cannot
predict the effects of the occupation or similar events in the
future on the U.S. economy and securities markets. Given the
risks described above, an investment in the common shares may not
be appropriate for all investors. You should carefully consider
your ability to assume these risks before making an investment in
the Trust.
Anti-Takeover Provisions. The Trust's Agreement and Declaration
of Trust includes provisions that could limit the ability of
other entities or persons to acquire control of the Trust or
convert the Trust to open-end status. These provisions could
deprive the holders of common shares of opportunities to sell
their common shares at a premium over the then current market
price of the common shares 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) .......................... %
Offering expenses borne by the Trust (as a percentage of offering price)(1)(2)....... %
Dividend reinvestment plan fees(3)................................................... None
Percentage of
Net Assets
Annual Expenses Attributable to
Common Shares
-------------
Management Fees............................................... --------------
Other Expenses................................................ --------------
Total Annual Expenses......................................... (4)(5)
==============
Fee and Expense Waiver........................................ (5)
--------------
Net Annual Expenses........................................... (4)(5)
--------------
-------------
(1) The Trust will pay organizational and offering costs of the Trust
(other than the sales load) up to an aggregate of $ per share of the
Trust's common shares sold in this offering which may include a
reimbursement of BlackRock Advisors' expenses incurred in connection
with this offering. BlackRock Advisors has agreed to pay such
offering costs of the Trust to the extent offering expenses (other
than sales load) and organizational expenses exceed $ per share of
the Trust's common shares.
(2) BlackRock Advisors has agreed to pay from its own assets additional
compensation to . BlackRock Advisors may pay commissions to
employees of its affiliates that participate in the marketing of the Trust's
common shares. See "Underwriting."
(3) You will be charged a $2.50 service charge and a brokerage commission
of $.15 per share sold if you direct the Plan Agent (as defined
below) to sell your common shares held in a dividend reinvestment
account.
(4) Certain of these expenses represent reimbursement at cost to
BlackRock Advisors for non-advisory services provided to the Trust by
employees of BlackRock Advisors. See "Management of the
Trust--Investment Management Agreements."
(5) BlackRock Advisors has agreed to waive receipt of a portion of the
management fee or other expenses of the Trust in the amount of % of
average weekly net assets attributable to common shares for the first
five years of the Trust's operations, % in year six, % in year
seven and % in year eight. Without the waiver, "Total Annual Expenses"
would be estimated to be % of the average weekly net assets attributable
to common shares.
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Annual Expenses" are based on estimated amounts for the
Trust's first full year of operations and assume that the Trust issues
common shares. If the Trust issues fewer common shares, all other things
being equal, these expenses would increase as a percentage of the Trust's net
assets attributable to common shares. See "Management of the Trust" and
"Dividend Reinvestment Plan."
The following example illustrates the expenses (including the offering
expenses borne by the Trust and the sales load of $45) that you would pay on a
$1,000 investment in common shares, assuming (1) total annual expenses of %
of net assets attributable to common shares in years one through five, % in
year six, % in year seven, % in year eight and % thereafter, and (2)
a % annual return: (1)(2)
1 Year 3 Years 5 Years 10 Years
---------- ---------- --------- --------
Total Expenses Incurred............. $ $ $ $
-------------
(1) The examples should not be considered a representation of future expenses.
Actual expenses may be greater or less than those assumed.?The examples
assume that the estimated "Other Expenses" set forth in the Annual
Expenses table are accurate, and that all dividends and distributions are
reinvested at net asset value. Moreover, the Trust's actual rate of return
may be greater or less than the hypothetical 5% return shown in the
examples.
(2) Assumes waiver of fees and expenses of % of average weekly net assets
attributable to common shares in years one through five, % in year six,
% in year seven and % in year eight. BlackRock Advisors has not
agreed to waive any portion of its fees and expenses beyond January 31,
. See "Management of the Trust--Investment Management Agreements."
THE TRUST
The Trust is a newly organized, non-diversified, closed-end management
investment company registered under the Investment Company Act. The Trust was
organized as a Delaware statutory trust on July 19, 2006, pursuant to an
Agreement and Declaration of Trust governed by the laws of the State of
Delaware. 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 (800) 882-0052.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be
approximately $ ($ if the Underwriters exercise the overallotment option
in full) after payment of the estimated offering costs and the deduction of the
sales load. The Trust will invest the net proceeds of this 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 primarily in
equity securities that meet the Trust's investment objective and policies
within approximately three months after the completion of this offering.
Pending such investment, it is anticipated that the proceeds will be invested
in short-term debt securities.
THE TRUST'S INVESTMENTS
Investment Objective and Policies
The Trust's investment objective is to provide total return through a
combination of current income and capital appreciation. The Trust seeks to
achieve its objective by investing primarily in equity securities of companies
engaged in the energy, natural resources and basic materials businesses and
equity derivatives with exposure to the energy, natural resources and basic
materials industries.
Under normal market conditions, the Trust invests at least 80% of its
total assets in equity securities of energy, natural resources and basic
materials companies and equity derivatives with exposure to companies in the
energy, natural resources and basic materials industries. Energy, natural
resources and basic materials companies include those companies that own,
produce, refine, process, transport and market natural resources, and companies
that provide related services. This sector includes, but is not limited to,
industries such as integrated oil, oil and gas exploration and production, gold
and other precious metals, steel and iron ore production, energy services, and
technology, metal production, forest products, paper products, chemicals,
building materials, coal, alternative energy sources and environmental
services, as well as related transportation companies and equipment
manufacturers. Equity securities held by the Trust may include common stocks,
preferred shares, convertible securities, warrants, depository receipts, equity
interests in Canadian Royalty Trusts and equity interests in MLPs. The Trust
will not invest more than 25% of its total assets in MLPs. The Trust may invest
in companies located anywhere in the world. The Trust expects to invest
primarily in companies located in developed countries, but may invest in
companies located in emerging markets. In selecting investments, the Trust
looks for equity securities of companies that appear to have potential for
above average performance. These may include companies that the Advisors expect
to show above average growth over the long term as well as those that appear to
the Advisors to be trading below their true net worth. The Trust may invest in
companies of any market capitalization, including small capitalization and
mid-capitalization companies. The Trust does not intend to invest directly in
physical commodities such as gold and other metals.
As part of its investment strategy, the Trust currently intends to
employ a strategy of writing (selling) covered call options on a portion of the
common stocks in its portfolio, writing (selling) covered put options and, to a
lesser extent, writing (selling) covered call and put options on indices of
securities and sectors of securities. This option strategy is intended to
generate current gains from option premiums as a means to enhance distributions
payable to the Trust's shareholders. As the Trust writes covered calls over
more of its portfolio, its ability to benefit from capital appreciation becomes
more limited. The Trust may use strategic transactions for hedging purposes or
to enhance gain and may engage in short sales of securities.
The Trust may invest up to 20% of its total assets in other U.S. and
non-U.S. investments. These investments may include stocks and debt securities
of companies not engaged in the energy, natural resources and basic materials
industries. The Trust reserves the right to invest up to 10% of its total
assets in non-investment grade debt securities, commonly known as "junk bonds."
See "Investment Policies and Techniques--Non-Investment Grade Securities" in
the Statement of Additional Information.
In addition to the option strategies discussed above, the Trust may
engage in Strategic Transactions for hedging purposes, risk management or to
enhance total return. The Trust may also engage in short sales of securities.
The percentage limitations applicable to the Trust's portfolio
described in this prospectus apply only at the time of investment, and the
Trust will not be required to sell investments due to subsequent changes in the
value of investments that it owns.
For a more complete discussion of the Trust's intended portfolio
composition, see "--Portfolio Composition."
Investment Philosophy
The Advisors believe inefficient pricing in the energy, natural
resources and basic materials industries provides the opportunity for enhanced
investment returns. The Advisors seek to take advantage of value dislocations
through the combination of top-down macro analysis and bottom-up security
selection. The knowledge and expertise of the Advisors' energy, natural
resources and basic materials portfolio management teams are used to evaluate
the macro environment and assess its impact on the various industries within
the energy, natural resources and basic materials industries. Within this
framework, the Advisors seek to identify attractively-valued securities with
strong growth prospects through rigorous bottom-up fundamental research.
The top-down component of the investment process is designed to assess
the various interrelated macro variables affecting the energy, natural
resources and basic materials industries as a whole. These variables generally
include the supply, demand, inventory, raw material and transportation factors
for crude oil, natural gas, coal, electricity, gold, precious metals, base
metals and industrial metals on a worldwide basis. By comparing the market's
perception of these factors relative to the Advisors' outlook, the Advisors
seek to identify value dislocations. The greater the conviction and value
dislocation, the greater the potential investment returns.
Risk/reward analysis is a key component of the Advisors' macro view.
The Advisors evaluate energy, natural resources and basic materials sub-sectors
(i.e., oil, gas, coal, pipes, gold, etc.) to seek to determine optimal
portfolio positioning. Industry selection is a direct result of the Advisors'
sub-sector analysis. Once the evaluation of the various energy, natural
resources and basic materials industries is complete, the Advisors identify
those sub-sectors that are most attractive based on their long-term macro view.
Bottom-up security selection is focused on identifying the most
compelling investment opportunities within each industry. The Advisors seek to
identify reasonably-priced companies with attractive long-term prospects,
quality management and strong cash-flow growth.
Portfolio Composition
The Trust's portfolio will be composed principally of the following
investments. A more detailed description of the Trust's investment policies and
restrictions and more detailed information about the Trust's portfolio
investments are contained in the Statement of Additional Information.
Equity Securities. The Trust intends to invest primarily in equity
securities, including common and preferred stocks, convertible securities,
warrants and depository receipts, of issuers engaged in the energy and natural
resources business, including Canadian Royalty Trusts and MLPs. Common stocks
generally represent an equity ownership interest in an issuer. Although common
stocks have historically generated higher average total returns than
fixed-income securities over the long term, common stocks also have experienced
significantly more volatility in those returns and may under-perform relative
to fixed-income securities during certain periods. An adverse event, such as an
unfavorable earnings report, may depress the value of a particular common stock
held by the Trust. Also, prices of common stocks are sensitive to general
movements in the stock market and a drop in the stock market may depress the
price of common stocks to which the Trust has exposure. Common stock prices
fluctuate for several reasons including changes in investors' perceptions of
the financial condition of an issuer or the general condition of the relevant
stock market, or when political or economic events affecting the issuers occur.
In addition, common stock prices may be particularly sensitive to rising
interest rates, as the cost of capital rises and borrowing costs increase. The
Trust will employ a strategy, as described below, of writing covered call
options on common stocks.
For more information regarding preferred stocks, convertible
securities, warrants and depository receipts, see "Investment Policies and
Techniques--Equity Securities" in the Statement of Additional Information.
Energy, Natural Resources and Basic Materials Companies. Under normal
market conditions, the Trust will invest at least 80% of its total assets in
equity securities and equity derivatives with exposure to companies in the
energy, natural resources and basic materials industries. Energy, natural
resources and basic materials companies that own, produce, refine, process,
transport and market natural resources, and companies that provide related
services. This sector includes, but is not limited to, industries such as
integrated oil, oil and gas exploration and production, gold and other precious
metals, steel and iron ore production, energy services, and technology, metal
production, forest products, paper products, chemicals, building materials,
coal, alternative energy sources and environmental services, as well as related
transportation companies and equipment manufacturers. The Trust does not intend
to invest directly in physical commodities such as gold and other metals.
Equity securities held by the Trust may include common stocks, preferred
shares, convertible securities, warrants, depositary receipts, equity interests
in Canadian Royalty Trusts and equity interests in MLPs. The Trust will
consider a company to be principally engaged in the energy, natural resources
or basic materials industries if: (i) at least 50% of the company's assets,
income, sales or profits are committed to or derived from any of the energy,
natural resources or basic materials industries; or (ii) a third party has
given the company an industry or sector classification consistent with the
designated business activity.
Options--In General. An option on a security is a contract that gives
the holder of the option, in return for a premium, the right to buy from (in
the case of a call) or sell to (in the case of a put) the writer of the option
the security underlying the option at a specified exercise or "strike" price.
The writer of an option on a security has the obligation upon exercise of the
option to deliver the underlying security upon payment of the exercise price or
to pay the exercise price upon delivery of the underlying security. Certain
options, known as "American style" options may be exercised at any time during
the term of the option. Other options, known as "European style" options, may
be exercised only on the expiration date of the option.
If an option written by the Trust expires unexercised, the Trust
realizes on the expiration date a capital gain equal to the premium received by
the Trust at the time the option was written. If an option purchased by the
Trust expires unexercised, the Trust realizes a capital loss equal to the
premium paid. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of
an option of the same series (type, underlying security, exercise price and
expiration). There can be no assurance, however, that a closing purchase or
sale transaction can be effected when the Trust desires. The Trust may sell put
or call options it has previously purchased, which could result in a net gain
or loss depending on whether the amount realized on the sale is more or less
than the premium and other transaction costs paid on the put or call option
when purchased. The Trust will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Trust will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Trust will realize a capital gain or,
if it is less, the Trust will realize a capital loss. Net gains from the
Trust's option strategy will be short-term capital gains which, for federal
income tax purposes, will constitute net investment company taxable income.
Call Options and Covered Call Writing. The Trust will follow a
strategy known as "covered call option writing," which is a strategy designed
to generate current gains from option premiums as a means to enhance
distributions payable to the Trust's shareholders. Under current market
conditions, this strategy will be the Trust's primary option investment
strategy. As the Trust writes covered calls over more of its portfolio, its
ability to benefit from capital appreciation becomes more limited.
As part of its strategy, the Trust may not sell "naked" call options
on individual securities, i.e., options representing more shares of the stock
than are held in the portfolio. A call option written by the Trust on a
security is "covered" if the Trust owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is required, cash or
other assets determined to be liquid by the Advisors (in accordance with
procedures established by the board of trustees) in such amount are segregated
by the Trust's custodian) upon conversion or exchange of other securities held
by the Trust. A call option is also covered if the Trust holds a call on the
same security as the call written where the exercise price of the call held is
(i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written, provided the difference is
maintained by the Trust in segregated assets determined to be liquid by the
Advisors as described above.
The standard contract size for a single option is 100 shares of the
common stock. There are four items needed to identify any option: (1) the
underlying security, (2) the expiration month, (3) the strike price and (4) the
type (call or put). For example, ten XYZ Co. October 40 call options provide
the right to purchase 1,000 shares of XYZ Co. on or before October 31, 2006 at
$40 per share. A call option whose strike price is above the current price of
the underlying stock is called "out-of-the-money." Most of the options that
will be sold by the Trust are expected to be out-of-the-money, allowing for
potential appreciation in addition to the proceeds from the sale of the option.
An option whose strike price is below the current price of the underlying stock
is called "in-the-money" and will be sold by the Trust as a defensive measure
to protect against a possible decline in the underlying stock.
The following is a conceptual example of a covered call transaction,
making the following assumptions: (1) a common stock currently trading at
$37.15 per share; (2) a six-month call option is written with a strike price of
$40 (i.e., 7.7% higher than the current market price); and (3) the writer
receives $2.45 (or 6.6%) of the common stock's value as premium income. This
example is not meant to represent the performance of any actual common stock,
option contract or the Trust itself. Under this scenario, before giving effect
to any change in the price of the stock, the covered-call writer receives the
premium, representing 6.6% of the common stock's value, regardless of the
stock's performance over the six-month period until option expiration. If the
stock remains unchanged, the option will expire and there would be a 6.6%
return for the 6-month period. If the stock were to decline in price by 6.6%,
the strategy would "break-even" thus offering no gain or loss. If the stock
were to climb to a price of $40 or above, the option would be exercised and the
stock would return 7.7% coupled with the option premium of 6.6% for a total
return of 14.3%. Under this scenario, the investor would not benefit from any
appreciation of the stock above $40, and thus be limited to a 14.3% total
return. The premium income from writing the call option serves to offset some
of the unrealized loss on the stock in the event that the price of the stock
declines, but if the stock were to decline more than 6.6% under this scenario,
the investor's downside protection is eliminated and the stock could eventually
become worthless.
For conventional listed call options, the option's expiration date can
be up to nine months from the date the call options are first listed for
trading. Longer-term call options can have expiration dates up to three years
from the date of listing. It is anticipated that most options that are written
against Trust stock holdings will be repurchased prior to the option's
expiration date, generating a gain or loss in the options. If the options were
not to be repurchased, the option holder would exercise their rights and buy
the stock from the Trust at the strike price if the stock traded at a higher
price than the strike price. In general, the Trust intends to continue to hold
its common stocks rather than allowing them to be called away by the option
holders.
Put Options. Put options are contracts that give the holder of the
option, in return for a premium, the right to sell to the writer of the option
the security underlying the option at a specified exercise price at any time
during the term of the option. These strategies may produce a considerably
higher return than the Trust's primary strategy of covered call writing, but
involve a higher degree of risk and potential volatility.
The Trust will write (sell) put options on individual securities only
if the put option is "covered." A put option written by the Trust on a security
is "covered" if the Trust segregates or earmarks assets determined to be liquid
by the Advisor, as described above, equal to the exercise price. A put option
is also covered if the Trust holds a put on the same security as the put
written where the exercise price of the put held is (i) equal to or greater
than the exercise price of the put written, or (ii) less than the exercise
price of the put written, provided the difference is maintained by the Trust in
segregated or earmarked assets determined to be liquid by the Advisor, as
described above.
The following is a conceptual example of a put transaction, making the
following assumptions: (1) a common stock currently trading at $37.15 per
share; (2) a six-month put option written with a strike price of $35.00 (i.e.,
94.2% of the current market price); and (3) the writer receives $1.10 or 2.95%
of the common stock's value as premium income. This example is not meant to
represent the performance of any actual common stock, option contract or the
Trust itself. Under this scenario, before giving effect to any change in the
price of the stock, the put writer receives the premium, representing 2.95% of
the common stock's value, regardless of the stock's performance over the
six-month period until the option expires. If the stock remains unchanged,
appreciates in value or declines less than 5.8% in value, the option will
expire and there would be a 2.95% return for the six-month period. If the stock
were to decline by 5.8% or more, the Trust would lose an amount equal to the
amount by which the stock's price declined minus the premium paid to the Trust.
The stock's price could lose its entire value, in which case the Trust would
lose $33.90 ($35.00 minus $1.10).
Options on Indices. The Trust may sell put and call options on indices
of securities. Options on an index differ from options on securities because
(i) the exercise of an index option requires cash payments and does not involve
the actual purchase or sale of securities, (ii) the holder of an index option
has the right to receive cash upon exercise of the option if the level of the
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 and (iii)
index options reflect price-fluctuations in a group of securities or segments
of the securities market rather than price fluctuations in a single security.
As the seller of an index put or call option, the Trust receives cash
(the premium) from the purchaser. The purchaser of an index put option has the
right to any depreciation in the value of the index below a fixed price (the
exercise price) on or before a certain date in the future (the expiration
date). The purchaser of an index call option has the right to any appreciation
in the value of the index over a fixed price (the exercise price) on or before
a certain date in the future (the expiration date). The Trust, in effect,
agrees to accept the potential depreciation (in the case of a put) or sell the
potential appreciation (in the case of a call) in the value of the relevant
index in exchange for the premium. If, at or before expiration, the purchaser
exercises the put or call option sold by the Trust, the Trust will pay the
purchaser the difference between the cash value of the index and the exercise
price of the index option. The premium, the exercise price and the market value
of the index determine the gain or loss realized by the Trust as the seller of
the index put or call option.
The Trust may execute a closing purchase transaction with respect to
an index option it has sold and sell another option (with either a different
exercise price or expiration date or both). The Trust's objective in entering
into such a closing transaction will be to optimize net index option premiums.
The cost of a closing transaction may reduce the net index option premiums
realized from the sale of the index option.
The Trust will cover its obligations when it sells index options. An
index option is considered "covered" if the Trust maintains with its custodian
assets determined to be liquid in an amount equal to the contract value of the
index. An index put option also is covered if the Trust holds a put on the same
index as the put written where the exercise price of the put held is (i) equal
to or more than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the
Trust in segregated assets determined to be liquid. An index call option also
is covered if the Trust holds a call on the same index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Trust in
segregated assets determined to be liquid.
Limitation on Option Writing Strategy. The Trust generally intends to
write covered call and put options with respect to approximately % to % of
its total assets, although this percentage may vary from time to time with
market conditions. Under current market conditions, the Trust anticipates
initially writing covered call and put options with respect to approximately
% of its total assets. As the Trust writes covered calls over more of its
portfolio, its ability to benefit from capital appreciation becomes more
limited. The number of covered put and call options or securities the Trust can
write is limited by the total assets the Trust holds, and further limited by
the fact that all options represent 100 share lots of the underlying common
stock. In connection with its option writing strategy, the Trust will not write
"naked" or uncovered put or call options. Furthermore, the Trust's
exchange-listed option transactions will be subject to limitations established
by each of the exchanges, boards of trade or other trading facilities on which
such options are traded. These limitations govern the maximum number of options
in each class which may be written or purchased by a single investor or group
of investors acting in concert, regardless of whether the options are written
or purchased on the same or different exchanges, boards of trade or other
trading facilities or are held or written in one or more accounts or through
one or more brokers. Thus, the number of options which the Trust may write or
purchase may be affected by options written or purchased by other investment
advisory clients of the Advisor. An exchange, board of trade or other trading
facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Master Limited Partnerships. The Trust may invest up to 25% of the
value of its total assets in MLPs. The MLPs in which the Trust intends to
invest will be limited partnerships (or limited liability companies taxable as
partnerships), the units of which will be listed and traded on a U.S.
securities exchange. In addition, such MLPs will derive income and gains from
the exploration, development, mining or production, processing, refining,
transportation (including pipeline transporting gas, oil, or products thereof),
or the marketing of any mineral or natural resources. MLPs generally have two
classes of owners, the general partner and limited partners. When investing in
an MLP, the Trust intends to purchase publicly traded common units issued to
limited partners of the MLP. The general partner is typically owned by one or
more of the following: a major energy company, an investment fund, or the
direct management of the MLP. The general partner may be structured as a
private or publicly traded corporation or other entity. The general partner
typically controls the operations and management of the MLP through an up to 2%
equity interest in the MLP plus, in many cases, ownership of common units and
subordinated units. Limited partners own the remainder of the partnership,
through ownership of common units, and have a limited role in the partnership's
operations and management.
MLPs are typically structured such that common units and general
partner interests have first priority to receive quarterly cash distributions
up to an established minimum amount ("minimum quarterly distributions" or
"MQD"). Common and general partner interests also accrue arrearages in
distributions to the extent the MQD is not paid. Once common and general
partner interests have been paid, subordinated units receive distributions of
up to the MQD; however, subordinated units do not accrue arrearages.
Distributable cash in excess of the MQD paid to both common and subordinated
units is distributed to both common and subordinated units generally on a pro
rata basis. The general partner is also eligible to receive incentive
distributions if the general partner operates the business in a manner that
results in distributions paid per common unit surpassing specified target
levels. As the general partner increases cash distributions to the limited
partners, the general partner receives an increasingly higher percentage of the
incremental cash distributions. A common arrangement provides that the general
partner can reach a tier where it receives 50% of every incremental dollar paid
to common and subordinated unit holders. These incentive distributions
encourage the general partner to streamline costs, increase capital
expenditures and acquire assets in order to increase the partnership's cash
flow and raise the quarterly cash distribution in order to reach higher tiers.
Such results benefit all security holders of the MLP. For more information on
MLPs, see "Investment Policies and Techniques--Master Limited Partnerships
Interests" in the Statement of Additional Information.
Non-U.S. Securities. The Trust will invest in non-U.S. securities,
which may include securities denominated in U.S. dollars or in non-U.S.
currencies or multinational currency units. The Trust may invest in non-U.S.
securities of so-called emerging market issuers. For purposes of the Trust, a
company is deemed to be a non-U.S. company if it meets any of the following
tests: (i) such company was not organized in the United States; (ii) such
company's primary business office is not in the United States; (iii) the
principal trading market for such company's assets is not located in the United
States; (iv) less than 50% of such company's assets are located in the United
States; or (v) 50% or more of such issuer's revenues are derived from outside
the United States. Non-U.S. securities markets generally are not as developed
or efficient as those in the United States. Securities of some non-U.S. issuers
are less liquid and more volatile than securities of comparable U.S. issuers.
Similarly, volume and liquidity in most non-U.S. securities markets are less
than in the United States and, at times, volatility of price can be greater
than in the United States.
Because evidences of ownership of such securities usually are held
outside the United States, the Trust would be subject to additional risks with
respect to its investments in non-U.S. securities, which include possible
adverse political and economic developments, seizure or nationalization of
foreign deposits and adoption of governmental restrictions that might adversely
affect or restrict the payment of principal and interest on the non-U.S.
securities to investors located outside the country of the issuer, whether from
currency blockage or otherwise.
Since non-U.S. securities may be purchased with and payable in foreign
currencies, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Short Sales. The Trust may make short sales of securities. 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 strategic positions, for risk management, in order to
maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Trust may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
Government securities or other liquid securities. The Trust will also be
required to designate on its books and records similar collateral with its
custodian to the extent, if any, necessary so that the aggregate collateral
value is at all times at least equal to the current market value of the
security sold short. Depending on arrangements made with the broker-dealer from
which it borrowed the security regarding payment over of any payments received
by the Trust on such security, the Trust may not receive any payments
(including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of
the short sale and the time the Trust replaces the borrowed security, the Trust
will incur a loss; conversely, if the price declines, the Trust will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Trust's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Trust will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value of
its 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.
Non-Investment Grade Securities. The Trust may invest up to 10% of its
total assets in securities rated below investment grade, such as those rated Ba
or lower by Moody's Investors Service, Inc. ("Moody's") and BB or lower by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or Fitch Ratings ("Fitch") or securities comparably rated by other
rating agencies or in unrated securities determined by the Advisors to be of
comparable quality. Securities rated Ba by Moody's are judged to have
speculative elements, their future cannot be considered as well assured and
often the protection of interest and principal payments may be very moderate.
Securities rated BB by S&P or Fitch are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions that could lead to inadequate capacity to meet timely interest and
principal payments. Securities rated C are regarded as having extremely poor
prospects of ever attaining any real investment standing. Securities rated D
are in default and the payment of interest and/or repayment of principal is in
arrears. When the Advisors believe it to be in the best interests of the
Trust's shareholders, the Trust will reduce its investment in lower grade
securities.
Lower grade securities, though high yielding, are characterized by
high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated securities. The secondary market for lower grade securities may be less
liquid than that of higher rated securities. Adverse conditions could make it
difficult at times for the Trust to sell certain securities or could result in
lower prices than those used in calculating the Trust's net asset value.
The prices of debt securities generally are inversely related to
interest rate changes; however, the price volatility caused by fluctuating
interest rates of securities also is inversely related to the coupon of such
securities. Accordingly, lower grade securities may be relatively less
sensitive to interest rate changes than higher quality securities of comparable
maturity because of their higher coupon. This higher coupon is what the
investor receives in return for bearing greater credit risk. The higher credit
risk associated with lower grade securities potentially can have a greater
effect on the value of such securities than may be the case with higher quality
issues of comparable maturity and will be a substantial factor in the Trust's
relative share price volatility.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and the other rating agencies represent
their opinions as to the quality of the obligations which they undertake to
rate. Ratings are relative and subjective and, although ratings may be useful
in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of such obligations. Although these ratings may
be an initial criterion for selection of portfolio investments, the Advisors
also will independently evaluate these securities and the ability of the
issuers of such securities to pay interest and principal. To the extent that
the Trust invests in lower grade securities that have not been rated by a
rating agency, the Trust's ability to achieve its investment objectives will be
more dependent on the Advisors' credit analysis than would be the case when the
Trust invests in rated securities.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up
Period. During the period in which the net proceeds of this offering of common
shares are being invested, during periods in which the Advisors determine that
they are temporarily unable to follow the Trust's investment strategy or that
it is impractical to do so or pending re-investment of proceeds received in
connection with the sale of a security, the Trust may deviate from its
investment strategy and invest all or any portion of its assets in cash or cash
equivalents. The Advisors' determination that they are temporarily unable to
follow the Trust's investment strategy or that it is impractical to do so will
generally occur only in situations in which a market disruption event has
occurred and where trading in the securities selected through application of
the Trust's investment strategy is extremely limited or absent. In such a case,
shares of the Trust may be adversely affected and the Trust may not pursue or
achieve its investment objective. The Advisors currently anticipate that these
are the only circumstances in which the Trust will invest in income securities.
Securities Lending and Delayed Settlement Transactions. The Trust may
also lend the securities it owns to others, which allows the Trust the
opportunity to earn additional income. Although the Trust will require the
borrower of the securities to post collateral for the loan in accordance with
market practice and the terms of the loan will require that the Trust be able
to reacquire the loaned securities if certain events occur, the Trust is still
subject to the risk that the borrower of the securities may default, which
could result in the Trust losing money, which would result in a decline in the
Trust's net asset value. The Trust may also purchase securities for delayed
settlement. This means that the Trust is generally obligated to purchase the
securities at a future date for a set purchase price, regardless of whether the
value of the securities is more or less than the purchase price at the time of
settlement.
Strategic Transactions. In addition to the option strategies discussed
above, the Trust may, but is not required to, use various strategic
transactions described below to, facilitate portfolio management, mitigate
risks and enhance total return. Such strategic transactions are generally
accepted under modern portfolio management and are regularly used by many
mutual funds, closed-end funds and other institutional investors. Although the
Advisors seek to use the practices to further the Trust's investment objective,
no assurance can be given that these practices will achieve this result.
The Trust may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity indices, and other financial instruments, purchase
and sell financial futures contracts and options thereon and engage in swaps.
The Trust also may purchase derivative instruments that combine features of
these instruments. Collectively, all of the above are referred to as "Strategic
Transactions." The Trust generally seeks to use Strategic Transactions as a
portfolio management or hedging technique to seek to protect against possible
adverse changes in the market value of securities held in or to be purchased
for the Trust's portfolio, protect the value of the Trust's portfolio,
facilitate the sale of certain securities for investment purposes, or establish
positions in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. The Trust may use Strategic Transactions to
enhance potential total returns although the Trust will commit variation margin
for Strategic Transactions that involve futures contracts only in accordance
with the rules of the Commodity Futures Trading Commission.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to use Strategic Transactions
successfully depends on the Sub-Advisor's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Trust
to sell or purchase portfolio securities at inopportune times or for prices
other than current market values, may limit the amount of appreciation the
Trust can realize on an investment, or may cause the Trust to hold a security
that it might otherwise sell. Additionally, amounts paid by the Trust as
premiums and cash or other assets held in margin accounts with respect to
Strategic Transactions are not otherwise available to the Trust for investment
purposes. A more complete discussion of Strategic Transactions and their risks
is contained in the Trust's Statement of Additional Information.
RISKS
The net asset value of, and dividends paid on, the common shares will
fluctuate with and be affected by, among other things, the risks more fully
described below.
No Operating History. The Trust is a non-diversified, closed-end
management investment company with 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 offering.
Industry Concentration Risk. The Trust's investments will be
concentrated in the energy, natural resources and basic materials industries.
Because the Trust is focused in specific industries, it may present more risks
than if it were broadly diversified over numerous industries and sectors of the
economy. A downturn in any one of the energy, natural resources and basic
materials industries would have a larger impact on the Trust than on an
investment company that does not concentrate in such industries, which can be
significantly affected by the supply of and demand for specific products and
services, exploration and production spending, government regulation, world
events and economic conditions. The energy, natural resources and basic
materials industries can also be significantly affected by events relating to
international political developments, energy conservation, the success of
exploration projects, commodity prices, and tax and government regulations. At
times, the performance of securities of companies in the energy, natural
resources and basic materials industries will lag behind the performance of
other industries or the broader market as a whole. The Trust will not invest,
under normal market conditions, less than 25% of its total assets in securities
of energy, natural resources and equity derivatives with exposure to the
energy, natural resources and basic materials industries without shareholder
approval.
Risks inherent in investing in energy, natural resources and basic
materials companies include:
Supply and Demand Risk. A decrease in the production of a physical
commodity or a decrease in the volume of such commodity available for
transportation, mining, processing, storage or distribution may adversely
impact the financial performance of an energy, natural resources or basic
materials company that devotes a portion of its business to that commodity.
Production declines and volume decreases could be caused by various factors,
including catastrophic events affecting production, depletion of resources,
labor difficulties, environmental proceedings, increased regulations, equipment
failures and unexpected maintenance problems, import supply disruption,
increased competition from alternative energy sources or commodity prices.
Alternatively, a sustained decline in demand for such commodities could also
adversely affect the financial performance of energy, natural resources and
basic materials companies. Factors that could lead to a decline in demand
include economic recession or other adverse economic conditions, higher taxes
on commodities or increased governmental regulations, increases in fuel
economy, consumer shifts to the use of alternative commodities fuel sources,
changes in commodity prices, or weather.
Depletion and Exploration Risk. Many energy, natural resources and
basic materials companies are either engaged in the production of one or more
physical commodities, or are engaged in transporting, storing, distributing and
processing these items on behalf of shippers. To maintain or grow their
revenues, these companies or their customers need to maintain or expand their
reserves through exploration of new sources of supply, through the development
of existing sources, through acquisitions, or through long-term contracts to
acquire reserves. The financial performance of energy, natural resources and
basic materials companies may be adversely affected if they, or the companies
to whom they provide the service, are unable to acquire additional reserves
cost effectively in sufficient quantities to replace the natural decline.
Operational and Geological Risk. Energy, natural resources and basic
materials companies are subject to specific operational and geological risks in
addition to normal business and management risks. Some examples of operational
risks include mine rock falls, underground explosions and pit wall failures.
Geological risk would include faulting of the ore body and misinterpretation of
geotechnical data.
Regulatory Risk. Energy, natural resources and basic materials
companies are subject to significant federal, state and local government
regulation in virtually every aspect of their operations, including how
facilities are constructed, maintained and operated, environmental and safety
controls, and the prices they may charge for the products and services they
provide. Various governmental authorities have the power to enforce compliance
with these regulations and the permits issued under them, and violators are
subject to administrative, civil and criminal penalties, including civil fines,
injunctions or both. Stricter laws, regulations or enforcement policies could
be enacted in the future, which would likely increase compliance costs and may
adversely affect the operations and financial performance of energy, natural
resources and basic materials companies.
Commodity Pricing Risk. The operations and financial performance of
energy, natural resources and basic materials companies may be directly
affected by commodity prices, especially those energy, natural resources and
basic materials companies that own the underlying commodity. Commodity prices
fluctuate for several reasons, including changes in market and economic
conditions, the impact of weather on demand, levels of domestic production and
imported commodities, energy conservation, domestic and foreign governmental
regulation and taxation and the availability of local, intrastate and
interstate transportation systems. Volatility of commodity prices, which may
lead to a reduction in production or supply, may also negatively impact the
performance of energy, natural resources and basic materials companies that are
solely involved in the transportation, processing, storing, distribution or
marketing of commodities. Volatility of commodity prices may also make it more
difficult for energy, natural resources and basic materials companies to raise
capital to the extent the market perceives that their performance may be
directly or indirectly tied to commodity prices.
Precious Metals Pricing Risk. The Trust may have a material exposure
to precious metals, such as gold, silver and platinum, and precious
metals-related instruments and securities. The price of precious metals can
fluctuate widely and is affected by numerous factors beyond the Trust's control
including: global or regional political, economic or financial events and
situations; investors' expectations with respect to the future rates of
inflation and movements in world equity, financial and property markets; global
supply and demand for specific precious metals, which is influenced by such
factors as mine production and net forward selling activities by precious
metals producers, central bank purchases and sales, jewelry demand and the
supply of recycled jewelry, net investment demand and industrial demand, net of
recycling; interest rates and currency exchange rates, particularly the
strength of and confidence in the U.S. dollar; and investment and trading
activities of hedge funds, commodity funds and other speculators. The Trust
does not intend to hold physical precious metals.
Distress Gold Sale Risk. The possibility of large-scale distress sales
of gold in times of crisis may have a short-term negative impact on the price
of gold and adversely affect companies in which the Trust may invest. For
example, economic, political or social conditions or pressures may require
central banks, other governmental agencies and multi-lateral institutions that
buy, sell and hold gold as part of their reserve assets, to liquidate their
gold assets all at once or in an uncoordinated manner. The demand for gold
might not be sufficient to accommodate the sudden increase in the supply of
gold to the market.
Precious Metals in Emerging Markets. The Trust is likely to invest in
precious metals companies that are located in emerging markets. It should be
noted that some governments exercise substantial influence over the private
sector, and the political risk for many developing countries is a significant
factor. See also "Emerging Markets Risk" below.
Commodity and Currency Risk. The use of commodity and currency
derivative instruments by producers has increased in recent years. There have
been examples of companies that have mismanaged their exposures resulting, in
extreme cases, in financial distress or even bankruptcy.
Interest Rate Risk. Rising interest rates could adversely impact the
financial performance of energy, natural resources and basic materials
companies by increasing their costs of capital. This may reduce their ability
to execute acquisitions or expansion projects in a cost-effective manner.
Investment and Market Risk. An investment in the Trust's common shares
is subject to investment risk, including the possible loss of the entire amount
that you invest. Your investment in common shares represents an indirect
investment in the securities owned by the Trust, a majority of which are traded
on a national securities exchange or in the over-the-counter markets. The value
of these securities, like other market investments, may move up or down,
sometimes rapidly and unpredictably. Your common shares at any point in time
may be worth less than your original investment, even after taking into account
the reinvestment of Trust dividends and distributions.
Common Stock Risk. The Trust will have exposure to common stocks.
Although common stocks have historically generated higher average total returns
than fixed-income securities over the long term, common stocks also have
experienced significantly more volatility in those returns and in certain
periods have significantly underperformed relative to fixed-income securities.
An adverse event, such as an unfavorable earnings report, may depress the value
of a particular common stock held by the Trust. Also, the price of common
stocks is sensitive to general movements in the stock market and a drop in the
stock market may depress the price of common stocks to which the Trust has
exposure. Common stock prices fluctuate for several reasons including changes
in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, or when political or economic
events affecting the issuers occur. In addition, common stock prices may be
particularly sensitive to rising interest rates, as the cost of capital rises
and borrowing costs increase. Interest rates recently have been rising and it
is possible that they will rise further.
Non-U.S. Securities Risk. Investing in non-U.S. securities involves
certain risks not involved in domestic investments, including, but not limited
to: (1) fluctuations in foreign exchange rates; (2) future foreign economic,
financial, political and social developments; (3) different legal systems; (4)
the possible imposition of exchange controls or other foreign governmental laws
or restrictions; (5) lower trading volume; (6) much greater price volatility
and illiquidity of certain non-U.S. securities markets; (7) different trading
and settlement practices; (8) less governmental supervision; (9) changes in
currency exchange rates; (10) high and volatile rates of inflation; (11)
fluctuating interest rates; (12) less publicly available information; and (13)
different accounting, auditing and financial recordkeeping standards and
requirements.
Certain countries in which the Trust may invest, especially emerging
market countries, historically have experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty and instability. These risks are
especially evident in the Middle East and West Africa. The cost of servicing
external debt will generally be adversely affected by rising international
interest rates because many external debt obligations bear interest at rates
that are adjusted based upon international interest rates. In addition, with
respect to certain foreign countries, there is a risk of: (1) the possibility
of expropriation or nationalization of assets; (2) confiscatory taxation; (3)
difficulty in obtaining or enforcing a court judgment; (4) economic, political
or social instability; and (5) diplomatic developments that could affect
investments in those countries.
Because the Trust may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of securities in the Trust and the unrealized
appreciation or depreciation of investments. Currencies of certain countries
may be volatile and therefore may affect the value of securities denominated in
such currencies, which means that the Trust's net asset value or current income
could decline as a result of changes in the exchange rates between foreign
currencies and the U.S. dollar. Certain investments in non-U.S. securities also
may be subject to foreign withholding taxes. Dividend income from non-U.S.
corporations may not be eligible for the reduced rate for qualified dividend
income. These risks often are heightened for investments in smaller, emerging
capital markets. In addition, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as: (1) growth of gross
domestic product; (2) rates of inflation; (3) capital reinvestment; (4)
resources; (5) self-sufficiency; and (6) balance of payments position.
As a result of these potential risks, the Advisors may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Trust may
invest in countries in which foreign investors, including the Advisors, have
had no or limited prior experience.
Canadian Royalty Trust Risk. The Trust anticipates initially investing
approximately 20% of its total assets in units issued by Canadian Royalty
Trusts. Canadian Royalty Trusts are exposed to many of the same risks as energy
and natural resources companies, such as commodity pricing risk, supply and
demand risk and depletion and exploration risk.
Emerging Markets Risk. Investing in securities of issuers based in
underdeveloped emerging markets entails all of the risks of investing in
securities of non-U.S. issuers to a heightened degree. These heightened risks
include: (i) greater risks of expropriation, confiscatory taxation,
nationalization, and less social, political and economic stability; (ii) the
smaller size of the market for such securities and a lower volume of trading,
resulting in lack of liquidity and an increase in price volatility; and (iii)
certain national policies that may restrict the Trust's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests.
Liquidity Risk. In some circumstances, investments may be relatively
illiquid making it difficult to acquire or dispose of them at the prices quoted
on relevant exchanges or at all. Accordingly, the Trust's ability to respond to
market movements may be impaired and the Trust may experience adverse price
movements upon liquidation of its investments. Settlement of transactions may
be subject to delay and administrative uncertainties.
Foreign Currency Risk. Because the Trust may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the Trust
and the unrealized appreciation or depreciation of investments. Currencies of
certain countries may be volatile and therefore may affect the value of
securities denominated in such currencies, which means that the Trust's net
asset value could decline as a result of changes in the exchange rates between
foreign currencies and the U.S. dollar. In addition, the Trust may enter into
foreign currency transactions in an attempt to enhance total return which may
further expose the Trust to the risks of foreign currency movements and other
risks. See "Risks-Strategic Transactions."
Small and Mid-Cap Stock Risk. While the Trust generally will invest
primarily in large capitalization companies, the Trust may invest in companies
with small and mid-capitalizations. Small and medium company stocks can be more
volatile than, and perform differently from, larger company stocks. There may
be less trading in a smaller or medium company's stock, which means that buy
and sell transactions in that stock could have a larger impact on the stock's
price than is the case with larger company stocks. Small and medium companies
may have fewer business lines; changes in any one line of business, therefore,
may have a greater impact on a smaller and medium company's stock price than is
the case for a larger company. As a result, the purchase or sale of more than a
limited number of shares of a small or medium company may affect its market
price. The Trust may need a considerable amount of time to purchase or sell its
positions in these securities. In addition, smaller or medium company stocks
may not be well known to the investing public.
MLP Risk. An investment in MLP units involves some risks that differ
from an investment in the common stock of a corporation. Holders of MLP units
have limited control and voting rights on matters affecting the partnership. In
addition, there are certain tax risks associated with an investment in MLP
units and conflicts of interest may exist between common unit holders and the
general partner, including those arising from incentive distribution payments.
Short Sales Risk. Short selling involves selling securities that may
or may not be owned and borrowing the same securities for delivery to the
purchaser, with an obligation to replace the borrowed securities at a later
date. Short selling allows the short seller to profit from declines in market
prices to the extent such declines exceed the transaction costs and the costs
of borrowing the securities. A short sale creates the risk of an unlimited loss
in that the price of the underlying security could theoretically increase
without limit, thus increasing the cost of buying those securities to cover the
short position. There can be no assurance that the securities necessary to
cover a short position will be available for purchase. Purchasing securities to
close out the short position can itself cause the price of the securities to
rise further, thereby exacerbating the loss.
Risks Associated with Options on Securities. The ability of the Trust
to achieve its primary investment objective of providing total return through a
combination of current income and capital appreciation is partially dependent
on successful implementation of its option strategy. There are several risks
associated with transactions in options on securities used in connection with
the Trust's option strategy. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
As the writer of a covered call option, the Trust forgoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the call option above the sum of the premium and the
strike price of the call, but has retained the risk of loss should the price of
the underlying security decline. As the Trust writes covered calls over more of
its portfolio, its ability to benefit from capital appreciation becomes more
limited. The writer of an option has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver the underlying security at the exercise price.
When the Trust writes covered put options, it bears the risk of loss
if the value of the underlying stock declines below the exercise price minus
the put premium. If the option is exercised, the Trust could incur a loss if it
is required to purchase the stock underlying the put option at a price greater
than the market price of the stock at the time of exercise plus the put premium
the Trust received when it wrote the option. While the Trust's potential gain
in writing a covered put option is limited to distributions earned on the
liquid assets securing the put option plus the premium received from the
purchaser of the put option, the Trust risks a loss equal to the entire
exercise price of the option minus the put premium.
Exchange-Listed Option Risks. There can be no assurance that a liquid
market will exist when the Trust seeks to close out an option position. Reasons
for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms. If the Trust were unable to close out a covered call option that it had
written on a security, it would not be able to sell the underlying security
unless the option expired without exercise.
The hours of trading for options on an exchange may not conform to the
hours during which the underlying securities are traded. To the extent that the
options 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 options markets. Call options are marked to
market daily and their value will be affected by changes in the value and
dividend rates of the underlying common stocks, an increase in interest rates,
changes in the actual or perceived volatility of the stock market and the
underlying common stocks and the remaining time to the options' expiration.
Additionally, the exercise price of an option may be adjusted downward before
the option's expiration as a result of the occurrence of certain corporate
events affecting the underlying equity security, such as extraordinary
dividends, stock splits, merger or other extraordinary distributions or events.
A reduction in the exercise price of an option would reduce the Trust's capital
appreciation potential on the underlying security.
Over-the-Counter Option Risk. The Trust may write (sell) unlisted
("OTC" or "over-the-counter") options, and options written by the Trust with
respect to non-U.S. securities, indices or sectors generally will be OTC
options. OTC options differ from exchange-listed options in that they are
two-party contracts, with exercise price, premium and other terms negotiated
between buyer and seller, and generally do not have as much market liquidity as
exchange-listed options. The counterparties to these transactions typically
will be major international banks, broker-dealers and financial institutions.
The Trust may be required to treat as illiquid securities being used to cover
certain written OTC options. The OTC options written by the Trust will not be
issued, guaranteed or cleared by the Options Clearing Corporation. In addition,
the Trust's ability to terminate the OTC options may be more limited than with
exchange-traded options. Banks, broker-dealers or other financial institutions
participating in such transaction may fail to settle a transaction in
accordance with the terms of the option as written. In the event of default or
insolvency of the counterparty, the Trust may be unable to liquidate an OTC
option position.
Index Option Risk. The Trust intends to sell index put and call
options from time to time. The purchaser of an index put option has the right
to any depreciation in the value of the index below the exercise price of the
option on or before the expiration date. The purchaser of an index call option
has the right to any appreciation in the value of the index over the exercise
price of the option on or before the expiration date. Because the exercise of
an index option is settled in cash, sellers of index call options, such as the
Trust, cannot provide in advance for their potential settlement obligations by
acquiring and holding the underlying securities. The Trust will lose money if
it is required to pay the purchaser of an index option the difference between
the cash value of the index on which the option was written and the exercise
price and such difference is greater than the premium received by the Trust for
writing the option. The value of index options written by the Trust, which will
be priced daily, will be affected by changes in the value and dividend rates of
the underlying common stocks in the respective index, changes in the actual or
perceived volatility of the stock market and the remaining time to the options'
expiration. The value of the index options also may be adversely affected if
the market for the index options becomes less liquid or smaller. Distributions
paid by the Trust on its common shares may be derived in part from the net
index option premiums it receives from selling index put and call options, less
the cost of paying settlement amounts to purchasers of the options that
exercise their options. Net index option premiums can vary widely over the
short term and long term.
Non-Investment Grade Securities Risk. The Trust may invest up to 10%
of its total assets in securities that are below investment grade.
Non-investment grade securities are commonly referred to as "junk bonds."
Investments in lower grade securities will expose the Trust to greater risks
than if the Trust owned only higher grade securities. Because of the
substantial risks associated with lower grade securities, you could lose money
on your investment in common shares of the Trust, both in the short term and
the long term. Lower grade securities, though high yielding, are characterized
by high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated securities. The retail secondary market for lower grade securities may be
less liquid than that of higher rated securities. Adverse conditions could make
it difficult at times for the Trust to sell certain securities or could result
in lower prices than those used in calculating the Trust's net asset value.
Dividend Risk. Dividends on common stocks are not fixed but are
declared at the discretion of an issuer's board of directors. There is no
guarantee that the issuers of the common stocks in which the Trust invests will
declare dividends in the future or that if declared they will remain at current
levels or increase over time. As described further in "Tax Matters," "qualified
dividend income" received by the Trust will generally be eligible for the
reduced tax rate applicable to such dividends for taxable years beginning on or
before December 31, 2010. There is no assurance as to what portion of the
Trust's distributions will constitute qualified dividend income.
Non-Diversification. The Trust has registered as a "non-diversified"
investment company under the Investment Company Act. For federal income tax
purposes, the Trust, with respect to up to 50% of its total assets, will be
able to invest more than 5% (but not more than 25%, except for investments in
United States government securities and securities of other regulated
investment companies, which are not limited for tax purposes) of the value of
its total assets in the obligations of any single issuer or the securities of
one or more qualified publicly traded partnerships. To the extent the Trust
invests a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Trust may be more susceptible than a more widely
diversified investment company to any single economic, political or regulatory
occurrence.
Strategic Transactions. Strategic Transactions in which the Trust may
engage for hedging purposes, risk management or to enhance total return also
involve certain risks and special considerations. Strategic Transactions have
risks, including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of the other party
to the transaction or illiquidity of the derivative instruments. Furthermore,
the ability to use Strategic Transactions successfully depends on the Advisors'
ability to predict pertinent market movements, which cannot be assured. Thus,
the use of Strategic Transactions may result in losses greater than if they had
not been used, may require the Trust to sell or purchase portfolio securities
at inopportune times or for prices other than current market values, may limit
the amount of appreciation the Trust can realize on an investment, or may cause
the Trust to hold a security that it might otherwise sell. The use of foreign
currency transactions can result in the Trust incurring losses as a result of
the imposition of exchange controls, suspension of settlements or the inability
of the Trust to deliver or receive a specified currency. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in margin accounts
with respect to Strategic Transactions are not otherwise available to the Trust
for investment purposes.
Market Disruption and Geopolitical Risk. The aftermath of the war in
Iraq and the continuing occupation of Iraq, instability in the Middle East and
terrorist attacks in the U.S. and around the world may have resulted in market
volatility and may have long-term effects on the U.S. and worldwide financial
markets and on energy, natural resources and basic materials companies and may
cause further economic uncertainties in the U.S. and worldwide. The Trust does
not know how long the securities markets will continue to be affected by these
events and cannot predict the effects of the occupation or similar events in
the future on the U.S. economy and securities markets. Given the risks
described above, an investment in the common shares may not be appropriate for
all investors. You should carefully consider your ability to assume these risks
before making an investment in the Trust.
Anti-Takeover Provisions. The Trust's Agreement and Declaration of
Trust includes provisions that could limit the ability of other entities or
persons to acquire control of the Trust or convert the Trust to open-end
status. These provisions could deprive the holders of common shares of
opportunities to sell their common shares at a premium over the then current
market price of the common shares or at net asset value.
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
trustees of the Trust. A majority of the trustees are not "interested
persons" (as defined in the Investment Company Act) of the Trust. 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 acts as the Trust's investment advisor. BlackRock
Capital Management acts as the Trust's sub-advisor. BlackRock Advisors, located
at 100 Bellevue Parkway, Wilmington, Delaware 19809, and BlackRock Capital
Management, located at 40 East 52nd Street, New York, New York 10022, are
wholly-owned subsidiaries of BlackRock, Inc., which is one of the largest
publicly-traded investment management firms in the United States with
approximately $464 billion of assets under management as of June 30, 2006.
BlackRock manages assets on behalf of institutional and individual investors
worldwide through a variety of equity, fixed income, liquidity and alternative
investment products, including the BlackRock Funds(TM) and BlackRock Liquidity
Funds(TM). In addition, BlackRock provides risk management and investment
system services to institutional investors under the BlackRock Solutions(R)
name.
The BlackRock organization has over 17 years of experience managing
closed-end products and, as of June 30, 2006, advised a closed-end family of 56
active funds with approximately $18 billion in assets. BlackRock has $40.9
billion in equity assets under management as of June 30, 2006, including $4.2
billion in assets across 8 equity closed-end funds. Clients are served from the
company's headquarters in New York City, as well as offices in Boston, Chicago,
Edinburgh, Hong Kong, San Francisco, Singapore, Sydney, Tokyo and Wilmington.
BlackRock, Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"),
one of the largest diversified financial services organizations in the United
States, and is majority owned by PNC and by BlackRock employees.
BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill Lynch")
announced on February 15, 2006 that they had entered into an agreement pursuant
to which Merrill Lynch would contribute its investment management business,
Merrill Lynch Investment Managers, to BlackRock, Inc. to create a new
independent company (the "Transaction") that will be one of the world's
preeminent, diversified global money management organizations with
approximately $1 trillion in assets under management. Based in New York,
BlackRock, Inc. currently manages assets for institutional and individual
investors worldwide through a variety of equity, fixed income, cash management
and alternative investment products. The new company will operate under the
BlackRock name and be governed by a board of directors with a majority of
independent members. The new company will offer a full range of equity, fixed
income, cash management and alternative investment products with strong
representation in both retail and institutional channels, in the U.S. and in
non-U.S. markets. It will have over 4,500 employees in 18 countries and a major
presence in most key markets, including the United States, the United Kingdom,
Asia, Australia, the Middle East and Europe. Merrill Lynch will own no more
than 49.8% of the total issued and outstanding capital stock of the new company
and it will own no more than 45% of the new company's common stock, and The PNC
Financial Services Group, Inc. ("PNC"), which currently holds a majority
interest in BlackRock, will retain approximately 34% of the new company's
common stock. Each of Merrill Lynch and PNC has agreed that it will vote all of
its shares on all matters in accordance with the recommendation of BlackRock,
Inc.'s board. Completion of the transaction is subject to various regulatory
approvals, client consents, approval by BlackRock, Inc.'s shareholders and
customary conditions. The transaction has been approved by the boards of
directors of Merrill Lynch, BlackRock and PNC and is expected to close at the
end of the third quarter of 2006. Following the completion of the Transaction,
each of the Advisors will continue to provide investment management and
sub-advisory services to the Trust, as the case may be. The terms of the
successor advisory and sub-advisory agreements pursuant to which the Advisors
will continue to provide investment management or sub-advisory services to the
Trust following the Transaction will be substantially identical to the
respective predecessor agreements that were effective prior to the Transaction.
The initial and successor advisory and sub-advisory agreements were approved by
the Trust's board of trustees and will be approved by the sole initial
shareholder of the Trust prior to the initial public offering of the Trust.
Portfolio Managers. The Trust is managed by the BlackRock Global
Resources Team, which will be led by Denis J. Walsh III, CFA, Managing Director
and Daniel Rice III, Senior Vice President. Mr. Rice and Mr. Walsh joined
BlackRock following a merger with State Street Research & Management ("SSRM")
in 2005. Prior to joining BlackRock, Mr. Rice had been a Senior Vice President
and a portfolio manager of the State Street Research Global Resources Fund
since its inception in March 1990. He was employed by SSRM beginning in 1984.
Prior to joining BlackRock, Mr. Walsh was a Managing Director and was an energy
analyst for the State Street Research Global Resources Fund beginning in 1999.
He was also a member of the portfolio management team for the Large Cap Analyst
Fund and has worked as an investment professional in equity research since
1979.
Investment Process
The Advisors will employ their unique investment process in connection
with the Trust. Throughout this process, the portfolio managers will:
o Develop a macroeconomic view of the energy, natural resources and
basic materials industries. This includes understanding energy
fundamentals such as supply of and demand for inventories of oil,
natural gas, gold, base metals and industrial metals and energy,
natural resources and basic materials-related resources;
o Conduct a risk/reward analysis of the energy, natural resources and
basic materials sub-sectors;
o Determine what it believes to be the optimal portfolio position;
o Identify stocks with what it believes to be attractive
characteristics. These characteristics include a company's viability
as a long-term prospect, a debt versus cash flow ratio, the quality
of the company's management as well as how the company will likely be
affected by the fundamental outlook for the sector; and
o Continually monitor portfolio risk.
Investment Management Agreements
The Trust has agreed to pay BlackRock Advisors a management fee at an
annual rate equal to % of the average weekly value of the Trust's net assets.
BlackRock Advisors has agreed to waive receipt of a portion of its management
fee in the amount of % of the average weekly value of the Trust's net assets
attributable to common shares for the first five years of the Trust's
operations (through ), % for the year ending , % for the year ending
and % for the year ending . BlackRock Advisors will pay a sub-advisory
fee equal to of the management fee it actually receives to BlackRock
Capital Management for sub-advisory services. In addition, with the approval of
the board of trustees, including a majority of the independent trustees, a pro
rata portion of the salaries, bonuses, health insurance, retirement benefits
and similar employment costs for the time spent on Trust operations (other than
the provision of services required under the investment management agreement)
of all personnel employed by BlackRock Advisors who devote substantial time to
Trust operations may be reimbursed, at cost, to BlackRock Advisors by the
Trust. BlackRock Advisors currently anticipates that it may be reimbursed for
employees who provide pricing, secondary market support and compliance services
to the Trust, subject to the approval of the board of trustees, including a
majority of the independent trustees.
In addition to the management fee of BlackRock Advisors, the Trust
pays all other costs and expenses of its operations, including compensation of
its trustees (other than those affiliated with BlackRock Advisors), custodian,
transfer and dividend disbursing agent expenses, legal fees, rating agency
fees, listing fees and expenses, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
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 daily on each day that the New
York Stock Exchange is open for business as of the close of the regular trading
session on the New York Stock Exchange. The Trust calculates net asset value
per common share by subtracting liabilities (including accrued expenses or
dividends) from the total assets of the Trust (the value of the securities plus
cash or other assets, including interest accrued but not yet received) and
dividing the result by the total number of outstanding common shares of the
Trust.
The Trust values its investments primarily by using market quotations.
Short-term debt investments having a remaining maturity of 60 days or less when
purchased and debt investments originally purchased with maturities in excess
of 60 days but which currently have maturities of 60 days or less may be valued
at cost adjusted for amortization of premiums and accretion of discounts. Any
investments and other assets for which such current market quotations are not
readily available are valued at fair value ("Fair Valued Assets") as determined
in good faith under procedures established by, and under the general
supervision and responsibility of, the Trust's board of trustees. The
investment advisor and/or sub-advisor will submit its recommendations regarding
the valuation and/or valuation methodologies for Fair Valued Assets to a
valuation committee. The valuation committee may accept, modify or reject any
recommendations. The pricing of all Fair Valued Assets shall be subsequently
reported to and ratified by the Trust's board of trustees.
Foreign securities, including MLPs and equity securities from emerging
markets, are valued by translating available quotes into U.S. dollar
equivalents, if the quotes are considered reliable, and are otherwise valued at
fair value. Over-the-counter options are priced on the basis of dealer quotes.
Other types of derivatives for which quotes may not be available are valued at
fair value.
When determining the price for a Fair Valued Asset, the investment
advisor and/or sub-advisor shall seek to determine the price that the Trust
might reasonably expect to receive from the current sale of that asset in an
arms-length transaction. Fair value determinations shall be based upon all
available factors that BlackRock Advisors deems relevant.
DISTRIBUTIONS
Commencing with the Trust's initial dividend, the Trust intends to
make regular monthly cash distributions of all or a portion of its investment
company taxable income to common shareholders. We expect to declare the initial
monthly dividend on the Trust's common shares within 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. The Trust will
distribute to common shareholders at least annually all or substantially all
its investment company taxable income. The Trust intends to pay any capital
gains distributions annually.
Various factors will affect the level of the Trust's income, such as
its asset mix, 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 income earned in a particular period. The
undistributed 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 income actually earned by the Trust
during that period. Undistributed income will add to the Trust's net asset
value and, correspondingly, distributions from undistributed 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 the registered owner of common shares elects to receive cash by
contacting the Plan Agent (as defined below), all dividends declared for your
common shares of the Trust will be automatically reinvested by The Bank of New
York (the "Plan Agent"), agent for shareholders in administering the Trust's
Dividend Reinvestment Plan (the "Plan"), in additional common shares of the
Trust. If a registered owner of common shares elects 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 The Bank of New York, 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 The Bank of New York, 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. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that cash
in additional common shares of the Trust for you. If you wish for all dividends
declared on your common shares of the Trust to be automatically reinvested
pursuant to the Plan, please contact your broker.
The Plan Agent will open an account for each common shareholder under
the Plan in the same name in which such shareholder's common shares are
registered. Whenever the Trust declares a dividend or other 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 market price per common
share plus estimated brokerage commissions is greater than the net asset value
per common share (such condition being referred to herein as "market premium"),
the Plan Agent will invest the dividend amount in newly issued common shares,
including fractions, 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 payment date; provided that, if the net asset value per common
share is less than 95% of the market price per common share on the payment
date, the dollar amount of the dividend will be divided by 95% of the market
price per common share on the payment date.
If, on the payment date for any dividend, the net asset value per
common share is greater than the market value per common share plus estimated
brokerage commissions (such condition being referred to herein as "market
discount"), 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
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 will typically be approximately 10 days
after the payment date for such dividend. If, before the Plan Agent has
completed its open-market purchases, the market price of a 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, 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; provided that, if the
net asset value per common share is less than 95% of the market price per
common share on the payment date, the dollar amount of the dividend will be
divided by 95% of the market price per common share on the payment 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." Participants
that request a sale of shares through the Plan Agent are subject to a $2.50
sales fee and a brokerage commission of $.15 per share sold.
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 The Bank of New York, Dividend Reinvestment Department, P.O. Box 1958,
Newark, New Jersey 07101-9774; telephone: 1-866-216-0242.
DESCRIPTION OF SHARES
Common Shares
The Trust is a statutory trust organized under the laws of Delaware
pursuant to an Agreement and Declaration of Trust dated as of July 19, 2006.
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. 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 common shares it may issue under the Trust's 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 provides 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 anticipates that its common shares will be listed on the New
York Stock Exchange under the symbol " ." Net asset value will be reduced
immediately following the offering of common shares by the amount of the sales
load and the amount of the offering expenses paid by the Trust. See "Summary of
Trust Expenses."
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 through a broker on the New York
Stock Exchange 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
equity securities 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 on its portfolio securities, 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
the Statement of Additional Information under "Repurchase of Common Shares."
ANTI-TAKEOVER PROVISIONS IN THE
AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Trust or to change the composition of its board of trustees.
This could have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control over the Trust. 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 for cause only, and
not without cause, and only 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 requires
the favorable vote of a majority of the Trust's board of trustees followed by
the favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Trust, voting separately as a class or
series, to approve, adopt or authorize certain transactions with 5% or greater
holders of a class or series of shares and their associates, unless the
transaction has been approved by at least 80% of the trustees, in which case "a
majority of the outstanding voting securities" (as defined in the Investment
Company Act) of the Trust shall be required. For purposes of these provisions,
a 5% or greater holder of a class or series of shares (a "Principal
Shareholder") refers to any person who, whether directly or indirectly and
whether alone or together with its affiliates and associates, beneficially owns
5% or more of the outstanding shares of all outstanding classes or series of
shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval
requirements are: the merger or consolidation of the Trust or any subsidiary of
the Trust with or into any Principal Shareholder; the issuance of any
securities of the Trust to any Principal Shareholder for cash, except pursuant
to any automatic dividend reinvestment plan; the sale, lease or exchange of all
or any substantial part of the assets of the Trust to any Principal
Shareholder, except assets having an aggregate fair market value of less than
2% of the total assets of the Trust, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period; or the sale, lease or exchange to
the Trust or any subsidiary of the Trust, in exchange for securities of the
Trust, of any assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than 2% of the total assets of the Trust,
aggregating for purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period.
To convert the Trust to an open-end investment company, the Trust's
Agreement and Declaration of Trust 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, we anticipate conversion of the Trust to an open-end
investment company might not occur until 90 days after the shareholders'
meeting at which such conversion was approved and would also require at least
10 days' prior notice to all shareholders. Following any such conversion, it is
possible that certain of the Trust's investment policies and strategies would
have to be modified to assure sufficient portfolio liquidity. In the event of
conversion, the common shares would cease to be listed on the New York Stock
Exchange or other national securities exchanges or market systems. Shareholders
of an open-end investment company may require the company to redeem their
shares at any time, except in certain circumstances as authorized by or under
the Investment Company Act, at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a redemption. The Trust
expects to pay all such redemption requests in cash, but reserves the right to
pay redemption requests in a combination of cash and securities. If such
partial payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Trust were converted to an open-end
fund, it is likely that new shares would be sold at net asset value plus a
sales load. The board of trustees believes, however, that the closed-end
structure is desirable in light of the Trust's investment objectives and
policies. Therefore, you should assume that it is not likely that the board of
trustees would vote to convert the Trust to an open-end fund.
For the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, each class
and series of the Trust shall vote together as a single class, except to the
extent required by the Investment Company Act or the Trust's Agreement and
Declaration of Trust, with respect to any class or series of shares. If a
separate class vote is required, the applicable proportion of shares of the
class or series, voting as a separate class or series, also will be required.
The Agreement and Declaration of Trust also provides that the Trust
may be liquidated upon the approval of 80% of the trustees.
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. For a more complete explanation, see the full text of
these provisions in the Trust's Agreement and Declaration of Trust, which is on
file with the Securities and Exchange Commission.
CLOSED-END TRUST STRUCTURE
The Trust is a non-diversified, closed-end management investment
company with no operating history (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
a mutual 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 COMMON SHARES
Shares of closed-end investment companies often trade at a discount to
their net asset value, and the Trust's common shares may also trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Trust's common
shares will be determined by such factors as relative demand for and supply of
such 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 that 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 capital 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, as amended, the Investment Company Act and
the principal stock exchange on which the common shares are traded.
TAX MATTERS
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Trust and its shareholders. The
discussion reflects applicable tax laws of the United States as of the date of
this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Trust and its shareholders (including shareholders subject to
special treatment under U.S. federal income tax law). The discussion set forth
herein does not constitute tax advice. Investors are urged to consult their own
tax advisors to determine the tax consequences to them of investing in the
Trust.
The Trust intends to elect to be treated and to qualify each year for
special tax treatment afforded a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). As long as the
Trust meets certain requirements that govern the Trust's source of income,
diversification of assets and distribution of earnings to shareholders, the
Trust will not be subject to U.S. federal income tax on income distributed in a
timely manner to its shareholders. If, however, the Trust fails to meet these
requirements, resulting in a disqualification of the Fund as a regulated
investment company, then the Fund will be subject to the federal income tax on
its net income at regular corporate rates (without a deduction for
distributions to shareholders). When distributed, such income would then be
taxable to shareholders as an ordinary dividend.
Distributions paid to you by the Trust from its investment company
taxable income or from an excess of net short-term capital gain over net
long-term capital losses (together referred to hereinafter as "ordinary income
dividends") are generally taxable to you as ordinary income to the extent of
the Trust's earnings and profits. Such distributions (if designated by the
Trust) may qualify (provided holding period and other requirements are met) (i)
for the dividends received deduction in the case of corporate shareholders to
the extent that the Trust's income consists of dividend income from U.S.
corporations, and (ii) in the case of individual shareholders (effective for
taxable years beginning on or before December 31, 2010), as qualified dividend
income eligible to be taxed, in general, at a maximum rate of 15% (5% for
individuals in lower tax brackets) to the extent that the Trust receives
qualified dividend income. If the Trust's qualified dividend income is less
than 95 percent of its gross income, a shareholder of the Trust may include as
qualified dividend income only that portion of the dividends that may be and
are so designated by the Trust as qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and
certain foreign corporations (e.g., generally, foreign corporations
incorporated in a possession of the United States or in certain countries with
a qualified comprehensive tax treaty with the United States, or the stock of
which is readily tradable on an established securities market in the United
States, provided that the dividend is paid in respect of such publicly traded
stock). Dividend income from passive foreign investment companies and, in
general, dividend income from real estate investment trusts ("REITs") is not
eligible for the reduced rate for qualified dividend income and is taxed as
ordinary income. Distributions made to you from an excess of net long-term
capital gain over net short-term capital losses ("capital gain dividends"),
including capital gain dividends credited to you but retained by the Trust, are
taxable to you as long-term capital gain if they have been properly designated
by the Trust, regardless of the length of time you have owned Trust shares. The
maximum tax rate on capital gain dividends received by individuals generally is
15% (5% for individuals in lower brackets) for such gain recognized on or
before December 31, 2010. Distributions, if any, in excess of the Trust's
earnings and profits will first reduce the adjusted tax basis of your shares
and, after such adjusted tax basis is reduced to zero, will constitute capital
gain to you (assuming the shares are held as a capital asset). Generally, not
later than 60 days after the close of its taxable year, the Trust will provide
you with a written notice designating the amount of any qualified dividend
income or capital gain dividends and other distributions.
The sale or other disposition of shares of the Trust will generally
result in capital gain or loss to you if you hold the Trust shares as a capital
asset, and will be long-term capital gain or loss if the shares have been held
for more than one year at the time of sale. Any loss upon the sale or exchange
of Trust shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received (including
amounts credited as an undistributed capital gain dividend) by you. For
purposes of determining whether Trust shares have been held for six months or
less, the holding period is suspended for any periods during which your risk of
loss is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. A loss realized on a sale or exchange of shares of the Trust will be
disallowed if other substantially identical Trust shares are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date on which the
shares are sold. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Present law taxes both long-term and
short-term capital gain of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, short-term capital gain will currently be
taxed at a maximum rate of 35% applicable to ordinary income while long-term
capital gain generally will be taxed at a maximum rate of 15% (5% for
individuals in lower brackets) for such gain recognized with respect to taxable
years beginning on or before December 31, 2010.
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional shares of the Trust. If the Trust pays
you a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Trust and received by you on December 31 of the year in which the dividend
was declared.
An investor should be aware that if Trust shares are purchased shortly
before the record date for any taxable distribution (including a capital gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce the
trading value of such Trust shares, in effect resulting in a taxable return of
some of the purchase price.
The Trust is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Trust's shares who do not furnish the Trust with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
Certain dividends designated by the Trust as "interest-related
dividends" that are paid to most foreign investors (generally those that would
qualify for the portfolio interest exemptions of Section 871(h) or Section
881(c) of the Code) will be exempt from U.S. withholding tax. Interest-related
dividends are those dividends derived from certain interest income (including
bank deposit interest and short term original issue discount that is currently
exempt from the withholding tax) earned by the Trust that would not be subject
to U.S. tax if earned by a foreign person directly. Further, certain dividends
designated by the Trust as "short-term capital gain dividends" that are paid to
certain foreign investors (generally those not present in the United States for
183 days or more) will be exempt from U.S. withholding tax. In general,
short-term capital gain dividends are those that are derived from the excess of
the Trust's short-term capital gains over its net long-term capital losses.
These provisions generally apply, with certain exceptions, to taxable years
beginning on or before December 31, 2008. Prospective investors are urged to
consult their tax advisors regarding the specific tax consequences to them as
related to these provisions.
The foregoing is a general and abbreviated summary of the provisions
of the Code, Treasury regulations and judicial and administrative authorities
currently in effect as they directly govern the taxation of the Trust and its
shareholders. These provisions are subject to change or differing
interpretations by Congress, the courts or the Internal Revenue Service, and
any such change or interpretation may be retroactive. A more detailed
discussion of the tax rules applicable to the Trust and its shareholders can be
found in the Statement of Additional Information that is incorporated by
reference into this prospectus. Shareholders are urged to consult their tax
advisors regarding specific questions as to U.S. federal, state, local and
foreign income and other taxes.
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
, 2006, each Underwriter named below, for which
is acting as representative, has severally agreed to purchase, and
the Trust has agreed to sell to such Underwriter, the number of common shares
set forth opposite the name of such Underwriter.
Number of
Common
Underwriter Shares
----------- ----------
The purchase agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to
the approval of certain legal matters by counsel and certain other conditions.
The Underwriters are obligated to purchase all the common shares sold under the
purchase agreement if any of the common shares are purchased. In the purchase
agreement, the Trust, the Advisor and the Sub-Advisor have agreed to indemnify
the Underwriters against certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended, or to contribute payments the
Underwriters may be required to make for any of those liabilities.
Commissions and Discounts
The Underwriters propose to offer initially 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 $ per share. The
sales load the Trust will pay of $ per share is equal to 4.5% of the
initial offering price. The Underwriters may allow, and the dealers may reallow,
a discount not in excess of $ per share on sales to other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed. Investors must pay for any common shares purchased on or before
, 2006.
The following table shows the public offering price, sales load,
estimated offering expenses and proceeds, after expenses, to the Trust. The
information assumes either no exercise or full exercise by the Underwriters of
their overallotment option.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price........................... $
Sales load...................................... $
Estimated offering expenses..................... $
Proceeds, after expenses, to the Trust.......... $
The expenses of the offering are estimated at $ and are payable by
the Trust. The Trust will pay all of its organizational and offering costs
(other than sales load) up to and including $.03 per common share. This amount
includes the $ per common share partial reimbursement of expenses to the
Underwriters and may also include a reimbursement of BlackRock Advisors'
expenses incurred in connection with this offering. The amount paid by the
Trust as the partial reimbursement to the Underwriters will not exceed % of
the total price to the public of the common shares sold in this offering.
BlackRock Advisors has agreed to pay all of the Trust's offering costs (other
than sales load) to the extent offering expenses (other than sales load) and
organizational expenses exceed $ per common share.
Overallotment Option
The Trust has granted the Underwriters an option to purchase up to
additional common shares at the public offering price, less the sales
load, within 45 days from the date of this prospectus solely to cover any
overallotments. If the Underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that Underwriter's
initial amount reflected in the above table.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common shares is complete, the rules of
the Securities and Exchange Commission may limit Underwriters and selling group
members from bidding for and purchasing our common shares. However, the
representatives may engage in transactions that stabilize the price of our
common shares, such as bids or purchases to peg, fix or maintain that price.
If the Underwriters create a short position in our common shares in
connection with the offering, i.e., if they sell more common shares than are
listed on the cover of this prospectus, the representatives may reduce that
short position by purchasing common shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the overallotment option described above. Purchases of our common
shares to stabilize its price or to reduce a short position may cause the price
of our common shares to be higher than it might be in the absence of such
purchases. The Underwriters may also impose a penalty bid, whereby selling
concessions allowed to syndicate members or other brokers in respect of the
common shares sold in this offering for their account may be reclaimed by the
syndicate if such common shares are repurchased by the syndicate in stabilizing
or covering transactions.
Neither we nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common shares. In addition,
neither we nor any of the Underwriters make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
The Trust has agreed not to offer or sell any additional common shares
for a period of 180 days after the date of the purchase agreement without the
prior written consent of the Underwriters, except for the sale of the common
shares to the Underwriters pursuant to the purchase agreement and certain
transactions related to the Trust's Dividend Reinvestment Plan.
The Trust anticipates that the Underwriters may from time to time act
as brokers or dealers in executing the Trust's portfolio transactions after
they have ceased to be underwriters. The Underwriters are active underwriters
of, and dealers in, securities and act as market makers in number of such
securities, and therefore can be expected to engage in portfolio transactions
with the Trust.
The common shares will be sold to ensure that the New York Stock
Exchange's distribution standards (i.e., round lots, public shares and
aggregate market value) will be met.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Trust will be The Bank of New York.
The Custodian will perform custodial, fund accounting and portfolio accounting
services. The Bank of New York will also 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 .
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
USE OF PROCEEDS............................................................B-1
INVESTMENT OBJECTIVE AND POLICIES..........................................B-1
INVESTMENT POLICIES AND TECHNIQUES.........................................B-2
OTHER INVESTMENT POLICIES AND TECHNIQUES...................................B-8
MANAGEMENT OF THE TRUST....................................................B-10
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................B-19
DESCRIPTION OF SHARES......................................................B-20
REPURCHASE OF COMMON SHARES................................................B-22
TAX MATTERS................................................................B-23
TAXATION OF THE TRUST......................................................B-23
THE TRUST'S INVESTMENTS....................................................B-24
TAXATION OF SHAREHOLDERS...................................................B-26
EXPERTS....................................................................B-28
ADDITIONAL INFORMATION.....................................................B-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................F-1
FINANCIAL STATEMENTS.......................................................F-2
APPENDIX A GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC TRANSACTIONS....A-1
APPENDIX B PROXY VOTING POLICY..............................................1
===============================================================================
Shares
BlackRock Real Asset Trust
Common Shares
-------------
PROSPECTUS
-------------
, 2006
===============================================================================
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 is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject to Completion
Preliminary Statement of Additional Information
Dated July 19, 2006
BLACKROCK REAL ASSET TRUST
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Real Asset Trust (the "Trust") is a newly organized,
non-diversified, closed-end management investment company with no operating
history. 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 , 2006. This Statement of Additional
Information, which is not a prospectus, 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
(800) 882-0052. 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.
This Statement of Additional Information is dated , 2006.
TABLE OF CONTENTS
Page
----
USE OF PROCEEDS..........................................................B-1
INVESTMENT OBJECTIVE AND POLICIES........................................B-1
INVESTMENT POLICIES AND TECHNIQUES.......................................B-2
OTHER INVESTMENT POLICIES AND TECHNIQUES.................................B-8
MANAGEMENT OF THE TRUST.................................................B-10
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................B-19
DESCRIPTION OF SHARES...................................................B-20
REPURCHASE OF COMMON SHARES.............................................B-22
TAX MATTERS.............................................................B-23
TAXATION OF THE TRUST...................................................B-23
THE TRUST'S INVESTMENTS.................................................B-24
TAXATION OF SHAREHOLDERS................................................B-26
EXPERTS.................................................................B-28
ADDITIONAL INFORMATION..................................................B-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................F-1
FINANCIAL STATEMENTS.....................................................F-2
APPENDIX A GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC TRANSACTIONS..A-1
APPENDIX B PROXY VOTING POLICY............................................1
USE OF PROCEEDS
Pending investment in securities that meet the Trust's investment
objective and policies, the net proceeds of this offering will be invested in
short-term debt securities of the type described under "Investment Policies and
Techniques--Short-Term Debt Securities." We currently anticipate that the Trust
will be able to invest primarily in securities that meet the Trust's investment
objective and policies within approximately three months after the completion
of this offering.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide total return through a
combination of current income and capital appreciation. The Trust seeks to
achieve this objective by investing primarily in equity securities of companies
engaged in the energy, natural resources and basic materials businesses and
equity derivatives with exposure to companies in the energy, natural resources
and basic materials industries.
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 any preferred shares, if any, voting together as a single
class, and of the holders of a majority of the outstanding preferred shares, if
any, voting as a separate class:
(1) invest 25% or more of the value of its total assets in any single
industry (except that the Trust will invest at least 25% of its total
assets in the energy, natural resources and basic materials industries);
(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 debt securities 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, except that the Trust may invest in
securities of companies that deal in real estate or are engaged in the
real estate business, including REITs and real estate operating companies,
and instruments secured by real estate or interests therein and the Trust
may acquire, hold and sell real estate acquired through default,
liquidation, or other distributions of an interest in real estate as a
result of the Trust's ownership of such other assets; 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" shares 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.
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
B-1
25% of the value of the Trust's total assets and the Trust's aggregate
short sales of a particular class of securities of an issuer 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. 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 outstanding voting stock of the acquired investment company at
the time such shares are purchased. As a shareholder in any investment
company, the Trust will bear its ratable share of that investment
company's expenses, and will remain subject to payment of the Trust's
advisory fees and other expenses with respect to assets so invested.
Holders of common shares will therefore be subject to duplicative expenses
to the extent the Trust invests in other investment companies. In
addition, the securities of other investment companies may be leveraged
and will therefore be subject to the risks of 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;
(3) under normal market conditions, invest less than 80% of its total
assets in equity securities of companies engaged in the energy, natural
resources and basic materials industries or equity derivatives with
exposure to companies in the energy and natural resources and basic
materials industries; the Trust will provide shareholders with notice at
least 60 days prior to changing this non-fundamental policy of the Trust
unless such change was previously approved by shareholders; or
(4) issue senior securities or borrow money for investment purposes
(other than in connection with hedging transactions, short sales, when
issued or forward commitment transactions and similar investment
strategies).
In addition, to comply with federal income tax requirements for qualification
as a regulated investment company, the Trust's investments will be limited in a
manner such that at the close of each quarter of each taxable year, (a) no more
than 25% of the value of the Trust's total assets are invested (i) in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of a single issuer or two or more issuers
controlled by the Trust and engaged in the same, similar or related trades or
businesses or (ii) in the securities of one or more "qualified publicly traded
partnerships" (as defined under Section 851(h) of the Code) and (b) with regard
to at least 50% of the Trust's total assets, no more than 5% of its total
assets are invested in the securities (other than U.S. Government securities or
securities of other regulated investment companies) of a single issuer and no
investment represents more than 10% of the outstanding voting securities of
such issuer. These tax-related limitations may be changed by the trustees to
the extent appropriate in light of changes to applicable tax requirements.
The percentage limitations applicable to the Trust's portfolio
described in the prospectus and this Statement of Additional Information apply
only at the time of investment, and the Trust will not be required to sell
securities due to subsequent changes in the value of securities it owns.
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.
Short-Term Debt Securities
For temporary defensive purposes or to keep cash on hand, the Trust
may invest up to 100% of its total assets in cash equivalents and short-term
debt securities. Short-term debt investments are defined to include, without
limitation, the following:
B-2
(1) U.S. Government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities. U.S. Government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
and Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and Tennessee
Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage
Association, whose securities are supported by the discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it always will do so
since it is not so obligated by law. The U.S. Government, its agencies and
instrumentalities do not guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Certificates of deposit purchased by the Trust may
not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Trust purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Trust during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Trust to invest temporarily
available cash. The Trust may enter into repurchase agreements only with
respect to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Trust may invest. Repurchase agreements may be considered loans
to the seller, collateralized by the underlying securities. The risk to
the Trust is limited to the ability of the seller to pay the agreed-upon
sum on the repurchase date; in the event of default, the repurchase
agreement provides that the Trust is entitled to sell the underlying
collateral. If the value of the collateral declines after the agreement is
entered into, and if the seller defaults under a repurchase agreement when
the value of the underlying collateral is less than the repurchase price,
the Trust could incur a loss of both principal and interest. The Advisors
monitor the value of the collateral at the time the action is entered into
and on a daily basis during the term of the repurchase agreement. The
Advisors do 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. The Advisors will consider the financial condition of
the corporation (e.g., earning power, cash flow and other liquidity
ratios) and will continually 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.
Equity Securities
While the Trust will primarily invest in common stocks, it may also
invest in other equity securities including preferred stocks, convertible
securities, warrants, depository receipts and equity interests in Canadian
Royalty Trusts.
B-3
Preferred Stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule, the market value
of preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and
other obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in a
more senior debt security with similar stated yield characteristics. Unlike
interest payments on debt securities, preferred stock dividends are payable
only if declared by the issuer's board of directors. Preferred stock also may
be subject to optional or mandatory redemption provisions.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock or other equity security of the same or
a different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible income
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower yields than comparable nonconvertible securities. The value
of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to comparable nonconvertible securities.
Convertible securities may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument.
Warrants. Warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares
of the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of warrants involves the risk that the Trust could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not
exercised prior to the warrants' expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the right warrant added to
the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
Depository Receipts. The Trust may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company and
evidence ownership of underlying securities issued by a non-U.S. corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts, are
receipts issued in Europe, typically by non-U.S. banks and trust companies,
that evidence ownership of either non-U.S. or domestic underlying securities.
GDRs are depository receipts structured like global debt issues to facilitate
trading on an international basis. Unsponsored ADR, EDR and GDR programs are
organized independently and without the cooperation of the issuer of the
underlying securities. As a result, available information concerning the issuer
may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of
unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments
were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present
additional investment considerations of non-U.S. securities.
Canadian Royalty Trusts. A Canadian royalty trust is a trust whose
securities are listed on a Canadian stock exchange and which controls an
underlying company whose business is the acquisition, exploitation, production
and sale of oil and natural gas. These funds generally pay out to unitholders
the majority of the cash flow that they receive from the production and sale of
underlying oil and natural gas reserves. The amount of distributions paid on a
Canadian Royalty Trust's units will vary from time to time based on production
levels, commodity prices, royalty rates and certain expenses, deductions and
costs, as well as on the distribution payout ratio policy adopted. As a result
of distributing the bulk of their cash flow to unitholders, the ability of a
Canadian Royalty Trust to finance internal growth through exploration is
limited. Therefore, Canadian Royalty Trusts typically grow through acquisition
of additional oil and gas properties or producing companies with proven
reserves of oil and gas, funded through the issuance of additional equity or,
where the trust is able, additional debt.
B-4
Master Limited Partnership Interests
MLP common units represent a limited partnership interest in the MLP.
Common units are listed and traded on U.S. securities exchanges or
over-the-counter, with their value fluctuating predominantly based on
prevailing market conditions and the success of the MLP. We intend to purchase
common units in market transactions as well as directly from the MLP or other
parties. Unlike owners of common stock of a corporation, owners of common units
have limited voting rights and have no ability annually to elect directors.
MLPs generally distribute all available cash flow (cash flow from operations
less maintenance capital expenditures) in the form of quarterly distributions.
Common units along with general partner units, have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common units have preference over subordinated units, but
not debt or preferred units, to the remaining assets of the MLP.
I-Shares represent an ownership interest issued by an affiliated party
of an MLP. The MLP affiliate uses the proceeds from the sale of I-Shares to
purchase limited partnership interests in the MLP in the form of i-units.
I-units have similar features as MLP common units in terms of voting rights,
liquidation preference and distributions. However, rather than receiving cash,
the MLP affiliate receives additional i-units in an amount equal to the cash
distributions received by MLP common units. Similarly, holders of I-Shares will
receive additional I-Shares, in the same proportion as the MLP affiliates
receipt of i-units, rather than cash distributions. I-Shares themselves have
limited voting rights which are similar to those applicable to MLP common
units. The MLP affiliate issuing the I-Shares is structured as a corporation
for federal income tax purposes. I-Shares are traded on the New York Stock
Exchange (the "NYSE").
Non-Investment Grade Securities
The Trust may invest up to 10% of its total assets in securities rated
below investment grade such as those rated Ba or below by Moody's Investors
Service, Inc. ("Moody's") or BB or below by Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc. ("S&P") or Fitch Ratings ("Fitch")
or securities comparably rated by other rating agencies or in unrated
securities determined by the Advisors to be of comparable quality. Securities
rated Ba and below by Moody's and Fitch are judged to have speculative
elements; their future cannot be considered as well assured and often the
protection of interest and principal payments may be very moderate. Securities
rated BB by S&P are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability
to default than other speculative grade debt, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
that could lead to inadequate capacity to meet timely interest and principal
payments. Lower grade securities, though high yielding, are characterized by
high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated securities. The retail secondary market for lower grade securities may be
less liquid than that of higher rated securities; adverse conditions could make
it difficult at times for the Trust to sell certain securities or could result
in lower prices than those used in calculating the Trust's net asset value. The
prices of debt securities generally are inversely related to interest rate
changes; however, the price volatility caused by fluctuating interest rates of
securities also is inversely related to the coupons of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity
because of their higher coupon. This higher coupon is what the investor
receives in return for bearing greater credit risk. The higher credit risk
associated with below investment grade securities potentially can have a
greater effect on the value of such securities than may be the case with higher
quality issues of comparable maturity. Lower grade securities may be
particularly susceptible to economic downturns. It is likely that an economic
recession could severely disrupt the market for such securities and may have an
adverse impact on the value of such securities. In addition, it is likely that
any such economic downturn could adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon and increase the
incidence of default for such securities. The ratings of Moody's, S&P and other
rating agencies represent their opinions as to the quality of the obligations
that they undertake to rate. Ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Although these ratings may be an initial criterion for selection of portfolio
investments, the Advisors also will independently evaluate these securities and
the ability for the issuers of such securities to pay interest and principal.
To the extent that the Trust invests in lower grade securities that have not
been rated by a rating agency, the Trust's ability to achieve its investment
objectives will be more dependent on the Advisors' credit analysis than would
be the case when the Trust invests in rated securities.
B-5
Securities Lending and Delayed Settlement Transactions
The Trust may also lend the securities it owns to others, which allows
the Trust the opportunity to earn additional income. Although the Trust will
require the borrower of the securities to post collateral for the loan in
accordance with market practice and the terms of the loan will require that the
Trust be able to reacquire the loaned securities if certain events occur, the
Trust is still subject to the risk that the borrower of the securities may
default, which could result in the Trust losing money, which would result in a
decline in the Trust's net asset value. The Trust may also purchase securities
for delayed settlement. This means that the Trust is generally obligated to
purchase the securities at a future date for a set purchase price, regardless
of whether the value of the securities is more or less than the purchase price
at the time of settlement.
Strategic Transactions and Risk Management
Consistent with its investment objectives and policies set forth
herein, the Trust may also enter into certain risk management transactions. In
particular, the Trust may purchase and sell futures contracts, exchange listed
and over-the-counter put and call options on securities, equity and other
indices and futures contracts, forward foreign currency contracts, and may
enter into various interest rate transactions (collectively, "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect
against possible changes in the market value of the Trust's portfolio resulting
from fluctuations in the securities markets and changes in interest rates, to
protect the Trust's unrealized gains in the value of its portfolio securities,
to facilitate the sale of such securities for investment purposes and to
establish a position in the securities markets as a temporary substitute for
purchasing particular securities. Any or all of these Strategic Transactions
may be used at any time. There is no particular strategy that requires use of
one technique rather than another. Use of any Strategic Transaction is a
function of market conditions. The ability of the Trust to manage them
successfully will depend on the Advisors' ability to predict pertinent market
movements as well as sufficient correlation among the instruments, which cannot
be assured. The Strategic Transactions that the Trust may use are described
below. Although the Trust recognizes it is not likely that it will use certain
of these strategies in light of its investment policies, it nevertheless
describes them here because the Trust may seek to use these strategies in
certain circumstances.
Futures Contracts and Options on Futures Contracts. In connection with
its Strategic Transactions and other risk management strategies, the Trust may
also enter into contracts for the purchase or sale for future delivery
("futures contracts") of securities, aggregates of securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will engage in such transactions only for bona
fide risk management and other portfolio management purposes.
Forward Foreign Currency Contracts. The Trust may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount of
U.S. dollars or another foreign currency. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days (term) from the date of the forward currency
contract agreed upon by the parties, at a price set at the time the forward
currency contract is entered into. Forward currency contracts are traded
directly between currency traders (usually large commercial banks) and their
customers. The Trust may purchase a forward currency contract to lock in the
U.S. dollar price of a security denominated in a foreign currency that the
Trust intends to acquire. The Trust may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security or a dividend or interest payment denominated in a foreign currency.
The Trust may also use forward currency contracts to shift the Trust's exposure
to foreign currency exchange rate changes from one currency to another. For
example, if the Trust owns securities denominated in a foreign currency and the
Advisors believe that currency will decline relative to another currency, the
Trust might enter into a forward currency contract to sell the appropriate
amount of the first foreign currency with payment to be made in the second
currency. The Trust may also purchase forward currency contracts to enhance
income when the Advisors anticipate that the foreign currency will appreciate
in value but securities denominated in that currency do not present attractive
investment opportunities. The Trust may also use forward currency contracts to
offset against a decline in the value of existing investments denominated in a
foreign currency. Such a transaction would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Trust could also enter into a forward currency
contract to sell another currency expected to perform similarly to the currency
in which the Trust's existing investments are denominated. This type of
transaction could offer advantages in terms of cost, yield or efficiency, but
may not offset currency exposure as effectively as a simple forward currency
B-6
transaction to sell U.S. dollars. This type of transaction may result in losses
if the currency sold does not perform similarly to the currency in which the
Trust's existing investments are denominated. The Trust may also use forward
currency contracts in one currency or a basket of currencies to attempt to
offset against fluctuations in the value of securities denominated in a
different currency if the Advisors anticipate that there will be a correlation
between the two currencies. The cost to the Trust of engaging in forward
currency contracts varies with factors such as the currency involved, the
length of the contract period and the market conditions then prevailing.
Because forward currency contracts are usually entered into on a principal
basis, no fees or commissions are involved. When the Trust enters into a
forward currency contract, it relies on the counterparty to make or take
delivery of the underlying currency at the maturity of the contract. Failure by
the counterparty to do so would result in the loss of some or all of any
expected benefit of the transaction. Secondary markets generally do not exist
for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counterparty. Thus, there can be no assurance that the Trust
will in fact be able to close out a forward currency contract at a favorable
price prior to maturity. In addition, in the event of insolvency of the
counterparty, the Trust might be unable to close out a forward currency
contract. In either event, the Trust would continue to be subject to market
risk with respect to the position, and would continue to be required to
maintain a position in securities denominated in the foreign currency or to
maintain cash or liquid assets in a segregated account. The precise matching of
forward currency contract amounts and the value of the securities involved
generally will not be possible because the value of such securities, measured
in the foreign currency, will change after the forward currency contract has
been established. Thus, the Trust might need to purchase or sell foreign
currencies in the spot (cash) market to the extent such foreign currencies are
not covered by forward currency contracts. The projection of short term
currency market movements is extremely difficult, and the successful execution
of a short term strategy is highly uncertain.
Calls on Securities, Indices and Futures Contracts. In order to
enhance income or reduce fluctuations on net asset value, the Trust currently
expects to sell or purchase call options ("calls") on securities and indices
based upon the prices of futures contracts and debt securities that are traded
on U.S. and non-U.S. securities exchanges and in the over-the-counter markets.
A call option gives the purchaser of the option the right to buy, and obligates
the seller to sell, the underlying security, futures contract or index at the
exercise price at any time or at a specified time during the option period. All
such calls sold by the Trust must be "covered" as long as the call is
outstanding (i.e., the Trust must own the instrument subject to the call or
other securities or assets acceptable for applicable segregation and coverage
requirements). A call sold by the Trust exposes the Trust during the term of
the option to possible loss of opportunity to realize appreciation in the
market price of the underlying security, index or futures contract and may
require the Trust to hold an instrument that 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 securities must also be
covered by assets or instruments acceptable under applicable segregation and
coverage requirements.
Puts on Securities, Indices and Futures Contracts. As with calls, the
Trust may purchase put options ("puts") that relate to securities (whether or
not it holds such securities in its portfolio), indices or futures contracts.
For the same purposes, the Trust may also sell puts on securities, 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 debt
securities having a value not less than the exercise price. The Trust will not
sell puts if, as a result, more than 50% of the Trust's total assets would be
required to cover its potential obligations under its Strategic Transactions
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.
Interest Rate Transactions. Among the Strategic Transactions in which
the Trust may enter into are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Trust expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a duration management technique or to
protect against any increase in the price of securities the Trust anticipates
purchasing at a later date. The Trust intends to use these transactions for
risk management purposes and not as a speculative investment. The Trust will
not sell interest rate caps or floors that it does not own. Interest rate swaps
involve the exchange by the Trust with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of
principal. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
B-7
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on whether it is
offsetting volatility with respect to its assets or liabilities, and will
usually enter into interest rate swaps on a net basis, i.e., the two payment
streams are netted out, with the Trust receiving or paying, as the case may be,
only the net amount of the two payments on the payment dates. Inasmuch as these
Strategic Transactions are entered into for good faith risk management
purposes. The Advisors and the Trust believe such obligations do not constitute
senior securities, and, accordingly will not treat them as being subject to its
borrowing restrictions. The Trust will accrue the net amount of the excess, if
any, of the Trust's obligations over its entitlements with respect to each
interest rate swap on a daily basis and will designate on its books and records
with a custodian an amount of cash or liquid high grade securities having an
aggregate net asset value at all times at least equal to the accrued excess.
The Trust will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. If there is a default by the other party to such a
transaction, the Trust will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they
are less liquid than swaps.
Credit Derivatives. The Trust may engage in credit derivative
transactions. There are two broad categories of credit derivatives: default
price risk derivatives and market spread derivatives. Default price risk
derivatives are linked to the price of reference securities or loans after a
default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index. There are three
basic transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If the Advisors are incorrect in
their forecasts of default risks, market spreads or other applicable factors,
the investment performance of the Trust would diminish compared with what it
would have been if these techniques were not used. Moreover, even if the
Advisors are correct in their forecasts, there is a risk that a credit
derivative position may correlate imperfectly with the price of the asset or
liability being purchased. There is no limit on the amount of credit derivative
transactions that may be entered into by the Trust. The Trust's risk of loss in
a credit derivative transaction varies with the form of the transaction. For
example, if the Trust purchases a default option on a security, and if no
default occurs with respect to the security, the Trust's loss is limited to the
premium it paid for the default option. In contrast, if there is a default by
the grantor of a default option, the Trust's loss will include both the premium
that it paid for the option and the decline in value of the underlying security
that the default option protects.
Appendix A contains further information about the characteristics,
risks and possible benefits of Strategic Transactions and the Trust's other
policies and limitations (which are not fundamental policies) relating to
investment in futures contracts and options. The principal risks relating to
the use of futures contracts and other Strategic Transactions are: (a) less
than perfect correlation between the prices of the instrument and the market
value of the securities in the Trust's portfolio; (b) possible lack of a liquid
secondary market for closing out a position in such instruments; (c) losses
resulting from interest rate or other market movements not anticipated by the
Advisors; and (d) the obligation to meet additional variation margin or other
payment requirements, all of which could result in the Trust being in a worse
position than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the ability of
the Trust to engage in Strategic Transactions. See "Tax Matters."
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
B-8
illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to acquire
the security or to offset against anticipated changes in interest rates and
prices. When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date,
but the Trust will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. If the Trust disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it might incur a gain or loss. At the time the Trust enters
into a transaction on a when-issued or forward commitment basis, it will
designate on its books and records cash or liquid debt securities equal to at
least the value of the when-issued or forward commitment securities. The value
of these assets will be monitored daily to ensure that their marked to market
value will at all times equal or exceed the corresponding obligations of the
Trust. There is always a risk that the securities may not be delivered and that
the Trust may incur a loss. Settlements in the ordinary course, which may take
substantially more than five business days, are not treated by the Trust as
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to
its portfolio investments subject to the investment restrictions set forth
herein. Reverse repurchase agreements involve the sale of securities held by
the Trust with an agreement by the Trust to repurchase the securities at an
agreed upon price, date and interest payment. At the time the Trust enters into
a reverse repurchase agreement, it may designate on its books and records
liquid instruments having a value not less than the repurchase price (including
accrued interest). If the Trust establishes and maintains such a segregated
account, a reverse repurchase agreement will not be considered a borrowing by
the Trust; however, under certain circumstances in which the Trust does not
establish and maintain such a segregated account, such reverse repurchase
agreement will be considered a borrowing for the purpose of the Trust's
limitation on borrowings. The use by the Trust of reverse repurchase agreements
involves many of the same risks of leverage since the proceeds derived from
such reverse repurchase agreements may be invested in additional securities.
Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may
decline below the price of the securities the Trust has sold but is obligated
to repurchase. Also, reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Trust in
connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Trust's
obligation to repurchase the securities, and the Trust's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Trust would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase
agreements. A repurchase agreement is a contractual agreement whereby the
seller of securities agrees to repurchase the same security at a specified
price on a future date agreed upon by the parties. The agreed-upon repurchase
price determines the yield during the Trust's holding period. Repurchase
agreements are considered to be loans collateralized by the underlying security
that is the subject of the repurchase contract. The Trust will only enter into
repurchase agreements with registered securities dealers or domestic banks
that, in the opinion of the Advisors, 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
B-9
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. The Advisors 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, the Advisors will demand
additional collateral from the issuer to increase the value of the collateral
to at least that of the repurchase price, including interest.
Lending of Securities
The Trust may lend its portfolio securities to banks or dealers which
meet the creditworthiness standards established by the board of trustees of the
Trust ("Qualified Institutions"). By lending its portfolio securities, the
Trust attempts to increase its income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that may
occur during the term of the loan will be for the account of the Trust. The
Trust may lend its portfolio securities so long as the terms and the structure
of such loans are not inconsistent with requirements of the Investment Company
Act, which currently require that (i) the borrower pledge and maintain with the
Trust collateral consisting of cash, a letter of credit issued by a domestic
U.S. bank, or securities issued or guaranteed by the U.S. government having a
value at all times not less than 100% of the value of the securities loaned;
(ii) the borrower add to such collateral whenever the price of the securities
loaned rises (i.e., the value of the loan is "marked to the market" on a daily
basis); (iii) the loan be made subject to termination by the Trust at any time;
and (iv) the Trust receive reasonable interest on the loan (which may include
the Trust's investing any cash collateral in interest bearing short term
investments), any distributions on the loaned securities and any increase in
their market value. The Trust will not lend portfolio securities if, as a
result, the aggregate of such loans exceeds 331/3% of the value of the Trust's
total assets (including such loans). Loan arrangements made by the Trust will
comply with all other applicable regulatory requirements, including the rules
of the New York Stock Exchange, which rules presently require the borrower,
after notice, to redeliver the securities within the normal settlement time of
five business days. All relevant facts and circumstances, including the
creditworthiness of the Qualified Institution, will be monitored by the
Advisors, and will be considered in making decisions with respect to lending
securities, subject to review by the Trust's board of trustees.
The Trust may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Trust's board of trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting
such a loan, the loan must be called and the securities voted.
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. On and after the effective date of
the agreement pursuant to which Merrill Lynch will contribute its investment
management business, Merrill Lynch Investment Managers, to BlackRock, Inc. to
create a new independent company (the "Transaction"), BlackRock Advisors will
continue to provide investment advisory services to the Trust pursuant to a
successor investment management agreement, the terms of which will be
substantially identical to the investment management agreement that was in
place prior to the Transaction.
The investment management agreement and the successor investment
management agreement also provide 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
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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, the successor investment
management agreement and certain scheduled waivers of the investment advisory
fees were approved by the Trust's board of trustees at an "in person" meeting
of the board of trustees held on , 2006 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). Each agreement
provides for the Trust to pay a management fee at an annual rate equal to %
of the average weekly value of the Trust's net assets. A related waiver letter
from BlackRock Advisors provided for temporary fee waiver of % of the average
weekly value of the Trust's net assets in each of the first years of the
Trust's operations (through January ) and for a declining amount for an
additional three years (through ). The other terms and provisions of the
investment management agreement and the successor investment management
agreement also are substantially identical. In approving each agreement the
board of trustees considered, among other things, the nature and quality of
services to be provided by BlackRock Advisors, the profitability to BlackRock
Advisors of its relationship with the Trust, economies of scale and comparative
fees and expense ratios.
The investment management agreement, the successor investment
management agreement, and the waivers of the management fees were approved by
the sole common shareholder of the Trust as of , 2006. The investment
management agreement and the successor investment management agreement will
each 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 securities of the Trust at the time
outstanding and entitled to vote (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 and the successor investment management
agreement may each be terminated as a whole at any time by the Trust, without
the payment of any penalty, upon the vote of a majority of the Trust's board of
trustees or a majority of the outstanding voting securities of the Trust or by
BlackRock Advisors, on 60 days' written notice by either party to the other
which can be waived by the non-terminating party. The investment management
agreement and the successor investment management agreement will each 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
Pursuant to a sub-investment advisory agreement, BlackRock Advisors
has appointed BlackRock Capital Management, Inc. ("BlackRock Capital
Management" or the "Sub-Advisor"), to perform the day-to-day investment
management of the Trust. On and after the effective date of the Transaction,
BlackRock Capital Management will continue to provide sub-investment advisory
services to the Trust pursuant to a successor sub-investment advisory
agreement. The terms of the successor sub-investment advisory agreement of
BlackRock Capital Management will be substantially identical to the
sub-investment advisory agreement that was effective prior to the Transaction.
The Sub-Advisor will receive a portion of the management fee paid by the Trust
to BlackRock Advisors. From the management fees, BlackRock Advisors will pay
the Sub-Advisor, for serving as sub-advisor to the Trust a fee equal to: (i)
prior to , 200 , % of the monthly management fees received by
BlackRock Advisors; (ii) from , 200 to , 200 , % of the
monthly management fees received by BlackRock Advisors; and (iii) after ,
200 , % 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 and the successor sub-investment
advisory agreement provide that, in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Trust will indemnify the Sub-Advisor, 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.
B-11
Although the Sub-Advisor 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 the Sub-Advisor are not exclusive and the Sub-Advisor
provides similar services to other investment companies and other clients and
may engage in other activities.
The sub-investment advisory agreement and the successor sub-investment
advisory agreement were approved by the Trust's board of trustees at an "in
person" meeting held on including a majority of the trustees who are not
parties to the agreement or interested persons of any such party (as such term
is defined in the Investment Company Act). In approving these agreements the
board of trustees considered, among other things, the nature and quality of
services to be provided by the Sub-Advisor, the profitability to the
Sub-Advisor of its relationship with the Trust, economies of scale and
comparative fees and expense ratios.
The sub-investment advisory agreement and successor sub-investment
advisory agreement were approved by the sole common shareholder of the Trust as
of , 200 . The sub-investment advisory agreement and successor sub-
investment advisory agreement will each continue in effect for a period of two
years from their respective effective dates, 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 at the time
outstanding and entitled to vote (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 and
successor sub-investment advisory agreement may be terminated as a whole at any
time by the Trust or by BlackRock Advisors 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 Trusts, or the Sub-Advisor, on 60
days' written notice by any party to the other (which may be waived by the
non-terminating party). The sub-investment advisory agreement and successor
sub-investment advisory agreement will also terminate automatically in the
event of their assignment (as such term is defined in the Investment Company
Act and the rules thereunder).
The successor sub-investment advisory agreement of BlackRock Capital
Management was approved by the Trust's board of trustees at an "in person"
meeting held on __ 2006, including a majority of the Trustees who are not
parties to the agreements or interested persons of any such party (as such term
is defined in the Investment Company Act). In approving these agreements the
board of trustees considered, among other things, the nature and quality of
services to be provided by BlackRock Capital Management, the profitability to
BlackRock Capital Management of its relationship with the Trust, economies of
scale and comparative fees and expense ratios.
The successor sub-investment advisory agreement of BlackRock Capital
Management was approved by the sole common shareholder of the Trust as of
, 200 .
Information Received by the Board
In considering the Trust's initial and successor investment management
and sub-investment advisory agreements, the board of trustees received
information specifically related to the approval of the initial and successor
investment management and sub-advisory agreements including information
regarding: (i) the team of investment advisory personnel assigned to the Trust;
(ii) the structure, expertise and finances of BlackRock Advisors, BlackRock
Capital Management and their parent companies; (iii) the Trust's management fee
and total operating expenses as compared to funds with similar investment
policies and strategies selected by Lipper, Inc.; (iv) BlackRock's
profitability with respect to other funds in the BlackRock family of closed-end
funds; (v) BlackRock's overall profitability as compared with available
industry data; (vi) certain direct and indirect "fallout" benefits to BlackRock
from its relationship with the Trust; and (vii) BlackRock's policies and
procedures in respect of execution of portfolio transactions. Periodically, the
trustees, in connection with their duties as trustees or directors of other
funds in the BlackRock family of closed-end funds, have received other
information including general information regarding BlackRock's management of
relationships with service providers and resources devoted to compliance with
such funds' investment objectives and polices and other matters.
B-12
Matters Considered by the Board
In considering the initial and successor investment management and
sub-investment advisory agreements, the board of trustees, including the
non-interested trustees, did not identify any factor as all-important or
all-controlling and instead considered these factors collectively in light of
all of the Trust's surrounding circumstances. Matters considered by the board
of trustees, including the non-interested trustees, in approving the initial
and successor investment management and sub-advisory agreements included the
following:
Conclusion
Based on the information reviewed and discussions held with respect to
each of the foregoing items, the board of trustees, including a majority of the
independent trustees, each of the initial and successor
investment advisory agreement between BlackRock Advisors and the Trust and
each of the initial and successor sub-advisory agreements among BlackRock
Advisors, the Sub-Advisor and the Trust as in the best interests of shareholders
of the Trust.
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. Below is a list of the
trustees and officers of the Trust and their present positions and principal
occupations during the past five years. 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.
Interested Trustee
----------------------------------------------- ------------------------------------------------------------------
Principal Occupation During the Past Five Years and Other
Name and Age Title Affiliations
---------------------- -------------------- ------------------------------------------------------------------
Anne F. Ackerley Sole Initial Trustee, Managing Director of BlackRock, Inc. since 2000. Formerly, First
Age: 43 President, Chief Vice President and Chief Operating Officer, Mergers and
Executive Officer and Acquisition Group at Merrill Lynch & Co. from 1997 to 2000; First
Chief Financial Office 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.
Share Ownership
Dollar Range of Aggregate Dollar Range of Equity
Equity Securities Overseen by Trustees in
Securities in the Family of Registered Investment
Name of Trustee the Trust (1) Companies (1)
------------------------------------------- ------------------ ------------------------------------
Interested Trustee......................... $___________________
Independent Trustee........................ $___________________
-----------
(1) As of ______, 2006, the trustees do not own shares in the Trust as the Trust has no operating history.
Compensation of Trustees
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. It is estimated that the Independent
B-13
Trustees will receive from the Trust the amounts set forth before the Trust's
calendar year ending _______, 2006, assuming the Trust will have been in
existence for the full calendar year.
Total Compensation from the
Estimated Compensation Trust and Fund Complex Paid
Name of Board Member from the Trust to Board Members(1)
------------------------------- ----------------------- ----------------------------
$ $ (3)(4)(5)
$ (2) $ (4)(5)
$ (2) $ (4)(5)
$ (2) $ (4)(5)
$ (2) $ (4)
$ (2) $ (4)
$ (2) $ (4)
$ (2) $ (4)
-------------------
(1) Estimates the total compensation to be earned by that person during the calendar year
ending December 31, 2006 from the closed-end funds advised by the Advisor (the "Fund Complex").
(2) Of these amounts it is anticipated that trustees , , , ,
, , , and may defer $ , $ , $ , $ , $ , $ ,
$ and $ , respectively, pursuant to the Fund Complex's deferred compensation plan in
the calendar year ended December 31, 2006.
(3) serves as "lead director" and Governance Committee Chairman for each board of trustees/
directors in the Fund Complex. For his services as lead trustee/director, will be
compensated in the amount of $ per annum by the Fund Complex.
(4) Of this amount, trustees , , , , , ,
and are expected to defer $ , $ , $ , $ ,
$ , $ , $ and $ , respectively, pursuant to the Fund Complex's
deferred compensation plan.
(5) Includes compensation for service on the Audit Committee. receives $ per annum for
his service as Chairman of the Audit Committee and all other trustees on the Audit Committee
receive $ base per annum for their service on the Audit Committee.
The Trust shall pay a pro rata portion (based on relative net assets)
of the following trustee fees paid by the Fund Complex: (i) $ per annum
for each Independent Trustee as a retainer and (ii) $ per day for each
Independent Trustee for each special meeting of each board in the Fund Complex
(i.e., any meeting, whether telephonic or in person, other than one of the six
regularly scheduled meetings of each board per year) attended. Each Independent
Trustee shall also be entitled to reimbursement for all of his or her out-of-
pocket expenses in attending each meeting of the board of trustees of the Trust
and any committee thereof. will receive an additional $ per annum from
the Fund Complex for acting as the lead trustee for each board of trustees/
directors in the Fund Complex plus an additional $ per annum for his service
as chairman of the Audit Committee. Messrs. , and will receive an
additional $ per annum from the Fund Complex for their service on the
Audit Committee of the Fund Complex. This additional compensation to Messrs.
, , and will be allocated among the funds/trusts in the
Fund Complex based on their relative net assets. Certain of the above fees paid
to the Independent Trustees will be subject to mandatory deferrals pursuant to
the Fund Complex's deferred compensation plan. The Independent Trustees have
agreed that at least $ of their $ retainer will be mandatorily deferred
pursuant to the Fund Complex's deferred compensation plan. Also, members of the
Audit Committee of the Fund Complex will be required to defer $ of the per
annum fee they will receive for their services on the Audit Committee pursuant
to the Fund Complex's deferred compensation plan. Under the deferred
compensation plan, deferred amounts earn a return for the Independent Trustees
as though equivalent dollar amounts had been invested in common shares of
certain other funds/trusts in the Fund Complex selected by the Independent
Trustees. This has approximately the same economic effect for the Independent
Trustees as if they had invested the deferred amounts in such other
funds/trusts. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of a
fund/trust. A fund/trust may, however, elect to invest in common shares of
those funds/trusts selected by the Independent Trustee in order to match its
deferred compensation obligations.
The board of trustees of the Trust currently has five committees: an
Executive Committee, an Audit Committee, a Governance Committee, a Compliance
Committee and a Portfolio Review Committee.
B-14
The Executive Committee consists of Messrs. and , and acts
in accordance with the powers permitted to such a committee under the Agreement
and Declaration of Trust and the By-Laws of the Trust. The Executive Committee,
subject to the Trust's Amended and Restated Agreement and Declaration of Trust,
By-Laws and applicable law, acts on behalf of the full board of trustees in the
intervals between meetings of the board.
The Audit Committee consists of Messrs. , , and
. The Audit Committee acts according to the Audit Committee charter.
has been appointed as Chairman of the Audit Committee. The Audit Committee
is responsible for reviewing and evaluating issues related to the accounting
and financial reporting policies of the Trust, overseeing the quality and
objectivity of the Trust's financial statements and the audit thereof and
acting as a liaison between the board of trustees and the Trust's independent
accountants. The board of trustees of the Trust has determined that the Trust
has three audit committee financial experts serving on its Audit Committee,
Messrs. , and , all of whom are independent for the purpose of
the definition of audit committee financial expert as applicable to the Trust.
The Governance Committee consists of all of the Independent Trustees.
The Governance Committee acts in accordance with the Governance Committee
charter. has been appointed as Chairman of the Governance Committee.
The Governance Committee performs those functions enumerated in the Governance
Committee charter including, but not limited to, making nominations for the
appointment or election of Independent Trustees including shareholder nominees,
reviewing Independent Trustee compensation, retirement policies and personnel
training policies and administrating the provisions of the Code of Ethics
applicable to the Independent Trustees.
The Governance Committee will consider trustee candidates recommended
by shareholders. In considering candidates submitted by shareholders, the
Governance Committee will take into consideration the needs of the Board and
the qualifications of the candidate. The Governance Committee may also take
into consideration the number of shares held by the recommending shareholder
and the length of time that such shares have been held. To have a candidate
considered by the Governance Committee, a shareholder must submit the
recommendation in writing and must include:
o The name of the shareholder and evidence of the person's ownership of
shares of the Trust, including the number of shares owned and the
length of time of ownership; and
o The name of the candidate, the candidate's resume or a listing of his
or her qualifications to be a trustee of the Trust and the person's
consent to be named as a trustee if selected by the Governance
Committee and nominated by the Board.
The shareholder recommendation and information described above must be
sent to the Corporate Secretary, c/o BlackRock, P.O. Box 4546, New York, New
York 10163.
The Compliance Committee consists of Messrs. , , ,
, , and . The Compliance Committee acts according to the
Compliance Committee charter. has been appointed as Chairman of the
Compliance Committee. The Compliance Committee performs those functions
enumerated in the Compliance Committee charter, including, but not limited to,
supporting the Independent Trustees in acting independently of BlackRock
Advisors in pursuing the best interests of the Trust and its shareholders,
receiving information on and, where appropriate, recommending policies
concerning the Trust's compliance with applicable law, and receiving reports
from and making certain recommendations in respect of the Trust's Chief
Compliance Officer.
The Portfolio Review Committee consists of Messrs. , , ,
, , and . The Portfolio Review Committee acts in accordance
with the Portfolio Review Committee charter. has been appointed as an Ex
Officio member of the Portfolio Review Committee. The Portfolio Review
Committee performs those functions enumerated in the Portfolio Review Committee
charter, including, but not limited to, supporting the Independent Trustees in
acting independently of BlackRock in pursuing the best interests of the Trust
and its shareholders, developing an understanding of and reviewing the
investment objective, policies and practices of the Trust, and reviewing with
respect to the Trust: (a) whether the Trust has complied with its investment
policies and restrictions as reflected in its prospectus and Statement of
Additional Information, (b) appropriate benchmarks and competitive universes,
B-15
(c) investment performance, (d) unusual or exceptional investment matters, and
(e) other matters bearing on the Trust's investment results.
As the Trust is a closed-end investment company with no prior
investment operations, no meetings of the above committees have been held in
the current fiscal year, provided that the Governance Committee has acted by
written consent to form the Audit Committee which, in turn, met in connection
with the organization of the Trust to select the Trust's independent registered
public accounting firm.
Prior to this offering, all of the outstanding shares of the Trust
were owned by an affiliate of BlackRock Advisors.
Proxy Voting Policies
The board of trustees of the Trust has delegated the voting of proxies
for Trust securities to BlackRock pursuant to BlackRock's proxy voting
guidelines. Under these guidelines, BlackRock will vote proxies related to
Trust securities in the best interests of the Trust and its shareholders. A
copy of BlackRock's proxy voting procedures is attached as Appendix B to this
Statement of Additional Information.
Codes of Ethics
The Trust, the Advisor and the Sub-Advisor have adopted codes of
ethics under Rule 17j-1 of the Investment Company Act. These codes permit
personnel subject to the codes to invest in securities, including securities
that may be purchased or held by the Trust. These codes can be reviewed and
copied at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the Securities and Exchange Commission at
1-202-942-8090. These codes of ethics are available on the EDGAR Database on
the Securities and Exchange Commission's web site (http://www.sec.gov), and
copies of these codes may be obtained, after paying a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Securities and Exchange Commission's Public Reference Section,
Washington, D.C. 20549-0102.
Investment Advisor and Sub-Advisor
BlackRock Advisors acts as the Trust's investment advisor. BlackRock
Capital Management acts as the Trust's sub-advisor. BlackRock Advisors, located
at 100 Bellevue Parkway, Wilmington, Delaware 19809, and BlackRock Capital
Management, Inc., located at 40 East 52nd Street, New York, New York 10022, are
wholly owned subsidiaries of BlackRock, Inc., which is one of the largest
publicly traded investment management firms in the United States with
approximately $464 billion of assets under management as of June 30, 2006.
BlackRock manages assets on behalf of institutional and individual investors
worldwide through a variety of equity, fixed income, liquidity and alternative
investment products, including the BlackRock Funds(TM) and BlackRock Liquidity
Funds(TM). In addition, BlackRock provides risk management and investment
system services to institutional investors under the BlackRock Solutions(R)
name.
The BlackRock organization has over 17 years of experience managing
closed-end products and, as of March 31, 2006, advised a closed-end family of
56 active funds with approximately $18 billion in assets. BlackRock has $40.9
billion in equity assets under management as of June 30, 2006, including $4.2
billion in assets across 8 equity closed-end funds. Clients are served from the
company's headquarters in New York City, as well as offices in Boston, Chicago,
Edinburgh, Hong Kong, San Francisco, Singapore, Sydney, Tokyo and Wilmington.
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 Managers
As of , 2006, managed or was a member of the management
team for the following client accounts:
B-16
Total Assets Number of Accounts
Number of in the Subject to a Assets Subject to a
Type of Account Accounts Accounts Performance Fee Performance Fee
--------------- -------- -------- --------------- ---------------
Registered Investment
Companies...................
Pooled Investment Vehicles
Other Than Registered
Investment Companies........
Other Accounts...................
As of , 2006, managed or was a member of the
management team for the following client accounts:
Total Assets Number of Accounts
Number of in the Subject to a Assets Subject to a
Type of Account Accounts Accounts Performance Fee Performance Fee
--------------- -------- -------- --------------- ---------------
Registered Investment
Companies...................
Pooled Investment Vehicles
Other Than Registered
Investment Companies........
Other Accounts...................
As of , 2006, managed or was a member of the
management team for the following client accounts:
Total Assets Number of Accounts
Number of in the Subject to a Assets Subject to a
Type of Account Accounts Accounts Performance Fee Performance Fee
--------------- -------- -------- --------------- ---------------
Registered Investment
Companies...................
Pooled Investment Vehicles
Other Than Registered
Investment Companies........
Other Accounts...................
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to protect
against potential incentives that may favor one account over another. BlackRock
has adopted policies and procedures that address the allocation of investment
opportunities, execution of portfolio transactions, personal trading by
employees and other potential conflicts of interest that are designed to ensure
that all client accounts are treated equitably over time. Nevertheless,
BlackRock furnishes investment management and advisory services to numerous
clients in addition to the Trust, and BlackRock may, consistent with applicable
law, make investment recommendations to other clients or accounts (including
accounts that are hedge funds or have performance or higher fees paid to
BlackRock, or in which portfolio managers have a personal interest in the
receipt of such fees), which may be the same as or different from those made to
the Trust. In addition, BlackRock, its affiliates and any officer, director,
stockholder or employee may or may not have an interest in the securities whose
purchase and sale BlackRock recommends to the Trust. Actions with respect to
securities of the same kind may be the same as or different from the action
which BlackRock, or any of its affiliates, or any officer, director,
stockholder, employee or any member of their families may take with respect to
the same securities. Moreover, BlackRock may refrain from rendering any advice
or services concerning securities of companies of which any of BlackRock's (or
its affiliates') officers, directors or employees are directors or officers, or
companies as to which BlackRock or any of its affiliates or the officers,
B-17
directors and employees of any of them has any substantial economic interest or
possesses material non-public information. Each portfolio manager also may
manage accounts whose investment strategies may at times be opposed to the
strategy utilized for the Trust. In this connection, it should be noted that
Messrs. and currently manage certain accounts that are subject
to performance fees and each portfolio manager may in the future manage other
such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells securities for
more than one account, the trades must be allocated in a manner consistent with
its fiduciary duties. BlackRock attempts to allocate investments in a fair and
equitable manner among client accounts, with no account receiving preferential
treatment. To this end, BlackRock has adopted a policy that is intended to
ensure that investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve reasonable
efficiency in client transactions and provide BlackRock with sufficient
flexibility to allocate investments in a manner that is consistent with the
particular investment discipline and client base.
Portfolio Manager Compensation
BlackRock's financial arrangements with its portfolio managers, its
competitive compensation and its career path emphasis at all levels reflect the
value senior management places on key resources. Compensation may include a
variety of components and may vary from year to year based on a number of
factors. The principal components of compensation include a base salary, a
discretionary bonus, participation in various benefits programs and one or more
of the incentive compensation programs established by BlackRock such as its
Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base compensation. Generally, portfolio managers receive base
compensation based on their seniority and/or their position with the firm,
which may include the amount of assets supervised and other management roles
within the firm.
Discretionary compensation. In addition to base compensation,
portfolio managers may receive discretionary compensation, which can be a
substantial portion of total compensation. Discretionary compensation can
include a discretionary cash bonus as well as one or more of the following:
Long-Term Retention and Incentive Plan (LTIP) --The LTIP is a
long-term incentive plan that seeks to reward certain key employees.
The plan provides for the grant of awards that are expressed as an
amount of cash that, if properly vested and subject to the attainment
of certain performance goals, will be settled in part in cash and in
part in BlackRock, Inc. common stock. Messrs. Klingert, Downs and
McGinley have received awards under the LTIP.
Deferred Compensation Program --A portion of the compensation
paid to each portfolio manager may be voluntarily deferred by the
portfolio manager into an account that tracks the performance of
certain of the firm's investment products. Each portfolio manager is
permitted to allocate his deferred amounts among various options,
including to certain of the firm's hedge funds and other unregistered
products. In addition, prior to 2005, a portion of the annual
compensation of certain senior managers, including Messrs. and
was mandatorily deferred in a similar manner for a number of
years. Beginning in 2005, a portion of the annual compensation of
certain senior managers, including Messrs. , and , is paid
in the form of BlackRock, Inc. restricted stock units which vest
ratably over a number of years.
Options and Restricted Stock Awards --While incentive stock
options are not currently being awarded to BlackRock employees,
BlackRock, Inc. previously granted stock options to key employees,
including certain portfolio managers who may still hold unexercised or
unvested options. BlackRock, Inc. also has a restricted stock award
program designed to reward certain key employees as an incentive to
contribute to the long-term success of BlackRock. These awards vest
over a period of years. Messrs. , and have
been granted stock options in prior years, and Messr. participates in
BlackRock's restricted stock program.
B-18
Incentive Savings Plans --The PNC Financial Services Group,
Inc., which owns approximately 71% of BlackRock, Inc.'s common stock,
has created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including an Employee Stock
Purchase Plan (ESPP) and a 401(k) plan. The 401(k) plan may involve a
company match of the employee's contribution of up to 6% of the
employee's salary. The company match is made using BlackRock, Inc.
common stock. The firm's 401(k) plan offers a range of investment
options, including registered investment companies managed by the
firm. Messrs. , and are eligible to participate
in these plans.
Annual incentive compensation for each portfolio manager is a function
of several components: the performance of BlackRock, Inc., the performance of
the portfolio manager's group within BlackRock, the investment performance,
including risk-adjusted returns, of the firm's assets under management or
supervision by that portfolio manager relative to benchmarks, and the
individual's teamwork and contribution to the overall performance of these
portfolios and BlackRock. Unlike many other firms, portfolio managers at
BlackRock compete against benchmarks rather than each other. In most cases,
including for the portfolio managers of the Trust, these benchmarks are the
same as the benchmark or benchmarks against which the performance of the Trust
or other accounts are measured. A group of BlackRock, Inc.'s officers
determines which benchmarks against which to compare the performance of funds
and other accounts managed by each portfolio manager. In the case of the Trust,
it is anticipated that such benchmarks would include
the . The group then makes
a subjective determination with respect to the portfolio manager's compensation
based on the performance of the funds and other accounts managed by each
portfolio manager relative to the various benchmarks. Senior portfolio managers
who perform additional management functions within BlackRock may receive
additional compensation for serving in these other capacities.
Securities Ownership of Portfolio Managers
The Trust is a newly organized investment company. Accordingly, as of
the date of this Statement of Additional Information, none of the portfolio
managers beneficially owns any securities issued by the Trust.
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 Trust will generally purchase securities on a stock exchange
effected through brokers who charge a commission for their services. The Trust
may also invest in securities that 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.
Payments of commissions to brokers who are affiliated persons of the
Trust (or affiliated persons of such persons) will be made in accordance with
Rule 17e-1 under the Investment Company Act. Commissions paid on such
transactions would be commensurate with the rate of commissions paid on similar
transactions to brokers that are not so affiliated.
The Advisor and Sub-Advisor may, consistent with the interests of the
Trust, select brokers on the basis of the research, statistical and pricing
services they provide to the Trust and the Advisor's or Sub-Advisor's other
clients. Such research, statistical and/or pricing services must provide lawful
and appropriate assistance to the Advisor's or Sub-Advisor, investment decision
making process in order for such research, statistical and/or pricing services
to be considered by the Advisor or Sub-Advisor in selecting a broker. These
research services may include information on securities markets, the economy,
individual companies, pricing information, research products and services and
such other services as may be permitted from time to time by Section 28(e) of
the Securities Exchange Act of 1934, as amended. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by the Advisor and Sub-Advisor under their
respective contracts. A commission paid to such brokers may be higher than that
B-19
which another qualified broker would have charged for effecting the same
transaction, provided that the Advisor or Sub-Advisor determines in good faith
that such commission is reasonable in terms either of the transaction or the
overall responsibility of the Advisor or Sub-Advisor and its other clients and
that the total commissions paid by the Trust will be reasonable in relation to
the benefits to the Trust over the long-term. The advisory fees that the Trust
pays to the Advisor will not be reduced as a consequence of the Advisor's or
Sub-Advisor receipt of brokerage and research services. To the extent that
portfolio transactions are used to obtain such services, the brokerage
commissions paid by the Trust will exceed those that might otherwise be paid by
an amount that cannot be presently determined. Such services generally would be
useful and of value to the Advisor or Sub-Advisor in serving one or more of
their other clients and, conversely, such services obtained by the placement of
brokerage business of other clients generally would be useful to the Advisor
and Sub-Advisor in carrying out their obligations to the Trust. While such
services are not expected to reduce the expenses of the Advisor or Sub-Advisor,
the Advisor would, through use of the services, avoid the additional expenses
that would be incurred if they should attempt to develop comparable information
through their own staffs. Commission rates for brokerage transactions on
foreign stock exchanges are generally fixed.
One or more of the other investment companies or accounts that the
Advisor and/or the Sub-Advisor manage 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, usually on a pro rata basis, by the Advisor and/or the Sub-Advisor in
their discretion in accordance with the accounts' various investment
objectives. Such allocations are based upon the written procedures of the
Advisor and/or Sub-Advisor, which have been reviewed and approved by the board
of trustees. 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 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. However, the annual
portfolio turnover rate of the Trust may be greater than 100%. 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. 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.
Preferred Shares
Although the Trust does not currently intend to issue preferred
shares, the Agreement and Declaration of Trust provides that the Trust's board
of trustees may authorize and issue preferred shares (the "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. 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.
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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. The remaining trustees will be
elected by holders of common shares and Preferred Shares, voting together as a
single class. 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. 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.
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 any Preferred Shares would typically 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 possible offering of Preferred
Shares by the Trust. If the board of trustees determines to proceed with such
an offering, the terms of the Preferred Shares may be the same as, or different
from, the terms described above, subject to applicable law and the Trust's
Agreement and Declaration of Trust. The board of trustees, without the approval
of the holders of common shares, may authorize an offering of Preferred Shares
or may determine not to authorize such an offering, and may fix the terms of
the Preferred Shares to be offered.
The Trust may apply for ratings for any Preferred Shares from Moody's,
S&P or Fitch. In order to obtain and maintain the required ratings, the Trust
will be required to comply with investment quality, diversification and other
guidelines established by Moody's and/or S&P. Such guidelines will likely be
more restrictive than the restrictions set forth above. The Trust does not
anticipate that such guidelines would have a material adverse effect on the
Trust's holders of common shares or its ability to achieve its investment
objective. The Trust anticipates that any Preferred Shares that it issues 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.
Other Shares
The board of trustees (subject to applicable law and the Trust's
Agreement and Declaration of Trust) may authorize an offering, without the
approval of the holders of either common shares or Preferred Shares, of other
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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.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such
its shareholders will not have the right to cause the Trust to redeem their
shares. Instead, the Trust's common shares will trade in the open-market at a
price that will be a function of several factors, including dividend levels
(which are in turn affected by expenses), net asset value, call protection,
dividend stability, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors. Because
shares of a closed-end investment company may frequently trade at prices lower
than net asset value, the Trust's board of trustees may consider action that
might be taken to reduce or eliminate any material discount from net asset
value in respect of common shares, which may include the repurchase of such
shares in the open-market or in private transactions, the making of a tender
offer for such shares, or the conversion of the Trust to an open-end investment
company. The board of trustees may decide not to take any of these actions. In
addition, there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's Preferred
Shares are outstanding, the Trust may not purchase, redeem or otherwise acquire
any of its common shares unless (1) all accrued Preferred Shares dividends have
been paid and (2) at the time of such purchase, redemption or acquisition, the
net asset value of the Trust's portfolio (determined after deducting the
acquisition price of the common shares) is at least 200% of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). Any
service fees incurred in connection with any tender offer made by the Trust
will be borne by the Trust and will not reduce the stated consideration to be
paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to
finance the repurchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of cash
by the Trust in anticipation of share repurchases or tenders will reduce the
Trust's net income. Any share repurchase, tender offer or borrowing that might
be approved by the Trust's board of trustees would have to comply with the
Securities Exchange Act of 1934, as amended, the Investment Company Act and the
rules and regulations thereunder.
Although the decision to take action in response to a discount from
net asset value will be made by the board of trustees at the time it considers
such issue, it is the board's present policy, which may be changed by the board
of trustees, not to authorize repurchases of common shares or a tender offer
for such shares if: (1) such transactions, if consummated, would (a) result in
the delisting of the common shares from the New York Stock Exchange or (b)
impair the Trust's status as a regulated investment company under the Code,
(which would make the Trust a taxable entity, causing the Trust's income to be
taxed at the corporate level in addition to the taxation of shareholders who
receive dividends from the Trust) or as a registered closed-end investment
company under the Investment Company Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment 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 that 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
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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 net
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 discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Trust and its shareholders. No attempt
is made to present a detailed explanation of all federal, state, local and
foreign tax concerns affecting the Trust and its shareholders (including
shareholders subject to special treatment under U.S. federal income tax law),
and the discussions set forth here and in the prospectus do not constitute tax
advice. Investors are urged to consult their own tax advisors with any specific
questions relating to U.S. federal, state, local and foreign taxes. The
discussion reflects applicable tax laws of the United States as of the date of
this Statement of Additional Information, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the "IRS") retroactively or prospectively.
Taxation of the Trust
The Trust intends to elect to be treated and to qualify each year as a
regulated investment company under Subchapter M of the Code (a "RIC").
Accordingly, the Trust must, among other things, (i) derive in each taxable
year at least 90% of its gross income (including tax-exempt interest) from (a)
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, 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 and (b) interests in
qualified "publicly traded partnerships" as defined below (the "Gross Income
Test"); and (ii) diversify its holdings so that, at the end of each quarter of
each taxable year (a) at least 50% of the market value of the Trust's total
assets is represented by cash and cash items, U.S. Government securities, the
securities of other RICs and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Trust's total assets and not more than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the market value
of the Trust's total assets is invested in (I) the securities of any one issuer
(other than U.S. Government securities and the securities of other RICs), (II)
the securities of any two or more issuers that the Trust controls and that are
determined to be engaged in the same business or similar or related trades or
businesses or (III) one or more qualified publicly traded partnerships.
Generally, a qualified publicly traded partnership (as defined in Section
851(h) of the Code) includes a partnership, such as the MLPs in which the Trust
intends to invest, the interests of which are traded on an established
securities market or readily tradable on a secondary market (or the substantial
equivalent thereof) and which derive income and gains from, among other things,
the exploration, development, mining or production, processing, refining,
transportation, or the marketing of any mineral or natural resource. These
provisions generally apply to taxable years beginning after December 31, 2004.
As a RIC, the Trust generally is not subject to U.S. federal income
tax on income and gains that it distributes each taxable year to shareholders,
if it distributes the sum of (i) 90% of the Trust's investment company taxable
income (which includes, among other items, dividends, interest and the excess
of any net short-term capital gain over net long-term capital loss and other
taxable income, other than any net long-term capital gain, reduced by
deductible expenses) determined without regard to the deduction for dividends
paid and (ii) 90% of the Trust's net tax-exempt interest (the excess of its
gross tax-exempt interest over certain disallowed deductions). The Trust
intends to distribute at least annually substantially all of such income. The
Trust will be subject to income tax at regular corporate rates on any taxable
income or gains that it does not distribute to its shareholders.
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Amounts not distributed on a timely basis in accordance with the
calendar year distribution requirement are subject to a nondeductible 4% excise
tax at the Trust level. To avoid the tax, the Trust must distribute (or be
deemed to have distributed) by December 31 of each calendar year an amount at
least equal to the sum of (i) 98% of its ordinary income (not taking into
account any capital gain or loss) for the calendar year, (ii) 98% of its
capital gain in excess of its capital loss (adjusted for certain ordinary
losses) for a one-year period generally ending on October 31 of the calendar
year (unless an election is made to use the Trust's fiscal year) plus 100% of
any ordinary income and capital gain net income from the prior year (as
previously computed) that were not paid out during such year and on which the
Trust paid no U.S. federal income tax. While the Trust intends to distribute
any income and capital gain in the manner necessary to minimize imposition of
the 4% excise tax, there can be no assurance that sufficient amounts of the
Trust's taxable income and capital gain will be distributed to avoid entirely
the imposition of the tax. In that event, the Trust will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirement.
A distribution will be treated as paid during the calendar year if it
is paid during the calendar year or declared by the Trust in October, November
or December of the year, payable to shareholders of record on a date during
such a month and paid by the Trust during January of the following year. Any
such distributions paid during January of the following year will be deemed to
be received on December 31 of the year the distributions are declared, rather
than when the distributions are received. In addition, certain other
distributions made after the close of a taxable year of the Trust may be
"spilled back" and treated as paid by the Trust (except for purposes of the 4%
excise tax) during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the
distributions were actually made.
If the Trust were unable to satisfy the 90% distribution requirement
or otherwise were to fail to qualify as a RIC in any year, it would be taxed in
the same manner as an ordinary corporation and distributions from earnings and
profits, including distributions of net capital gain (if any), to the Trust's
shareholders, would be taxable to shareholders as ordinary income. Furthermore,
such distributions would not be deductible by the Trust in computing its
taxable income. In such case, distributions generally would be eligible (i) for
treatment as qualified dividend income in the case of individual shareholders
and (ii) for the dividends received deduction in the case of corporate
shareholders, subject, in each case, to certain holding period requirements.
The Trust's Investments
Certain of the Trust's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions; (ii) convert lower taxed long-term capital gains or "qualified
dividend income" into higher taxed short-term capital gains or ordinary income;
(iii) convert ordinary loss or a deduction into capital loss (the deductibility
of which is more limited); (iv) cause the Trust to recognize income or gain
without a corresponding receipt of cash; (v) adversely affect the time as to
when a purchase or sale of stock or securities is deemed to occur; and (vi)
adversely alter the characterization of certain complex financial transactions.
These income tax provisions could therefore affect the amount, timing and
character of distributions to shareholders. The Trust intends to monitor its
transactions and may make certain tax elections to mitigate the effect of these
provisions and prevent disqualification of the Trust as a RIC.
The Trust intends to invest in equity securities of MLPs that are
expected to derive income and gains from, among other things, the exploration,
development, mining or production, processing, refining, transportation
(including pipeline transporting gas, oil, or products thereof), or the
marketing of any mineral or natural resources. The Trust expects that these
MLPs will be treated as qualified publicly traded partnerships (as defined in
Section 851(h) of the Code and discussed above under "Taxation of the Trust").
Accordingly, it is expected that the net income derived by the Trust from such
investments will qualify as "good income" for purposes of the Gross Income
Test. If the MLPs in which the Trust invests do not, however, qualify as
qualified publicly traded partnerships under the new rules or otherwise are not
treated as corporations for U.S. federal income tax purposes, the income
derived by the Trust from such investments may not qualify as "good income"
under the Gross Income Test and, therefore, could adversely affect the Trust's
status as a RIC.
The MLPs in which the Trust intends to invest are expected to be
treated as partnerships for U.S. federal income tax purposes and, therefore,
the cash distributions received by the Trust from an MLP may not correspond to
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the amount of income allocated to the Trust by the MLP in any given taxable
year. If the amount of income allocated by an MLP to the Trust exceeds the
amount of cash received by such MLP, the Trust may have difficulty making
distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and avoiding the income and excise taxes. Accordingly,
the Trust may have to dispose of securities under disadvantageous circumstances
in order to generate sufficient cash to satisfy the distribution requirements.
The Trust intends to invest in Canadian Royalty Trusts that are
expected to derive income and gains from the exploration, development, mining
or production, processing, refining, transportation (including pipeline
transporting gas, oil, or products thereof), or the marketing of any mineral or
natural resources. Canadian Royalty Trusts are generally treated as either
corporations or partnerships for U.S. federal income tax purposes. If the
Canadian Royalty Trusts in which the Trust invests are treated as corporations
for U.S. federal income tax purposes, the income and gain generated by the
Trust from such investments will generally be qualifying income, and a trust
unit will generally be a qualifying asset, for purposes of the Trust qualifying
as a RIC. Moreover, if the Canadian Royalty Trust is a PFIC, the Trust will be
subject to additional rules described below relating to tax consequences of an
investment in a PFIC.
If the Canadian Royalty Trusts in which the Trust invests are treated
as partnerships for U.S. federal income tax purposes, the effect on the Trust
will depend on whether the Canadian Royalty Trust is a qualified publicly
traded partnership (as described above). If the Canadian Royalty Trust is a
qualified publicly traded partnership, the Trust's investment therein would
generally be subject to the rules described above relating to investments in
MLPs. If the Canadian Royalty Trust is not, however, treated as a qualified
publicly traded partnership, then the consequences to the Trust of an
investment in such Canadian Royalty Trust will depend upon the amount and type
of income and assets of the Canadian Royalty Trust allocable to the Trust. The
Trust intends to monitor its investments in Canadian Royalty Trusts to prevent
the disqualification of the Trust as a RIC.
If the Trust invests (directly or indirectly through a REIT) in
residual interests in REMICs, a portion of the Trust's income will be subject
to U.S. federal income tax in all events. Excess inclusion income of the Trust
generated by a residual interest in a REMIC will be allocated to shareholders
of the Trust in proportion to the dividends received by the shareholders of the
Trust. Excess inclusion income generally (i) cannot be offset by net operating
losses, (ii) will constitute unrelated business taxable income to certain tax
exempt investors and (iii) in the case of a foreign shareholder will not
qualify for any reduction in U.S. federal withholding taxes. In addition, if
the shareholders of the Trust include a "disqualified organization" (such as
certain governments or governmental agencies), the Trust may be liable for a
tax on the excess inclusion income allocable to the disqualified organization.
Income received by the Trust with respect to non-U.S. securities may
be subject to withholding and other taxes imposed by foreign countries and U.S.
possessions. Tax conventions may reduce or eliminate such taxes. Due to the
makeup of the Trust's investment portfolio, shareholders will not be entitled
to claim a credit or deduction with respect to such foreign taxes. If, however,
the Trust invests more than 50% of its total assets in non-U.S. securities as
of a year-end, the Trust may elect to have its foreign tax deduction or credit
for foreign taxes paid with respect to qualifying taxes to be taken by its
shareholders instead of on its own tax return. If the Trust so elects, the
Trust would treat those foreign taxes as dividends paid to its shareholders and
each shareholder (1) would be required to include in gross income, and treat as
paid by such shareholder, a proportionate share of those taxes, (2) would be
required to treat such share of those taxes and of any dividend paid by the
Trust that represents income from foreign or U.S. possessions sources as such
shareholder's own income from those sources, and (3) could either deduct the
foreign taxes deemed paid in computing taxable income or, alternatively, use
the foregoing information in calculating the foreign tax credit against federal
income tax. The Trust will report to its shareholders shortly after each
taxable year their respective shares of foreign taxes paid and the income from
sources within, and taxes paid to, foreign countries and persons filing
jointly) of creditable foreign taxes included on Forms 1099 and all of whose
foreign source income is "qualified passive income" may elect each year to be
exempt from the complicated foreign tax credit limitation, in which event such
individual would be able to claim a foreign tax credit without needing to file
the detailed Form 1116 that otherwise is required.
Investments by the Trust in certain passive foreign investment
companies ("PFICs") could subject the Trust to U.S. federal income tax
(including interest charges) on certain distributions or dispositions with
respect to those investments which the Trust cannot eliminate by making
distributions to its shareholders. One or more tax elections will be available
to the Trust to mitigate the effect of this provision, but the elections
generally cause the recognition of income without the receipt of cash.
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Dividends paid by PFICs will not qualify for the reduced tax rates discussed
below under "Taxation of Shareholders." A PFIC is any foreign corporation (with
certain exceptions) that, in general, meets either of the following tests: (1)
at least 75% of its gross income is passive or (2) an average of at least 50%
of its assets produce, or are held for the production of, passive income.
Under Section 988 of the Code, gains or losses attributable to
fluctuations in exchange rates between the time the Trust accrues income or
receivables or expenses or other liabilities denominated in a foreign currency
and the time the Trust actually collects such income or receivables or pays
such liabilities are generally treated as ordinary income or loss. Similarly,
gains or losses on foreign currency forward contracts and the disposition of
debt securities denominated in a foreign currency, to the extent attributable
to fluctuations in exchange rates between the acquisition and disposition
dates, are also treated as ordinary income or loss.
The Trust believes that its investment strategies, including its
investments in foreign currency-denominated securities, will generate
qualifying income for RIC purposes under current federal income tax law. The
Code expressly provides the U.S. Treasury with authority to issue regulations
that would exclude foreign currency gains from qualifying income if such gains
are not directly related to a fund's business of investing in stock or
securities. While to date the U.S. Treasury has not exercised this regulatory
authority, there can be no assurance that it will not issue regulations in the
future (possibly with retroactive application) that would treat some or all of
the Trust's foreign currency gains as non-qualifying income, which may affect
the Trust's status as a RIC for all years to which such regulations are
applicable.
Taxation of Shareholders
Distributions (whether paid in cash or reinvested in Trust shares)
paid by the Trust from its investment company taxable income, which includes
net short-term capital gain, generally are taxable as ordinary income to the
extent of the Trust's earnings and profits. Such distributions (if designated
by the Trust) may qualify (provided holding period and other requirements are
met) (i) for the dividends received deduction available to corporations, but
only to the extent that the Trust's income consists of dividends received from
U.S. corporations and (ii) in the case of individual shareholders, as qualified
dividend income eligible to be taxed at a maximum rate of generally 15% (5% for
individuals in lower tax brackets) to the extent that the Trust receives
qualified dividend income. If the Trust's qualified dividend income is less
than 95 percent of its gross income, a shareholder of the Trust may only
include as qualified dividend income that portion of the dividends that may be
and are so designated by the Trust as qualified dividend income. These special
rules relating to the taxation of ordinary income dividends paid by RICs to
individual taxpayers generally apply to taxable years beginning on or before
December 31, 2010. Thereafter, the Trust's dividends, other than capital gains
dividends, will be fully taxable at ordinary income tax rates unless further
Congressional action is taken. There can be no assurance as to what portion of
the Trust's income distributions will qualify for favorable treatment as
qualified dividend income.
Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain qualified foreign corporations. Distributions
with respect to interests in qualified publicly traded partnerships, dividend
income from PFICs and, in general, dividend income from REITs are not eligible
for the reduced rate for qualified dividend income and is taxed as ordinary
income. In the case of securities lending transactions, payments in lieu of
dividends do not constitute qualified dividend income. Subject to certain
exceptions, a "qualified foreign corporation" is any foreign corporation that
is either (i) incorporated in a possession of the United States (the
"possessions test"), or (ii) eligible for benefits of a comprehensive income
tax treaty with the United States, which the Secretary of the Treasury
determines is satisfactory for these purposes and which includes an exchange of
information program (the "treaty test"). The Secretary of the Treasury has
currently identified tax treaties between the United States and 52 other
countries that satisfy the treaty test. Subject to the same exceptions, a
foreign corporation that does not satisfy either the possessions test or the
treaty test will still be considered a "qualified foreign corporation" with
respect to any dividend paid by such corporation if the stock with respect to
which such dividend is paid is readily tradable on an established securities
market in the United States. The Treasury Department has issued a notice
stating that common or ordinary stock, or an American Depositary Receipt in
respect of such stock, is considered readily tradable on an established
securities market in the Unites States if it is listed on a national securities
exchange that is registered under section 6 of the Securities Exchange Act of
1934, as amended, or on the Nasdaq Stock Market.
B-26
A dividend (whether paid in cash or reinvested in additional Trust
shares) will not be treated as qualified dividend income (whether received by
the Trust or paid by the Trust to a shareholder) if (1) the dividend is
received with respect to any share held for fewer than 61 days during the
121-day period beginning on the date which is 60 days before the date on which
such share becomes exdividend with respect to such dividend, (2) to the extent
that the shareholder is under an obligation (whether pursuant to a short sale
or otherwise) to make related payments with respect to positions in
substantially similar or related property, or (3) if the shareholder elects to
have the dividend treated as investment income for purposes of the limitation
on deductibility of investment interest.
Distributions of net capital gain designated as capital gain
dividends, if any, are taxable to shareholders at rates applicable to long-term
capital gain, whether paid in cash or in shares, and regardless of how long the
shareholder has held the Trust's shares. Capital gain dividends are not
eligible for the dividends received deduction. The maximum tax rate on net
capital gain dividend received, or deemed to have been received, by individuals
on or before December 31, 2010 generally is 15% (5% for individuals in lower
brackets). Distributions in excess of the Trust's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gain to such
holder (assuming the shares are held as a capital asset). For non-corporate
taxpayers, distributions of investment company taxable income (other than
qualified dividend income) will currently be taxed at a maximum rate of 35%,
while net capital gain generally will be taxed at a maximum rate of 15%. For
corporate taxpayers, both investment company taxable income and net capital
gain are taxed at a maximum rate of 35%.
The Trust may retain for reinvestment all or part of its net capital
gain. If any such gain is retained, the Trust will be subject to a tax of 35%
of such amount. In that event, the Trust expects to designate the retained
amount as undistributed capital gain in a notice to its shareholders, each of
whom (i) will be required to include in income for tax purposes as long-term
capital gain its share of such undistributed amounts, (ii) will be entitled to
credit its proportionate share of the tax paid by the Trust against its U.S.
federal income tax liability and to claim refunds to the extent that the credit
exceeds such liability and (iii) will increase its basis in its shares of the
Trust by an amount equal to 65% of the amount of undistributed capital gain
included in such shareholder's gross income.
Shareholders may be entitled to offset their capital gain dividends
with capital loss. There are a number of statutory provisions affecting when
capital loss may be offset against capital gain, and limiting the use of loss
from certain investments and activities. Accordingly, shareholders with capital
loss are urged to consult their tax advisors.
The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will recognize a
taxable gain or loss depending upon its basis in the shares. Such gain or loss
will be treated as long-term capital gain or loss if the shares have been held
for more than one year. Any loss recognized by a shareholder on the sale of
Trust shares held by the shareholder for six months or less will be treated for
tax purposes as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder (or amounts credited to the shareholder
as an undistributed capital gain) with respect to such shares. In addition, all
or a portion of a loss recognized on a redemption or other disposition of Trust
shares may be disallowed under "wash sale" rules if the shares disposed of are
replaced with substantially identical shares within a 61-day period beginning
30 days before and ending 30 days after the date on which the shares are sold.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
Sales charges paid upon a purchase of shares cannot be taken into
account for purposes of determining gain or loss on a sale of the shares before
the 91st day after their purchase to the extent a sales charge is reduced or
eliminated in a subsequent acquisition of shares of the Trust (or of another
fund) pursuant to the reinvestment or exchange privilege. Any disregarded
amounts will result in an adjustment to the shareholder's tax basis in some or
all of any other shares acquired.
An investor should be aware that if Trust shares are purchased shortly
before the record date for any taxable distribution (including a capital gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce the
trading value of such Trust shares, in effect resulting in a taxable return of
some of the purchase price.
B-27
Ordinary income dividends and capital gain dividends also may be
subject to state and local taxes. shareholders are urged to consult their own
tax advisors regarding specific questions about U.S. federal (including the
application of the alternative minimum tax rules), state, local or foreign tax
consequences to them of investing in the Trust.
A shareholder that is a nonresident alien individual or a foreign
corporation (a "foreign investor") generally may be subject to U.S. withholding
tax at the rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on ordinary income dividends. Different tax consequences may result if
the foreign investor is engaged in a trade or business in the United States or,
in the case of an individual, is present in the United States for 183 days or
more during a taxable year and certain other conditions are met. Foreign
investors should consult their tax advisors regarding the tax consequences of
investing in the Trust's common shares.
Certain dividends designated by the Trust as "interest-related
dividends" that are received by most foreign investors (generally those that
would qualify for the portfolio interest exemptions of Section 871(h) or
Section 881(c) of the Code) in the Trust will be exempt from U.S. withholding
tax. Interest-related dividends are those dividends derived from certain
interest income (including bank deposit interest and short term original issue
discount that is currently exempt from the withholding tax) earned by the Trust
that would not be subject to U.S. tax if earned by a foreign person directly.
Further, certain dividends designated by the Trust as "short-term capital gain
dividends" that are received by certain foreign investors (generally those not
present in the United States for 183 days or more) will also be exempt from
U.S. withholding tax. In general, short-term capital gain dividends are those
that are derived from the Trust's short-term capital gains over net long-term
capital losses. These provisions generally apply, with certain exceptions, to
taxable years beginning after December 31, 2004 and on or before December 31,
2008. Prospective investors are urged to consult their tax advisors regarding
the specific tax consequences to them related to these provisions.
The Trust may be required to withhold federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
shareholders who fail to provide the Trust with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The Trust will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. If the Trust
issues preferred shares, the Trust will designate dividends made to holders of
shares and to holders of those preferred shares in accordance with each class's
proportionate share of each item of Trust income (such as net capital gains and
other taxable income). A class's proportionate share of a particular type of
income for a year is determined according to the percentage of total dividends
paid by the RIC during that year to the class.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in common shares should consult their own tax advisors regarding the
purchase, ownership and disposition of common shares.
EXPERTS
The statement of net assets of the Trust as of , 2006 and
related statement of operations and statement of changes in net assets for the
period from , 2006 (date of inception) to , 2006 appearing in
this Statement of Additional Information has been audited by , independent
registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. ,
located at , provides accounting and auditing services to the Trust.
B-28
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, 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 Securities and
Exchange Commission's principal office in Washington, D.C., and copies of all
or any part thereof may be obtained from the Securities and Exchange Commission
upon the payment of certain fees prescribed by the Securities and Exchange
Commission.
B-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholder of BlackRock Real Asset Trust:
We have audited the accompanying statement of assets and liabilities of
BlackRock Real Asset Trust (the "Trust") as of , 2006, and the related
statements of operations and changes in net assets for the period from
, 2006 (date of inception) to , 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust as of , 2006, and the results of
its operations and the changes in net assets for the period from , 2006
(date of inception) to , 2006, in conformity with accounting principles
generally accepted in the United States of America.
[ image ]
, 2006
F-1
Financial Statements
F-2
BLACKROCK REAL ASSET TRUST ( )
STATEMENT OF ASSETS AND LIABILITIES
, 2006
F-3
BLACKROCK REAL ASSET TRUST ( )
STATEMENT OF OPERATIONS
For the period , 2006 (date of inception) to , 2006
F-4
BLACKROCK REAL ASSET TRUST ( )
STATEMENT OF CHANGES IN NET ASSETS
For the period , 2006 (date of inception) to , 2006
F-5
NOTES TO FINANCIAL STATEMENTS
F-6
APPENDIX A
GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC TRANSACTIONS
In order to manage the risk of its securities portfolio, or to enhance
income or gain as described in the prospectus, the Trust will engage in
Strategic Transactions. The Trust will engage in such activities in the
Advisor's or Sub-Advisor's discretion, and may not necessarily be engaging in
such activities when movements in interest rates that could affect the value of
the assets of the Trust occur. The Trust's ability to pursue certain of these
strategies may be limited by applicable regulations of the CFTC. Certain
Strategic Transactions may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on
securities 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 securities 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 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
offset, in the amount of the option premium, against changes in the value of the
securities in its portfolio. During the term of the option, however, a covered
call seller has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price of the option if
the value of the underlying security increases, but has retained the risk of
loss should the price of the underlying security decline. Conversely, a secured
put seller retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option, less the premium
received on the sale of the option. The Trust is authorized to purchase and sell
exchange listed options and over-the-counter options ("OTC Options") which are
privately negotiated with the counterparty. Listed options are issued by the
Options Clearing 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.
A-1
The hours of trading for options on 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 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 an offset against anticipated 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.
The Trust currently may enter into such transactions without limit for bona fide
strategic 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-strategic 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
strategic purposes, 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. The
above policies are non-fundamental and may be changed by the Trust's board of
trustees at any time. Also, when required, an account of cash equivalents
designated on the books and records will be maintained and marked to market on a
daily basis in an amount equal to the market value of the contract.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, short sales, reverse repurchase agreements and dollar
rolls, and listed or OTC options on securities, indices and futures contracts
sold by the Trust are generally subject to earmarking and coverage requirements
of either the CFTC or the SEC, with the result that, if the Trust does not hold
the security or futures contract underlying the instrument, the Trust will be
required to designate on its books and records an ongoing basis, cash, U.S.
government securities, or other liquid high grade debt obligations in an amount
at least equal to the Trust's obligations with respect to such instruments.
Such amounts fluctuate as the obligations increase or decrease. The
earmarking requirement can result in the Trust maintaining securities positions
it would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
Strategic Transactions Present Certain Risks. With respect to Strategic
Transactions and risk management, the variable degree of correlation between
price movements of strategic instruments and price movements in the position
being offset create the possibility that losses using the strategy 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 Strategic Transactions
should tend to minimize the risk of loss due to a decline in the value of the
A-2
position, at the same time they tend to limit any potential gain which might
result from an increase in the value of such position. The ability of the Trust
to successfully utilize Strategic Transactions will depend on the Advisor's and
the Sub-Advisor's ability to predict pertinent market movements and sufficient
correlations, which cannot be assured. Finally, the daily deposit requirements
in futures contracts that the Trust has sold create an ongoing greater potential
financial risk than do options transactions, where the exposure is limited to
the cost of the initial premium. Losses due to the use of Strategic Transactions
will reduce net asset value.
Regulatory Considerations. The Trust has claimed an exclusion from the term
"commodity pool operator" under the Commodity Exchange Act and, therefore, is
not subject to registration or regulation as a commodity pool operator under the
Commodity Exchange Act.
A-3
APPENDIX B
PROXY VOTING POLICY
For
BlackRock Advisors, Inc.
and Its Affiliated Registered Investment Advisers
Introduction
This Proxy Voting Policy ("Policy") for BlackRock Advisors, Inc. and its
affiliated registered investment advisers ("BlackRock") reflects our duty as a
fiduciary under the Investment Advisers Act of 1940 (the "Advisers Act") to vote
proxies in the best interests of our clients. In addition, the Department of
Labor views the fiduciary act of managing ERISA plan assets to include the
voting of proxies. Proxy voting decisions must be made solely in the best
interests of the pension plan's participants and beneficiaries. The Department
of Labor has interpreted this requirement as prohibiting a fiduciary from
subordinating the retirement income interests of participants and beneficiaries
to unrelated objectives. The guidelines in this Policy have been formulated in a
manner designed to ensure decision-making consistent with these fiduciary
responsibilities.
Any general or specific proxy voting guidelines provided by an advisory
client or its designated agent in writing will supercede the specific guidelines
in this Policy for that client. BlackRock will disclose to our advisory clients
information about this Policy as well as disclose to our clients how they may
obtain information on how we voted their proxies. Additionally, BlackRock will
maintain proxy voting records for our advisory clients consistent with the
Advisers Act. For those of our clients that are registered investment companies,
BlackRock will disclose this Policy to the shareholders of such funds and make
filings with the Securities and Exchange Commission and make available to fund
shareholders the specific proxy votes that we cast in shareholder meetings of
issuers of portfolio securities in accordance with the rules and regulations
under the Investment Company Act of 1940.
Registered investment companies that are advised by BlackRock as well as
certain of our advisory clients may participate in securities lending programs,
which may reduce or eliminate the amount of shares eligible for voting by
BlackRock in accordance with this Policy if such shares are out on loan and
cannot be recalled in time for the vote.
Implicit in the initial decision to retain or invest in the security of a
corporation is acceptance of its existing corporate ownership structure, its
management, and its operations. Accordingly, proxy proposals that would change
the existing status of a corporation will be supported only when we conclude
that the proposed changes are likely to benefit the corporation and its
shareholders. Notwithstanding this favorable predisposition, we will assess
management on an ongoing basis both in terms of its business capability and its
dedication to shareholders to seek to ensure that our continued confidence
remains warranted. If we determine that management is acting on its own behalf
instead of for the well being of the corporation, we will vote to support
shareholder proposals, unless we determine other mitigating circumstances are
present.
Additionally, situations may arise that involve an actual or perceived
conflict of interest. For example, we may manage assets of a pension plan of a
company whose management is soliciting proxies, or a BlackRock employee involved
with managing an account may have a close relative who serves as a director or
executive of a company that is soliciting proxies regarding securities held in
such account. In all cases, we seek to vote proxies based on our clients' best
interests.
This Policy and its attendant recommendations attempt to generalize a
complex subject. It should be clearly understood that specific fact situations,
including differing voting practices in jurisdictions outside the United States,
might warrant departure from these guidelines. In such instances, we will
consider the facts we believe are relevant, and if we vote contrary to these
guidelines we will record the reasons for this contrary vote.
Section I of the Policy describes proxy proposals that may be characterized
as routine and lists examples of the types of proposals we would typically
support. Section II of the Policy describes various types of non-routine
proposals and provides general voting guidelines. These non-routine proposals
are categorized as those involving:
(A) Social Issues,
(B) Financial/Corporate Issues, and
(C) Shareholder Rights.
Finally, Section III of the Policy describes the procedures we follow in
casting votes pursuant to these guidelines.
SECTION I
ROUTINE MATTERS
Routine proxy proposals, amendments, or resolutions are typically proposed
by management and meet the following criteria:
1. They do not measurably change the structure, management control, or
operation of the corporation.
2. They are consistent with industry standards as well as the corporate
laws of the state of incorporation.
Voting Recommendation
BlackRock will normally support the following routine proposals:
1. To increase authorized common shares.
2. To increase authorized preferred shares as long as there are not
disproportionate voting rights per preferred share.
3. To elect or re-elect directors, except as noted below.
4. To appoint or elect auditors.
5. To approve indemnification of directors and limitation of directors'
liability.
6. To establish compensation levels.
7. To establish employee stock purchase or ownership plans.
8. To set time and location of annual meeting.
BlackRock will withhold its vote for a nominee to the board if he or she
failed to attend at least 75% of the board meetings in the previous year without
a valid reason. In addition, BlackRock will withhold its vote for all nominees
standing for election to a board if (1) since the last annual meeting of
shareholders and without shareholder approval, the board or its compensation
committee has repriced underwater options; or (2) within the last year,
shareholders approved by majority vote a resolution recommending that the board
rescind a "poison pill" and the board has failed to take responsive action to
C-2
that resolution. Responsive action would include the rescission of the "poison
pill" (without a broad reservation to reinstate the "poison pill" in the event
of a hostile tender offer), or public assurances that the terms of the "poison
pill" would be put to a binding shareholder vote within the next five to seven
years.
BlackRock evaluates a contested election of directors on a case-by-case
basis considering the long-term financial performance of the company relative to
its industry, management's track record, the qualifications of the nominees for
both slates and an evaluation of what each side is offering shareholders.
C-3
SECTION II
NON-ROUTINE PROPOSALS
A. Social Issues
Proposals in this category involve issues of social conscience. They are
typically proposed by shareholders who believe that the corporation's internally
adopted policies are ill-advised or misguided.
Voting Recommendation
If we have determined that management is generally socially responsible, we
will generally vote against the following shareholder proposals:
1. To enforce restrictive energy policies.
2. To place arbitrary restrictions on military contracting.
3. To bar or place arbitrary restrictions on trade with other countries.
4. restrict the marketing of controversial products.
5. To limit corporate political activities.
6. To bar or restrict charitable contributions.
7. To enforce a general policy regarding human rights based on arbitrary
parameters.
8. To enforce a general policy regarding employment practices based on
arbitrary parameters.
9. To enforce a general policy regarding animal rights based on arbitrary
parameters.
10. To place arbitrary restrictions on environmental practices.
B. Financial/Corporate Issues
Proposals in this category are usually offered by management and seek to
change a corporation's legal, business or financial structure.
Voting Recommendation
We will generally vote in favor of the following management proposals
provided the position of current shareholders is preserved or enhanced:
1. To change the state of incorporation.
2. To approve mergers, acquisitions or dissolution.
3. To institute indenture changes.
4. To change capitalization.
C. Shareholder Rights
C-4
Proposals in this category are made regularly both by management and
shareholders. They can be generalized as involving issues that transfer or
realign board or shareholder voting power.
We typically would oppose any proposal aimed solely at thwarting potential
takeover offers by requiring, for example, super-majority approval. At the same
time, we believe stability and continuity promote profitability. The guidelines
in this area seek to find a middle road, and they are no more than guidelines.
Individual proposals may have to be carefully assessed in the context of their
particular circumstances.
C-5
Voting Recommendation
We will generally vote for the following management proposals:
1. To require majority approval of shareholders in acquisitions of a
controlling share in the corporation.
2. To institute staggered board of directors.
3. To require shareholder approval of not more than 66 2/3% for a proposed
amendment to the corporation's by-laws.
4. To eliminate cumulative voting.
5. To adopt anti-greenmail charter or by-law amendments or to otherwise
restrict a company's ability to make greenmail payments.
6. To create a dividend reinvestment program.
7. To eliminate preemptive rights.
8. To eliminate any other plan or procedure designed primarily to
discourage a takeover or other similar action (commonly known as
a "poison pill").
9. To adopt or continue a stock option or restricted stock plan if all such
plans for a particular company do not involve excessive dilution.
We will generally vote against the following management proposals:
1. To require greater than 66 2/3% shareholder approval for a proposed
amendment to the corporation's by-laws ("super-majority provisions").
2. To require that an arbitrary fair price be offered to all shareholders
that is derived from a fixed formula ("fair price amendments").
3. To authorize a new class of common stock or preferred stock which may
have more votes per share than the existing common stock.
4. To prohibit replacement of existing members of the board of directors.
5. To eliminate shareholder action by written consent without a shareholder
meeting.
6. To allow only the board of directors to call a shareholder meeting or to
propose amendments to the articles of incorporation.
7. To implement any other action or procedure designed primarily to
discourage a takeover or other similar action (commonly known as
a "poison pill").
8. To limit the ability of shareholders to nominate directors.
9. To adopt or continue a stock option or restricted stock plan if plan
contributes to excessive dilution.
We will generally vote for the following shareholder proposals:
C-6
1. To rescind share purchases rights or require that they be submitted for
shareholder approval, but only if the vote required for approval is not
more than 66 2/3%.
2. To opt out of state anti-takeover laws deemed to be detrimental to the
shareholder.
3. To change the state of incorporation for companies operating under the
umbrella of anti-shareholder state corporation laws if another state
is chosen with favorable laws in this and other areas.
4. To eliminate any other plan or procedure designed primarily to
discourage a takeover or other similar action.
5. To permit shareholders to participate in formulating management's proxy
and the opportunity to discuss and evaluate management's director
nominees, and/or to nominate shareholder nominees to the board.
6. To require that the board's audit, compensation, and/or nominating
committees be comprised exclusively of independent directors.
7. To adopt anti-greenmail charter or by-law amendments or otherwise
restrict a company's ability to make greenmail payments.
8. To create a dividend reinvestment program.
9. To recommend that votes to "abstain" not be considered votes "cast" at
an annual meeting or special meeting, unless required by state law.
10. To require that "golden parachutes" be submitted for shareholder
ratification.
11. To rescind a stock option or restricted stock plan if the plan
contributes to excessive dilution.
We will generally vote against the following shareholder proposals:
1. To restore preemptive rights.
2. To restore cumulative voting.
3. To require annual election of directors or to specify tenure.
4. To eliminate a staggered board of directors.
5. To require confidential voting.
6. To require directors to own a minimum amount of company stock in order
to qualify as a director or to remain on the board.
7. To dock director pay for failing to attend board meetings.
8. To rescind a stock option or restricted stock plan if the plan does not
contribute to excessive dilution.
9. To prohibit the provision of any non-audit services by a company's
auditors to the company.
C-7
SECTION III
VOTING PROCESS
BlackRock has engaged an independent third-party service provider to assist
us in the voting of proxies. These guidelines have been provided to this service
provider, who then analyzes all proxy solicitations we receive for our clients
and makes recommendations to us as to how, based upon our guidelines, the
relevant votes should be cast. These recommendations are set out in a report
that is provided to the relevant BlackRock Portfolio Management Group team, who
must approve the proxy vote in writing and return such written approval to the
BlackRock Operations Group (e-mail is deemed to be a writing). If any authorized
member of a Portfolio Management Group team desires to vote in a manner that
differs from the third-party service provider recommendation, the reason for
such differing vote shall be noted in the written approval form sent to the
BlackRock Operations Group. The head of each relevant BlackRock Portfolio
Management Group team is responsible for making sure that proxies are voted in a
timely manner. The BlackRock Equity Investment Policy Oversight Committee (or
similar or successor committee, the "EIPOC") receives regular reports of votes
cast that differ from recommendations made by the third-party service provider
and votes cast that may have involved a material conflict of interest. The EIPOC
also review these guidelines from time to time to determine their continued
appropriateness and whether any changes to the guidelines or the proxy voting
process should be made.
Votes may involve a conflict of interest if (i) the vote is proposed to be
cast in a manner that differs from the third-party service provider
recommendation and (ii) the subject matter of the proxy involves a party that
has a material relationship with BlackRock, or the issuer of the proxy has such
a relationship, such as where the issuer soliciting the vote is a BlackRock
client. The BlackRock Operations Group identifies potential conflicts of
interest and then refers any potential conflict to BlackRock's Legal and
Compliance Department for review prior to a vote being cast.
With respect to votes in connection with securities held on a particular
record date but sold from a client account prior to the holding of the related
meeting, BlackRock may take no action on proposals to be voted on in such
meeting.
With respect to voting proxies of non-U.S. companies, a number of
logistical problems may arise that may have a detrimental effect on BlackRock's
ability to vote such proxies in the best interests of our clients. These
problems include, but are not limited to, (i) untimely and/or inadequate notice
of shareholder meetings, (ii) restrictions on the ability of holders outside the
issuer's jurisdiction of organization to exercise votes, (iii) requirements to
vote proxies in person, if not practicable, (iv) the imposition of restrictions
on the sale of the securities for a period of time in proximity to the
shareholder meeting, and (v) impracticable or inappropriate requirements to
provide local agents with power of attorney to facilitate the voting
instructions. Accordingly, BlackRock may determine not to vote proxies if it
believes that the restrictions or other detriments associated with such vote
outweigh the benefits that will be derived by voting on the company's proposal.
*****
Any questions regarding this Policy may be directed to the General Counsel
of BlackRock.
C-8
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
(1) Financial Statements
Part A--None.
Part B--Statement of Assets and Liabilities.
(2) Exhibits
(a) Agreement and Declaration of Trust.(1)
(b) By-Laws.(1)
(c) Inapplicable.
(d) Form of Specimen Certificate.(2)
(e) Form of Dividend Reinvestment Plan.(2)
(f) Inapplicable.
(g)(1) Investment Management Agreement.(2)
(g)(2) Sub-Investment Advisory Agreement.(2)
(h) Form of Underwriting Agreement.(2)
(i) Form of the BlackRock Closed-End Trusts Amended and Restated
Deferred Compensation Plan.(2)
(j)(1) Form of Custody Agreement.(2)
(j)(2) Form of Foreign Custody Manager Agreement.(2)
(k)(1) Form of Stock Transfer Agency Agreement.(2)
(k)(2) Form of Fund Accounting Agreement.(2)
(l) Opinion and Consent of Counsel to the Trust.(2)
(m) Inapplicable.
(n) Independent Registered Public Accounting Firm Consent.(2)
(o) Inapplicable.
(p) Subscription Agreement.(2)
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.(2)
(r)(2) Code of Ethics of the Advisor.(2)
(s) Power of Attorney.(2)
--------------------------------
(1) Filed herewith.
(2) To be filed by amendment.
Item 26. Marketing arrangements
Reference is made to the Form of Underwriting Agreement for the
Registrant's shares of beneficial interest to be filed by amendment to this
registration statement.
Item 27. 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:
C-9
Registration fees...................................................
NYSE listing fee....................................................
Printing (other than certificates)..................................
Engraving and printing certificates.................................
Accounting fees and expenses related to the offering................
Legal fees and expenses related to the offering.....................
NASD fee............................................................
Miscellaneous (i.e. travel) related to the offering.................
Total..........................................................
Item 28. Persons Controlled by or under Common Control with the Registrant
None.
Item 29. Number of Holders of Shares
As of _____, 2006.
Number of Record
Title of class holders
--------------------------------------------------------------------------
Shares of Beneficial Interest......................... 0
Item 30. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust provides
as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of
the Trust shall be subject in such capacity to any personal liability whatsoever
to any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust. Shareholders shall have the same limitation of personal
liability as is extended to stockholders of a private corporation for profit
incorporated under the Delaware General Corporation Law. No Trustee or officer
of the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person, save only liability to the Trust or its Shareholders
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard for his duty to such Person; and, subject to the foregoing exception,
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee or officer, as such, of the Trust, is made a party to any
suit or proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal liability.
Any repeal or modification of this Section 5.1 shall not adversely affect any
right or protection of a Trustee or officer of the Trust existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
5.2 Mandatory Indemnification (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
C-10
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
Investment Company Act) nor parties to the proceeding ("Disinterested Non-Party
Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2)
if such quorum is not obtainable or even if obtainable, if such majority so
directs, independent legal counsel in a written opinion concludes that the
indemnitee should be entitled to indemnification hereunder. All determinations
to make advance payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
(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 Investment Company 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
C-11
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. The Trustees may maintain
insurance for the protection of the Trust Property, its Shareholders, Trustees,
officers, employees and agents in such amount as the Trustees shall deem
adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable or is required by the
Investment Company Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the
Trust shall, in the performance of its duties, be fully and completely justified
and protected with regard to any act or any failure to act resulting from
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel, or upon reports made to the Trust by any of the
Trust's officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
Insofar as indemnification for liabilities arising under the Act, may be
terminated to Trustees, officers and controlling persons of the Trust, pursuant
to the foregoing provisions or otherwise, the Trust has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. Reference is made to Article 6 of the purchase
agreement attached as Exhibit (h), which is incorporated herein by reference.
Item 31. Business and Other Connections of Investment Advisor
Not Applicable
Item 32. 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 the Registrant's
Sub-Advisor, Custodian and Transfer Agent.
Item 33. Management Services
Not Applicable
Item 34. 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
C-12
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497 (h) under the Securities
Act of 1933 shall be deemed to be part of the Registration Statement as of the
time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-13
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 19th day of July, 2006.
/s/Anne F. Ackerley
-------------------------------------------
Anne F. Ackerley
Sole Initial Trustee, President, Chief
Executive
Officer and Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities set forth
below on the 19th day of July, 2006.
NAME TITLE
---- -----
Sole Initial Trustee, President, Chief Executive
/s/Anne F. Ackerley Officer and Principal Financial Officer
-------------------
Anne F. Ackerley
INDEX TO EXHIBITS
Ex. 99(a) Declaration of Trust
Ex. 99(b) By-Laws