PROSPECTUS
$700,000,000
VAN KAMPEN SENIOR INCOME TRUST
AUCTION RATE CUMULATIVE PREFERRED SHARES
5,600 SHARES, SERIES M
5,600 SHARES, SERIES T
5,600 SHARES, SERIES W
5,600 SHARES, SERIES TH
5,600 SHARES, SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Van Kampen Senior Income Trust (the "Fund") is a non-diversified, closed-end
management investment company. The Fund's investment objective is to provide a
high level of current income, consistent with preservation of capital. The Fund
seeks to achieve its objective by investing primarily in a professionally
managed portfolio of interests in floating or variable rate senior loans
("Senior Loans") to corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. The Fund's
investment adviser is Van Kampen Asset Management (the "Adviser").
The Fund is offering 5,600 Series M, 5,600 Series T, 5,600 Series W, 5,600
Series TH and 5,600 Series F Auction Rate Cumulative Preferred Shares
(collectively, the "Preferred Shares"). The minimum purchase amount for
Preferred Shares is $25,000.
---------------------
AN INVESTMENT IN THE PREFERRED SHARES MAY NOT BE APPROPRIATE FOR ALL
INVESTORS AND THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. SEE RISK FACTORS OF THE FUND DESCRIBED IN THE SECTION "RISK FACTORS"
BEGINNING ON PAGE 24 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved of these securities or
determined that this Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
---------------------
Per
Share Total
----- -----
Public Offering Price(1) $25,000 $700,000,000
Sales Load $ 225 $ 6,300,000
Proceeds to Fund (before expenses)(2) $24,775 $693,700,000
---------------------
(1) The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares
are first issued.
(2) Not including offering expenses incurred by the Fund, estimated to be
$550,000.
The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to an
investor's broker-dealer, in book-entry form through The Depository Trust
Company, on or about February 20, 2004.
---------------------
CITIGROUP
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
WACHOVIA SECURITIES
February 18, 2004
Senior Loans in which the Fund invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally the prime rate offered by one or
more major United States banks, the London Inter-Bank Offered Rate, the
Certificate of Deposit rate or other base lending rates used by commercial
lenders. Senior Loans generally hold the most senior position in the capital
structure of the Borrowers and generally are secured with specific collateral,
which may include guarantees, although the Fund may also invest in Senior Loans
that are not secured by any collateral. The terms of Senior Loans typically
include various restrictive covenants which are designed to limit certain
activities of the Borrowers. It is anticipated that the proceeds of the Senior
Loans in which the Fund acquires interests will be used primarily to finance
leveraged buyouts, recapitalizations, mergers, acquisitions and stock
repurchases and, to a lesser extent, to finance internal growth and for other
corporate purposes of Borrowers.
Senior Loans in which the Fund invests generally have a claim on the assets
of an issuer senior to that of subordinated debt, preferred stock and common
stock of such issuer. Senior Loans in which the Fund may invest generally are
not registered with the SEC or listed on any national securities exchange, and
there is no express limitation on the percentage of the Fund's assets that may
be invested in illiquid securities or the percentage of the Fund's assets that
may be invested in below investment grade Senior Loans, which are considered
speculative by rating agencies (and which are often referred to as "junk
securities").
Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for such
shares. The dividend rate on the Series M Preferred Shares for the initial
dividend period from and including the date of issue to but excluding March 2,
2004 will be 1.10%. The dividend rate on the Series T Preferred Shares for the
initial dividend period from and including the date of issue to but excluding
March 3, 2004 will be 1.10%. The dividend rate on the Series W Preferred Shares
for the initial dividend period from and including the date of issue to but
excluding March 4, 2004 will be 1.10%. The dividend rate on the Series TH
Preferred Shares for the initial dividend period from and including the date of
issue to but excluding March 5, 2004 will be 1.10%. The dividend rate on the
Series F Preferred Shares for the initial dividend period from and including the
date of issue to but excluding March 8, 2004 will be 1.10%. For each subsequent
dividend period, the auction agent will determine the dividend rate for a
particular period by an auction conducted on the business day prior to that
period.
The Preferred Shares are not listed on an exchange. Investors in Preferred
Shares may participate in auctions through broker-dealers that have entered into
an agreement with the auction agent and the Fund in accordance with the
procedures specified herein. Broker-dealers are not required to maintain a
secondary market in Preferred Shares, and there can be no assurance that a
secondary market will develop, or if it does develop a secondary market may not
provide you with liquidity. The Fund may redeem Preferred Shares as described
under "Description of Preferred Shares."
The Preferred Shares will be senior to the Fund's outstanding common
shares, par value $0.01 per share. The Fund's common shares are traded on the
New York Stock Exchange ("NYSE") under the symbol "VVR." It is a condition of
closing this offering that the Preferred Shares be offered with a rating of
"Aaa" from Moody's Investors Service, Inc. ("Moody's") and "AAA" from Fitch
Ratings ("Fitch").
This Prospectus sets forth concisely the information that prospective
investors should know before investing in Preferred Shares, including
information about risks. Investors should read this Prospectus before investing
and keep the Prospectus for future reference. The Fund's Statement of Additional
Information ("SAI") dated February 18, 2004, contains additional information
about the Fund and is incorporated by reference into this Prospectus. You may
obtain a copy of the SAI without charge by calling (800) 847-2424 (or (800)
421-2833 for the hearing impaired) or by writing to the Fund at 1 Parkview
Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. A table of contents
to the SAI is located at page 53 of this Prospectus. The SAI has been filed with
the SEC and is available along with other Fund-related materials at the SEC's
internet site (http://www.sec.gov).
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES
YOU WITH DIFFERENT OR INCONSISTENT INFORMATION YOU SHOULD NOT RELY ON IT. THE
FUND IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. THE FUND'S BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATION AND PROSPECTS MAY HAVE CHANGED SINCE THE DATE OF
THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 10
Senior Securities........................................... 11
The Fund.................................................... 11
Use of Proceeds............................................. 11
Capitalization.............................................. 12
Portfolio Composition....................................... 12
Investment Objective and Investment Policies................ 13
Use of Leverage............................................. 19
Other Investment Practices.................................. 21
Risk Factors................................................ 24
Description of Commercial Paper Program..................... 29
Net Asset Value............................................. 30
Description of Preferred Shares............................. 32
Rating Agency Guidelines.................................... 39
Management of the Fund...................................... 40
Custodian and Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 42
Federal Taxation............................................ 43
Description of Capital Structure............................ 45
Underwriting................................................ 51
Legal Matters............................................... 52
Experts..................................................... 52
Further Information......................................... 52
Table of Contents for the Statement of Additional
Information............................................... 53
PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus. It may
not contain all of the information that is important to you. To understand the
offering of the Preferred Shares fully, you should read this entire Prospectus
carefully, including the risk factors. The following summary is qualified in its
entirety by reference to the more detailed information included elsewhere in
this Prospectus, the SAI and the Fund's Certificate of Vote (the "Certificate")
attached as Appendix B to the SAI.
The Fund................... Van Kampen Senior Income Trust is a
non-diversified, closed-end management investment
company. The Fund was organized as a Massachusetts
business trust on April 8, 1998, and is registered
under the Investment Company Act of 1940, as
amended (the "1940 Act").
The Fund commenced investment operations on June
23, 1998 upon the closing of an initial public
offering of its common shares of beneficial
interest, par value $0.01 per share. The Fund's
common shares are traded on the NYSE under the
symbol "VVR." As of December 31, 2003, the Fund had
total assets of approximately $2.2 billion and net
assets of approximately $1.5 billion.
The Offering............... The Fund is offering 5,600 Series M Preferred
Shares, 5,600 Series T Preferred Shares, 5,600
Series W Preferred Shares, 5,600 Series TH
Preferred Shares and 5,600 Series F Preferred
Shares, each series with a par value of $0.01 at a
purchase price of $25,000 per share plus dividends,
if any, that have accumulated from the commencement
date of the dividend period during which the Fund
first issues the Preferred Shares. The Fund is
offering the Preferred Shares through a group of
underwriters led by Citigroup Global Markets Inc.
See "Underwriting."
The Preferred Shares of the Fund will entitle their
holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods
for such shares. In general, except as described
under "Description of Preferred Shares -- Dividends
and Dividend Periods," the dividend period for each
series will be seven days. The auction agent will
determine the dividend rate for a particular
dividend period by an auction conducted on the
business day immediately prior to the start of that
dividend period. See "Description of Preferred
Shares -- Summary of Auction Procedures."
The Preferred Shares are not listed on an exchange.
Investors and potential investors in Preferred
Shares may participate in auctions for the
Preferred Shares through broker-dealers that have
entered into an agreement with the auction agent
and the Fund. Generally, an investor in Preferred
Shares will not receive certificates representing
ownership of his or her shares. The securities
depository (The Depository Trust Company or any
successor) or its nominee for the account of the
investor's broker-dealer will maintain record
ownership of the Preferred Shares in book-entry
form. An investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of Preferred Shares.
The Fund will not issue Preferred Shares unless
such shares have a rating of "Aaa" from Moody's and
"AAA" from Fitch. A rating is not a financial
guarantee and can change. The Fund may at some
future
1
time seek to have the Preferred Shares rated by
another rating agency. See "Description of
Preferred Shares."
Use of Proceeds............ The Fund will use all of the net proceeds of the
offering to (i) pay down amounts borrowed by the
Fund under its commercial paper program by
approximately $690 million and (ii) invest the
remaining proceeds in accordance with the Fund's
investment objective and policies as soon as
practicable following the offering.
Investment Objective and
Investment Policies...... The Fund's investment objective is to provide a
high level of current income, consistent with
preservation of capital. The Fund seeks to achieve
its objective by investing primarily in a
professionally managed portfolio of interests in
Senior Loans to Borrowers which operate in a
variety of industries and geographical regions
(including domestic and foreign entities). Senior
Loans in which the Fund invests generally pay
interest at rates which are periodically
redetermined by reference to a base lending rate
plus a premium. These base lending rates are
generally the prime rate offered by one or more
major United States banks ("Prime Rate"), the
London Inter-Bank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or other base
lending rates used by commercial lenders. The value
of the Fund's portfolio may be affected by changes
in the credit quality of Borrowers with respect to
Senior Loan interests in which the Fund invests. No
assurance can be given that the Fund will achieve
its investment objective.
Senior Loans generally hold the most senior
position in the capital structure of the Borrowers
and generally are secured with specific collateral,
which may include guarantees, although the Fund may
also invest in Senior Loans that are not secured by
any collateral. The terms of Senior Loans typically
include various restrictive covenants which are
designed to limit certain activities of the
Borrowers. Senior Loans generally are arranged
through private negotiations between a Borrower and
several financial institutions ("Lenders")
represented in each case by one or more such
Lenders acting as agent ("Agent") of the several
Lenders. On behalf of the several Lenders, the
Agent will be primarily responsible for negotiating
the loan agreement ("Loan Agreement") that
establishes the relative terms and conditions of
the Senior Loan and rights of the Borrower and the
several Lenders. The Fund may invest in
participations ("Participations") in Senior Loans,
may purchase assignments ("Assignments") of
portions of Senior Loans from third parties and may
act as one of the group of Lenders originating a
Senior Loan (an "Original Lender"). The Fund will
purchase an Assignment or act as Original Lender
with respect to a syndicated Senior Loan only where
the Agent with respect to the Senior Loan at the
time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group ("S&P")
or Baa or P-3 or higher by Moody's) or determined
by the Adviser to be of comparable quality.
Under normal market conditions, at least 80% of the
Fund's total assets are invested in Senior Loans
(either as an Original Lender or as a purchaser of
an Assignment or Participation) of domestic
Borrowers or foreign Borrowers (so long as Senior
Loans to such foreign Borrowers are U.S. dollar
denominated and payments of interest and
2
repayments of principal pursuant to such Senior
Loans are required to be made in U.S. dollars). It
is anticipated that the proceeds of the Senior
Loans in which the Fund acquires interests will be
used primarily to finance leveraged buyouts,
recapitalizations, mergers, acquisitions and stock
repurchases and, to a lesser extent, to finance
internal growth and for other corporate purposes of
Borrowers. Senior Loans generally have the most
senior position in a Borrower's capital structure,
although some Senior Loans may hold an equal
ranking with other senior securities of the
Borrower. Senior Loans generally are secured by
specific collateral, which may include guarantees.
Such guaranteed Senior Loans may be guaranteed by,
or fully secured by assets of, shareholders, owners
or affiliated entities of the Borrower, even if the
Senior Loans are not otherwise collateralized by
assets of the Borrower. The Fund may invest up to
20% of its total assets in interests in Senior
Loans which are not secured by any collateral.
Senior loans which are not secured by specific
collateral generally pose a greater risk of
non-payment of interest or loss of principal than
do collateralized Senior Loans. The Fund may also
acquire warrants, equity securities and, in limited
circumstances, junior debt securities in connection
with its investments in Senior Loans. Such equity
securities and junior debt securities will not be
treated by the Fund as Senior Loans. Investments in
Senior Loans which are not secured by specific
collateral and in warrants, equity securities and
junior debt securities entail certain risks in
addition to those associated with investments in
collateralized Senior Loans.
The Fund is not subject to any restrictions with
respect to the maturity of Senior Loans held in its
portfolio. The Fund's assets invested in Senior
Loans generally consist of Senior Loans with stated
maturities of between three and ten years, and with
rates of interest which are redetermined either
daily, monthly, quarterly or semi-annually;
provided, however, that the Fund may invest up to
5% of its total assets in Senior Loans which permit
the Borrower to select an interest rate
redetermination period of up to one year.
Investments in Senior Loans with longer interest
rate redetermination periods may increase
fluctuations in the value of the Fund's portfolio
as a result of changes in interest rates. The
Senior Loans in the Fund's portfolio will at all
times have a dollar-weighted average time until
next interest rate redetermination of 90 days or
less. Because of prepayment provisions, the actual
remaining maturity of Senior Loans may vary
substantially from the stated maturity of such
loans. The Fund estimates that the actual
maturities of Senior Loans in the portfolio
generally range between 18 and 24 months.
The Adviser generally relies on its own credit
analyses of Borrowers and not on analyses prepared
by ratings agencies or other independent parties.
There is no minimum rating or other independent
evaluation of a Borrower or its securities limiting
the Fund's investments. Although a Senior Loan may
not be rated by any rating agency at the time the
Fund purchases the Senior Loan, rating agencies
have become more active in rating Senior Loans, and
at any given time a substantial portion of the
Senior Loans in the Fund's portfolio may be rated.
The lack of a rating does not necessarily imply
that a Senior Loan is of lesser investment quality.
There is no limit on the
3
percentage of the Fund's assets that may be
invested in Senior Loans that are rated below
investment grade or that are unrated but of
comparable quality, which are commonly referred to
as "junk securities." The Fund invests only in
those Senior Loans with respect to which the
Borrower, in the opinion of the Adviser,
demonstrates one or more of the following
characteristics: sufficient cash flow to service
debt; adequate liquidity; successful operating
history; strong competitive position; experienced
management; and, with respect to collateralized
Senior Loans, adequate collateral coverage of the
Senior Loans. In addition, the Adviser may
consider, and may rely in part, on analyses
performed by Lenders other than the Fund.
Under normal market conditions, the Fund may invest
up to 20% of its total assets in (i) high quality,
short-term debt securities with remaining
maturities of one year or less and (ii) warrants,
equity securities and, in limited circumstances,
junior debt securities acquired in connection with
the Fund's investments in Senior Loans. If the
Adviser determines that market conditions
temporarily warrant a defensive investment policy,
the Fund may, subject to its ability to liquidate
its relatively illiquid portfolio of Senior Loans,
invest up to 100% of its assets in cash and such
high quality, short-term securities. The Fund may
also lend its portfolio securities to other parties
and may enter into repurchase and reverse
repurchase agreements for securities, subject to
certain restrictions. For further discussion of the
Fund's investment objective and policies and its
investment practices and the associated
considerations, see "Investment Objective and
Investment Policies" and "Other Investment
Practices."
Use of Leverage............ The Fund uses financial leverage for investment
purposes. Including the proceeds of the offering of
the Preferred Shares, it is currently anticipated
that the amount of leverage will represent
approximately 32% (and in no event will it exceed
50%) of the Fund's total assets. As discussed
below, in addition to issuing Preferred Shares, the
Fund borrows money through a commercial paper
program. See "Use of Leverage." The Fund's
obligations under the commercial paper program are
senior to the Preferred Shares. Payments to holders
of Preferred Shares (the "Preferred Shareholders")
in liquidation or otherwise will be subject to the
prior payment of all outstanding indebtedness,
including the Fund's obligations under the
commercial paper program. There can be no assurance
that the commercial paper will remain outstanding
or that the Fund will continue such borrowing.
The issuance of Preferred Shares and the use of
borrowing for investment purposes are forms of
financial leverage and as such pose certain risks.
The Fund generally will not utilize financial
leverage if it anticipates that it would result in
a lower return to common shareholders over time.
Use of financial leverage creates an opportunity
for increased income for common shareholders but,
at the same time, creates the possibility for
greater loss (including the likelihood of greater
volatility of net asset value and market price of
the common shares and of dividends), and, under
certain circumstances, the Fund's use of financial
leverage may impair the ability of the Fund to
maintain its qualification, for federal income tax
purposes, as a regulated investment company. There
can be no assurance that a
4
leveraging strategy will be successful during any
period in which it is employed. The fees paid to
the Adviser and the Administrator (as defined
below) are calculated on the basis of the Fund's
managed assets, and those fees will be higher when
leverage is utilized.
The Fund currently has a fundamental investment
restriction that the Fund may not issue senior
securities (including borrowing money or entering
into reverse repurchase agreements) in excess of
33 1/3% of its total assets (including the amount
of senior securities issued but excluding any
liabilities and indebtedness not constituting
senior securities) except that the Fund may borrow
up to an additional 5% of its total assets for
temporary purposes, or pledge its assets other than
to secure such issuance or in connection with
hedging transactions, when-issued and delayed
delivery transactions and similar investment
strategies. The Fund has filed a proxy statement
seeking a shareholder vote to amend the
aforementioned investment restriction regarding the
Fund's use of financial leverage to allow the Fund
to utilize financial leverage to the maximum extent
allowable under the 1940 Act. The Fund expects to
hold a shareholder meeting to vote on this proposal
on April 8, 2004. For a description of the
limitations on financial leverage under the 1940
Act, see "Use of Leverage."
Principal Investment
Risks...................... Risk is inherent in all investing. The primary
risks of investing in Preferred Shares are:
- the Fund will not be permitted to declare
dividends or other distributions with respect to
the Preferred Shares or redeem the Preferred
Shares unless the Fund meets certain asset
coverage requirements and is not in default under
the terms of any senior indebtedness;
- in extraordinary circumstances, the Fund may not
earn sufficient income from its investments to
pay dividends on the Preferred Shares;
- senior indebtedness of the Fund may also
constitute a substantial lien and burden on the
common shares and the Preferred Shares by reason
of its prior claim against the income of the Fund
and against the net assets of the Fund in
liquidation;
- if a Preferred Share auction fails, investors may
not be able to sell any or all of their Preferred
Shares;
- because of the nature of the market for Preferred
Shares, investors may receive less than the price
paid for their Preferred Shares if sold outside
of the auction, especially when market interest
rates are rising;
- although broker-dealers may maintain a secondary
market in the Preferred Shares, they are not
obligated to do so and no secondary market may
develop or exist at any time;
- a rating agency or agencies could downgrade the
ratings assigned to the Preferred Shares, which
could affect liquidity; and
- the Fund may be forced to redeem the Preferred
Shares to meet regulatory or rating agency
requirements or may voluntarily redeem the
Preferred Shares in certain circumstances.
5
The primary risks of investing in the Fund are:
- borrowers under Senior Loans may default on
obligations to pay principal or interest when
due;
- although, with respect to collateralized Senior
Loans, the Fund generally will invest only in
Senior Loans that the Adviser believes are
secured by specific collateral, which may include
guarantees, the value of which exceeds the
principal amount of the Senior Loan at the time
of initial investment, there can be no assurance
that the liquidation of any such collateral would
satisfy the Borrower's obligation in the event of
non-payment of scheduled interest or principal
payments, or that such collateral could be
readily liquidated; moreover, to the extent that
a Senior Loan is collateralized by stock in the
borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the
event of bankruptcy of the Borrower;
- although it is growing, the secondary market for
Senior Loans is currently limited and Senior
Loans generally are not listed on any national
securities exchange or automated quotation system
and no active trading market may exist for many
of the Senior Loans in which the Fund will
invest; accordingly, Senior Loans are generally
less liquid than many other types of investments
and the Fund may be restricted in its ability to
sell its Senior Loans in a timely fashion and at
a fair price;
- interest rates are near historical lows and it is
likely that they will rise, and if long-term
rates rise, the value of the Fund's investment
portfolio may decline thereby reducing asset
coverage for the Preferred Shares, although such
risk may be reduced by the floating or variable
rate nature of Senior Loans held by the Fund;
- the Fund's use of financial leverage will result
in greater volatility in the net asset value of
the Fund's common shares;
- in certain circumstances, the Fund may not earn
sufficient income from its investments to pay
interest on the Fund's indebtedness or dividends;
- to the extent the Fund invests in non-U.S.
issuers, the Fund may be subject to special
risks; and
- the Fund is a non-diversified Fund and to the
extent the Fund invests a relatively high
percentage of its assets in obligation of a
limited number of issuers, the Fund may be more
susceptible than a diversified company to any
single corporate, economic, political or
regulatory occurrence.
For further discussion of the risks of investing in
the Preferred Shares and the Fund, see "Risk
Factors."
Investment Adviser and
Administrator............ Van Kampen Asset Management is the Fund's
investment adviser. The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van
Kampen Investments"). Van Kampen Investments is the
Fund's administrator (in such capacity, the
"Administrator"). Van Kampen Investments is a
diversified asset management company
6
that administers more than three million retail
investor accounts, has extensive capabilities for
managing institutional portfolios and has more than
$84 billion under management or supervision as of
December 31, 2003. Van Kampen Investments has more
than 50 open-end funds, more than 30 closed-end
funds and more than 2,700 unit investment trusts
that are distributed by authorized dealers
nationwide.
The Fund pays the Adviser a monthly fee (accrued
daily and paid monthly) computed based upon an
annual rate of 0.85% applied to the average daily
managed assets of the Fund (which, for purposes of
determining such fee, shall mean the average daily
gross asset value of the Fund minus the sum of
accrued liabilities other than the aggregate amount
of any borrowings undertaken by the Fund). The Fund
pays the Administrator a monthly fee (accrued daily
and paid monthly) computed based upon an annual
rate of 0.20% applied to the average daily managed
assets of the Fund (as defined above). Because
leverage will increase the amount of the Fund's
total assets, the Fund will pay a greater amount of
advisory and administrative fees when leverage is
utilized.
Dividends and Dividend
Periods.................... The table below shows the dividend rates for the
initial dividend periods for each series of the
Preferred Shares offered in this Prospectus. For
subsequent dividend periods, the Preferred Shares
will pay dividends based on a rate set at auctions,
normally held every 7 days. In most instances,
dividends are also payable every 7 days, on the
first business day following the end of the
dividend period. See "Description of Preferred
Shares."
The table below also shows the date from which
dividends on the Preferred Shares will accumulate
at the initial rate, the dividend payment date for
the initial dividend period and the day on which
dividends will normally be paid. If the day on
which dividends otherwise would be paid is not a
business day, then dividends will be paid on the
first business day that falls after that day.
Finally, the table below shows the number of days
of the initial dividend periods for the Preferred
Shares. Subsequent dividend periods generally will
be 7 days. The dividend payment date for special
dividend periods of more than 7 days will be set
out in the notice designating a special dividend
period. See "Description of Preferred
Shares -- Designation of Special Dividend Periods."
DIVIDEND
PAYMENT DATE NUMBER OF
INITIAL DATE OF FOR INITIAL SUBSEQUENT DAYS OF INITIAL
PREFERRED DIVIDEND ACCUMULATION DIVIDEND DIVIDEND DIVIDEND
SHARES RATE OF INITIAL RATE* PERIOD* PAYMENT DAY PERIOD
--------- -------- ----------------- ------------ ----------- -----------------
Series M 1.10% February 20 March 2 Tuesday 11
Series T 1.10% February 20 March 3 Wednesday 12
Series W 1.10% February 20 March 4 Thursday 13
Series TH 1.10% February 20 March 5 Friday 14
Series F 1.10% February 20 March 8 Monday 17
-----------------------------------------
* All dates 2004.
7
Asset Maintenance.......... The Fund's Certificate, attached as Appendix B to
the SAI, establishes and fixes the rights and
preferences of the Preferred Shares. The
Certificate provides that the Fund must maintain:
- asset coverage of the Preferred Shares as
required by the rating agency or agencies rating
the Preferred Shares, and
- asset coverage of the Preferred Shares as
required by the 1940 Act (which currently
requires asset coverage of at least 200%).
Based on the Fund's assets and liabilities as of
December 31, 2003, the asset coverage of the
Preferred Shares as measured pursuant to the 1940
Act would be approximately 317% if the Fund were to
issue all of the Preferred Shares offered in this
Prospectus and apply the proceeds as set forth
under "Use of Proceeds" below.
In addition, under the commercial paper program,
the Fund may not permit the Fund's asset coverage
ratio (as defined separately by related credit
agreements) to fall below 300% at any time without
causing an event of default under the credit
agreements.
Redemption................. Although the Fund ordinarily does not expect to
redeem Preferred Shares, it may be required to
redeem Preferred Shares if, for example, the Fund
does not correct a failure to meet an asset
coverage ratio required by law or a rating agency
guideline in a timely manner. The Fund may also
voluntarily redeem Preferred Shares under certain
conditions. See "Description of Preferred
Shares -- Redemption."
Liquidation Preference..... The liquidation preference (that is, the amount the
Fund must pay to Preferred Shareholders if the Fund
is liquidated) for Preferred Shares will be $25,000
per share plus accumulated but unpaid dividends, if
any, whether or not earned or declared. See
"Description of Preferred Shares -- Liquidation
Preference."
Voting Rights.............. The 1940 Act requires that the Preferred
Shareholders, and the holders of any other series
of preferred shares of the Fund, voting as a
separate class, have the right to:
- elect at least two trustees at all times, and
- elect a majority of the trustees at any time when
dividends on any series of the Preferred Shares,
or any other series of preferred shares of the
Fund, are unpaid for two full years, and they
will continue to be so represented until all
dividends in arrears shall have been paid or
otherwise provided for.
The holders of common shares will elect the
remaining trustees. The Preferred Shareholders, and
the holders of any other series of preferred shares
of the Fund, will vote as a separate class or
series on other matters as required under the
Fund's Agreement and Declaration of Trust, as
amended (the "Declaration of Trust"), the
Certificate, the 1940 Act and Massachusetts law.
Each common share, each Preferred Share and each
share of any other series of preferred shares of
the Fund is entitled to one vote per share. See
"Description of Preferred Shares -- Voting Rights."
Secondary Market Trading... The Preferred Shares are not listed on an exchange.
Instead, you may buy or sell Preferred Shares at an
auction that is normally held every
8
7 days by submitting orders to a broker-dealer that
has entered into an agreement with the auction
agent and the Fund (a "Broker-Dealer") or to a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer. Broker-dealers may,
but are not obligated to, maintain a secondary
market in Preferred Shares outside of auctions.
There can be no assurance that a secondary market
will develop or, if it does develop, that it will
provide owners with liquidity of investment.
Preferred Shares may be transferred outside of
auctions only to or through a broker-dealer.
Federal Income Taxes....... The distributions with respect to Preferred Shares
(other than distributions in redemption of
Preferred Shares subject to Section 302(b) of the
Internal Revenue Code of 1986, as amended (the
"Code")) will constitute dividends to the extent of
the Fund's current or accumulated earnings and
profits, as calculated for federal income tax
purposes. Such dividends generally will be taxable
as ordinary income to holders. Because the Fund's
portfolio income will consist principally of
interest income, corporate investors in the
Preferred Shares generally will not be entitled to
the dividends received deduction and individual
investors generally will not be entitled to the
reduced rates of taxation available for "qualified
dividend income." Distributions to holders of net
capital gain (the excess of net long-term capital
gain over net short-term capital loss) that are
designated by the Fund as capital gain dividends
will be treated as long-term capital gains in the
hands of such holders. The Internal Revenue Service
currently requires that a regulated investment
company that has two or more classes of stock
allocate to each such class proportionate amounts
of each type of its income (such as ordinary income
and capital gains). Accordingly, the Fund intends
to designate distributions of net capital gain made
with respect to Preferred Shares as capital gain
dividends in proportion to the Preferred Shares'
share of total dividends paid during the year.
9
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial information for a single
common share of beneficial interest of the Fund outstanding throughout the
periods presented. The financial highlights for the fiscal years ended July 31,
2003, 2002, 2001 and 2000 have been audited by Deloitte & Touche LLP,
independent auditors, whose report, along with the Fund's most recent financial
statements, are included in the SAI. The information for the fiscal year ended
July 31, 1999 and for the fiscal period ended July 31, 1998 was audited by the
Fund's former independent auditors.
JUNE 24, 1998
(COMMENCEMENT OF
YEAR ENDED JULY 31, INVESTMENT
---------------------------------------------------- OPERATIONS) TO
2003 2002(E) 2001 2000 1999 JULY 31, 1998
-------- -------- -------- -------- -------- ----------------
Net Asset Value, Beginning of the
Period(a)............................. $ 7.94 $ 8.51 $ 9.65 $ 10.08 $ 10.07 $ 9.99
-------- -------- -------- -------- -------- --------
Net Investment Income................. .46 .49 .79 .81 .77 .07
Net Realized and Unrealized
Gain/Loss........................... .14 (.55) (1.10) (.42) -0- .01
-------- -------- -------- -------- -------- --------
Total from Investment Operations........ .60 (.06) (.31) .39 .77 .08
-------- -------- -------- -------- -------- --------
Less:
Distributions from Net Investment
Income.............................. .44 .51 .83 .81 .76 -0-
Distributions from Net Realized
Gain................................ -0- -0- -0- .01 -0- -0-
-------- -------- -------- -------- -------- --------
Total Distributions..................... .44 .51 .83 .82 .76 -0-
-------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period...... $ 8.10 $ 7.94 $ 8.51 $ 9.65 $ 10.08 $ 10.07
======== ======== ======== ======== ======== ========
Common Share Market Price at End of the
Period................................ $ 7.84 $ 6.67 $ 7.79 $ 8.75 $ 9.56 $ 10.06
Total Return(b)......................... 25.06% -8.05% -1.42% .61% 2.98% .63%**
Net Assets at End of the Period (In
millions)............................. $1,458.6 $1,430.0 $1,532.7 $1,736.5 $1,815.1 $1,812.1
Ratio of Operating Expenses to Average
Net Assets excluding Borrowings*...... 1.59% 1.48% 1.63% 1.75% 1.66% 1.18%
Ratio of Interest Expense to Average Net
Assets excluding Borrowings........... .62% .53% 2.15% 2.49% 2.37% .28%
Ratio of Gross Expense to Average Net
Assets excluding Borrowings*.......... 2.21% 2.01% 3.78% 4.24% 4.03% 1.46%
Ratio of Net Investment Income to
Average Net Assets excluding
Borrowings*........................... 5.98% 6.02% 8.90% 8.19% 7.72% 6.94%
Portfolio Turnover(c)................... 78% 65% 55% 57% 28% 3%**
Supplemental Ratios:
Ratio of Operating Expenses to Average
Net Assets including Borrowings*...... 1.19% 1.22% 1.20% 1.24% 1.18% N/A
Ratio of Interest Expense to Average Net
Assets including Borrowings........... .46% .44% 1.58% 1.77% 1.67% N/A
Ratio of Gross Expense to Average Net
Assets including Borrowings*.......... 1.65% 1.66% 2.78% 3.01% 2.85% N/A
Ratio of Net Investment Income to
Average Net Assets including
Borrowings*........................... 4.47% 4.95% 6.55% 5.83% 5.46% N/A
Senior Indebtedness:
Total Borrowing Outstanding (In
thousands)............................ $401,000 $370,159 $375,000 $700,000 $800,000 $400,000
Asset Coverage Per $1,000 Unit of Senior
Indebtedness(d)....................... 4,637 4,863 5,087 3,481 3,269 5,530
------------
* If certain expenses had not been voluntarily assumed by the Adviser, total
return would have been lower and the Ratio of Operating Expenses to Average
Net Assets and the Ratio of Net Investment Income to Average Net Assets
would have been 1.21% and 6.90% for the period ended July 31, 1998.
** Non-Annualized
(a) Net asset value on June 24, 1998 of $10.00 is adjusted for common share
offering costs of $.013.
10
(b) Total return based on common share market price assumes an investment at the
common share market price at the beginning of the period indicated,
reinvestment of all distributions for the period in accordance with the
Fund's dividend reinvestment plan, and sale of all shares at the closing
common share market price at the end of the period indicated.
(c) Calculation includes the proceeds from principal repayments and sales of
variable rate senior loan interest.
(d) Calculated by subtracting the Fund's total liabilities (not including the
Borrowings) from the Fund's total assets and dividing by the total number of
senior indebtedness units, where one unit equals $1,000 of senior
indebtedness.
(e) As required, effective August 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities. The effect of this change for
the year ended July 31, 2002 was to decrease the ratio of net investment
income to average net asset applicable to common shares by .01%. Net
investment income per share and net realized and unrealized gains and losses
per share were unaffected by the adjustments. Per share, ratios and
supplemental data for the periods prior to July 31, 2002 have not been
restated to reflect this change in presentation.
NA--Not Applicable
SENIOR SECURITIES
AVERAGE DAILY
AVERAGE DAILY BALANCE OF AVERAGE AMOUNT
AMOUNT OF DEBT BALANCE OF DEBT ASSET COVERAGE SHARES OF DEBT
OUTSTANDING AT OUTSTANDING PER $1,000 OF OUTSTANDING PER SHARE
FISCAL YEAR ENDED END OF YEAR DURING YEAR INDEBTEDNESS DURING YEAR DURING YEAR
----------------- -------------- --------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
July 31, 2000.......... $737,000 $718,075 $3,481 180,010 $3,989
July 31, 2001.......... 375,000 578,000 5,087 180,010 3,211
July 31, 2002.......... 370,159 334,000 4,863 180,010 1,855
July 31, 2003.......... 401,000 472,687 4,637 180,010 2,626
THE FUND
The Fund is a non-diversified, closed-end management investment company.
The Fund was organized as a Massachusetts business trust on April 8, 1998, and
is registered under the 1940 Act. The Fund commenced investment operations on
June 23, 1998 upon the closing of an initial public offering of its common
shares of beneficial interest. As of December 31, 2003, the Fund had total
assets of approximately $1.5 billion and net assets of approximately $2.2
billion. On December 31, 2003, the Fund had outstanding 180,010,000 common
shares. The Fund's principal office is located at 1 Parkview Plaza, PO Box 5555,
Oakbrook Terrace, Illinois 60181-5555, and its telephone number is (630)
684-6000.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $693,150,000 after
payment of offering expenses and the sales load. The Fund will use all of the
net proceeds of the offering to (i) pay down amounts borrowed by the Fund under
its commercial paper program by approximately $690 million and (ii) invest the
remaining proceeds in accordance with the Fund's investment objective and
policies as soon as practicable, but in no event, under normal market
conditions, later than three months after the receipt thereof. Pending such
investment, the proceeds may be invested in high-quality, short-term securities.
11
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of December 31, 2003, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby and repayments of the commercial paper program
(including estimated offering expenses and sales load of $6,850,000).
AS OF DECEMBER 31, 2003
-------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
Shareholders' equity
Preferred Shares, par value $0.01 per share (no
shares issued; shares issued, as adjusted, at
$25,000 per share liquidation preference)........ $ -- $ 700,000,000
Common shares, par value $0.01 per share,
180,010,000 shares outstanding................... $ 1,800,100 $ 1,800,100
Capital in excess of par value........................ $1,795,669,290 $1,788,819,290
Undistributed net investment income................... $ 3,177,328 $ 3,177,328
Net accumulated realized gain (loss) from investment
transactions........................................ $ (253,937,719) $ (253,937,719)
Net unrealized depreciation of investments............ $ (24,602,696) $ (24,602,696)
Total net assets less liquidation value of Preferred
Shares.............................................. $1,522,106,303 $1,515,256,303
PORTFOLIO COMPOSITION
The following tables set forth the unaudited portfolio characteristics, top
ten Senior Loan industries as a percentage of assets, the top ten Senior Loans
as a percentage of assets and the ratings of Senior Loans held by the Fund, in
each case as of December 31, 2003.
PORTFOLIO CHARACTERISTICS
Net assets.................................................. $1,522,106,303
Total assets................................................ $2,190,055,917
Assets invested in Senior Loans and other loans............. $2,026,119,717
Average amount outstanding per loan......................... $ 6,720,000
Total number of industries.................................. 46
Weighted average days to next interest rate reset........... 56.9
Assets invested in other debt obligations................... $ 29,967,375
TOP 10 SENIOR LOAN INDUSTRIES AS A PERCENTAGE OF ASSETS ON DECEMBER 31, 2003
DECEMBER 31, 2003
-----------------
Beverage, Food and Tobacco.................................. 7.88%
Printing and Publishing..................................... 7.81%
Medical Products/Supplies................................... 6.44%
Broadcasting -- Cable....................................... 6.39%
Hotel/Motel/Inn/Gaming...................................... 5.19%
Health Care Providers....................................... 4.64%
Chemicals, Plastics & Rubber................................ 4.58%
Automotive.................................................. 3.64%
Leisure and Entertainment................................... 3.56%
Telecommunications-Wireless................................. 3.53%
12
TOP 10 SENIOR LOANS AS A PERCENTAGE OF ASSETS ON DECEMBER 31, 2003
Allied Waste North America.................................. 2.4%
Rite Aid Corporation........................................ 2.0
Charter Communications...................................... 1.9
Community Health Systems.................................... 1.7
Davita, Inc................................................. 1.6
Aladdin Gaming LLC.......................................... 1.5
Federal-Mogul Corporation................................... 1.4
Ispat Inland, L.P........................................... 1.3
Dex Media West LLC.......................................... 1.2
Aurora Foods, Inc........................................... 1.2
SECURITIES RATINGS
The table below reflects the ratings of Senior Loans only, representing
approximately 90% of the Fund's total assets as of December 31, 2003.
PERCENTAGE
NUMBER OF OF TOTAL
S&P* MOODY'S* ISSUES VALUE ASSETS
---- -------- --------- -------------- ----------
(IN THOUSANDS)
AAA Aaa 0 $ 0 0%
AA Aa 0 0 0
A A 0 0 0
BBB Baa 11 71,880 3.5
BB Ba 139 846,777 41.2
B B 134 639,294 31.1
CCC Caa 13 30,551 1.5
Unrated 110 467,585 22.7
--- ---------- -----
Total 407 $2,056,087 100.0%
------------
* Ratings: Using the higher of S&P's or Moody's ratings. S&P rating categories
may be modified further by a plus (+) or minus (-) in the AA, A, BBB, BB, B
and CCC ratings. Moody's rating categories may be modified further by a 1, 2,
or 3 in the Aa, A, Baa, Ba, B and Caa ratings.
+ Senior Loans that are not rated by S&P or Moody's. Such Senior Loans may be
rated by nationally recognized statistical rating organizations other than S&P
or Moody's, or may not be rated by any such organization. With respect to the
percentage of the Fund's assets invested in such Senior Loans, the Adviser
believes that these are of comparable quality to rated Senior Loans in which
the Fund may invest. This determination is based on the Adviser's own internal
evaluation and does not necessarily reflect how such Senior Loans would be
rated by S&P or Moody's if either were to rate the securities.
INVESTMENT OBJECTIVE AND INVESTMENT POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide a high level of current
income, consistent with preservation of capital.
13
INVESTMENT POLICIES
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of Senior Loans to Borrowers which operate in a
variety of industries and geographical regions (including domestic and foreign
entities). Although the Fund's net asset value per common share ("NAV") will
vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's NAV as a result
of changes in interest rates. No assurance can be given that the Fund will
achieve its investment objective.
Senior Loans generally are arranged through private negotiations between a
Borrower and Lenders represented in each case by one or more such Lenders acting
as Agent of the several Lenders. On behalf of the several Lenders, the Agent,
which is frequently the commercial bank or other entity that originates the
Senior Loan and the person that invites other parties to join the lending
syndicate, will be primarily responsible for negotiating the Loan Agreement(s)
that establish the relative terms, conditions and rights of the Borrower and the
several Lenders. In larger transactions it is common to have several Agents;
however, generally only one such Agent has primary responsibility for
documentation and administration of the Senior Loan. Agents are typically paid a
fee or fees by the Borrower for their services.
The Fund may invest in Participations in Senior Loans, may purchase
Assignments of portions of Senior Loans from third parties and may act as one of
the group of Original Lenders. Under normal market conditions, at least 80% of
the Fund's total assets are invested in Senior Loans (either as an Original
Lender or as a purchaser of an Assignment or Participation) of domestic
Borrowers or foreign Borrowers (so long as Senior Loans to foreign Borrowers are
U.S. dollar denominated and payments of interest and repayments of principal
pursuant to such Senior Loans are required to be made in U.S. dollars).
It is anticipated that the proceeds of the Senior Loans in which the Fund
will acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower. The capital structure of a Borrower may
include Senior Loans, senior and junior subordinated debt (which may include
"junk bonds"), preferred stock and common stock issued by the Borrower,
typically in descending order of seniority with respect to claims on the
Borrower's assets. Senior Loans generally are secured by specific collateral,
which may include guarantees. Such guaranteed Senior Loans may be guaranteed by,
or fully secured by assets of, shareholders, owners or affiliated entities of
the Borrower, even if the Senior Loans are not otherwise collateralized by
assets of the Borrower. The Fund may invest up to 20% of its total assets in
Senior Loans which are not secured by any collateral. Senior Loans that are not
secured by specific collateral generally pose a greater risk of non-payment of
interest or loss of principal than do collateralized Senior Loans.
As discussed below, the Fund may also acquire warrants, equity securities
and junior debt securities issued by a Borrower or its affiliates as part of a
package of investments in the Borrower or its affiliates. Warrants, equity
securities and junior debt securities will not be treated as Senior Loans and
thus assets invested in such securities will not count toward the 80% of the
Fund's total assets that normally will be invested in Senior Loans. The Fund
will acquire such interests in warrants, equity securities and junior debt
securities only as an incident to the intended purchase of interests in Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to trademarks, accounts receivable, inventory,
buildings, real estate, franchises and common and preferred stock in its
subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees or other credit support
by and/or securities of affiliates of the Borrowers. In certain instances, a
collateralized Senior Loan may be secured only by stock in the Borrower or its
subsidiaries. Collateral may consist of assets that may not be readily
liquidated, and there is no assurance that the liquidation of such assets would
satisfy fully a Borrower's obligations under a Senior Loan.
14
Loan Agreements may include various restrictive covenants designed to limit
the activities of the Borrower in an effort to protect the right of the Lenders
to receive timely payments of interest on and repayment of principal of the
Senior Loans. Restrictive covenants may include mandatory prepayment provisions
arising from excess cash flows and typically include restrictions on dividend
payments, specific mandatory minimum financial ratios, limits on total debt and
other financial tests. Breach of such covenants, if not waived by the Lenders,
is generally an event of default under the applicable Loan Agreement and may
give the Lenders the right to accelerate principal and interest payments. The
Adviser will consider the terms of such restrictive covenants in deciding
whether to invest in Senior Loans for the Fund's portfolio. When the Fund holds
a Participation in a Senior Loan, it may not have the right to vote to waive
enforcement of any restrictive covenant breached by a Borrower. Lenders voting
in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund, and such Lenders may not consider
the interests of the Fund in connection with their votes.
Senior Loans in which the Fund invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the Prime Rate, LIBOR, the CD
rate or other base lending rates used by commercial lenders. The Prime Rate
quoted by a major U.S. bank is generally the interest rate at which such bank is
willing to lend U.S. dollars to its most creditworthy borrowers, although it may
not be the bank's lowest available rate. LIBOR, as provided for in Loan
Agreements, is generally an average of the interest rates quoted by several
designated banks as the rates at which such banks would offer to pay interest to
major financial institutional depositors in the London interbank market on U.S.
dollar denominated deposits for a specified period of time. The CD rate, as
provided for in Loan Agreements, is generally the average rate paid on large
certificates of deposit traded in the secondary market.
The Fund may invest in the Senior Loans of non-U.S. issuers. Investment in
the Senior Loans of non-U.S. issuers involves special risks, including that
non-U.S. issuers may be subject to less rigorous accounting and reporting
requirements than U.S. issuers, less rigorous regulatory requirements, differing
legal systems and laws relating to creditors' rights, the potential inability to
enforce legal judgments and foreclose on collateral, possible restrictions on
expatriation and repatriation of capital and the potential for political, social
and economic adversity.
The Fund is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. The Fund's assets invested in Senior Loans
generally consist of Senior Loans with stated maturities of between three and
ten years, and with rates of interest which are redetermined either daily,
monthly, quarterly or semi-annually; provided, however, that the Fund may invest
up to 5% of its total assets in Senior Loans which permit the Borrower to select
an interest rate redetermination period of up to one year. Investment in Senior
Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's NAV as a result of changes in interest rates. The
Senior Loans in the Fund's portfolio will at all times have a dollar-weighted
average time until the next interest rate redetermination of 90 days or less. As
a result, as short-term interest rates increase, interest payable to the Fund
from its investments in Senior Loans should increase, and as short-term interest
rates decrease, interest payable to the Fund from its investments in Senior
Loans should decrease. The amount of time required to pass before the Fund will
realize the effects of changing short-term market interest rates on its
portfolio will vary with the dollar-weighted average time until the next
interest rate redetermination on the Senior Loans in the Fund's portfolio. The
Fund may utilize certain investment practices to, among other things, shorten
the effective interest rate redetermination period of Senior Loans in its
portfolio. In such event, the Fund will consider such shortened period to be the
interest rate redetermination period of the Senior Loan; provided, however, that
the Fund will not invest in Senior Loans which permit the Borrower to select an
interest rate redetermination period in excess of one year. Because most Senior
Loans in the Fund's portfolio will be subject to mandatory and/or optional
prepayment and there may be significant economic incentives for a Borrower to
prepay its loans, prepayments of Senior Loans in the Fund's portfolio may occur.
Accordingly, the actual remaining maturity of the Fund's portfolio invested in
Senior Loans may vary substantially from the average stated maturity of the
Senior Loans held in the Fund's portfolio. As a result of expected prepayments
from time to time of Senior Loans in the Fund's portfolio, the Fund
15
estimates that the actual maturities of Senior Loans held in its portfolio
generally range between 18 and 24 months.
When interest rates decline, the value of a portfolio invested in
fixed-rate obligations can be expected to rise. Conversely, when interest rates
rise, the value of a portfolio invested in fixed-rate obligations can be
expected to decline. Although the Fund's NAV will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in NAV as a result of changes in interest
rates. Accordingly, the Fund's management expects the value of the Fund's
portfolio to fluctuate less than a portfolio of fixed-rate, longer term
obligations as a result of interest rate changes. However, changes in prevailing
interest rates can be expected to cause some fluctuation in the Fund's NAV. In
addition to changes in interest rates, changes in the credit quality of
Borrowers will also affect the Fund's NAV. Further, a serious deterioration in
the credit quality of a Borrower could cause a prolonged or permanent decrease
in the Fund's NAV. Fluctuations in NAV may be magnified as a result of the
Fund's use of leverage.
The Fund may purchase and retain in its portfolio Senior Loan interests in
Borrowers which have filed for protection under the federal bankruptcy laws or
have had an involuntary bankruptcy petition filed against them by their
creditors. The values of such Senior Loan interests, if any, will reflect, among
other things, of the likelihood that the Fund ultimately will receive full
repayment of the principal amount of such Senior Loan interests, the likely
duration, if any, of a lapse in the scheduled repayment of principal and
prevailing interest rates. At times, in connection with the restructuring of a
Senior Loan either outside of bankruptcy court or in the context of bankruptcy
court proceedings, the Fund may determine or be required to accept equity
securities or junior debt securities in exchange for all or a portion of a
Senior Loan interest. Depending upon, among other things, the Adviser's
evaluation of the potential value of such securities in relation to the price
that could be obtained by the Fund at any given time upon sale thereof, the Fund
may determine to hold such securities in its portfolio. Any equity securities
and junior debt securities held by the Fund will not be treated as Senior Loans
and thus will not count toward the 80% of the Fund's total assets that normally
will be invested in Senior Loans.
Senior Loans historically have not been rated by nationally recognized
statistical rating organizations. Because of the senior capital structure
position of Senior Loans and the collateralized or guaranteed nature of most
Senior Loans, the Fund and the Adviser believe that ratings of other securities
issued by a Borrower do not necessarily reflect adequately the relative quality
of a Borrower's Senior Loans. Therefore, although the Adviser may consider such
ratings in determining whether to invest in a particular Senior Loan, the
Adviser is not required to consider such ratings and such ratings will not be
the determinative factor in the Adviser's analysis. The Fund may invest a
substantial portion of its assets in Senior Loans, the Borrowers with respect to
which have outstanding debt securities which are rated below investment grade by
a nationally recognized statistical rating organization or are unrated but
determined by the Adviser to be of comparable quality to such securities. Debt
securities rated below investment grade or unrated but of comparable quality
commonly are referred to as "junk bonds." The Fund will invest only in those
Senior Loans with respect to which the Borrower, in the opinion of the Adviser,
demonstrates one or more of the following characteristics: sufficient cash flow
to service debt; adequate liquidity; successful operating history; strong
competitive position; experienced management; and, with respect to
collateralized Senior Loans, collateral coverage that equals or exceeds the
outstanding principal amount of the Senior Loan. In addition, the Adviser will
consider, and may rely in part, on the analyses performed by the Agent and other
Lenders, including such persons' determinations with respect to collateral
securing a Senior Loan.
The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes reduce its
exposure to any risks incident to such policy, the Fund may be more susceptible
than an investment company without such a policy to any single economic,
political or regulatory occurrence affecting such industries. Persons engaged in
such industries may be more susceptible than are persons engaged in some other
industry to, among other
16
things, fluctuations in interest rates, changes in the Federal Open Market
Committee's monetary policy, governmental regulations concerning such industries
and concerning capital raising activities generally and fluctuations in the
financial markets generally.
Participations by the Fund in a Lender's portion of a Senior Loan typically
will result in the Fund having a contractual relationship only with such Lender,
not with the Borrower. As a result, the Fund may have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by such Lender of
such payments from the Borrower. In connection with purchasing Participations,
the Fund generally will have no right to enforce compliance by the Borrower with
the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower, and the Fund may
not directly benefit from the collateral supporting the Senior Loan in which it
has purchased the Participation. As a result, the Fund may assume the credit
risk of both the Borrower and the Lender selling the Participation. In the event
of the insolvency of the Lender selling a Participation, the Fund may be treated
as a general creditor of such Lender. The Fund has taken the following measures
in an effort to minimize such risks. The Fund will only acquire Participations
if the Lender selling the Participation, and any other persons interpositioned
between the Fund and the Lender, (i) at the time of investment has outstanding
debt or deposit obligations rated investment grade (BBB or A-3 or higher by S&P
or Baa or P-3 or higher by Moody's) or determined by the Adviser to be of
comparable quality and (ii) has entered into an agreement which provides for the
holding of assets in safekeeping for, or the prompt disbursement of assets to,
the Fund. Long-term debt rated BBB by S&P is regarded by S&P as having adequate
capacity to pay interest and repay principal, and debt rated Baa by Moody's is
regarded by Moody's as a medium grade obligation, i.e., it is neither highly
protected nor poorly secured. Commercial paper rated A-3 by S&P indicates that
S&P believes such obligations exhibit adequate protection parameters but that
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation, and issues of commercial paper rated P-3 by Moody's are considered
by Moody's to have an acceptable ability for repayment of short-term debt
obligations but the effect of industry characteristics and market compositions
may be more pronounced. The Fund ordinarily will purchase a Participation only
if, at the time of such purchase, the Fund believes that the party from whom it
is purchasing such Participation is retaining an interest in the underlying
Senior Loan. In the event that the Fund does not so believe, it will only
purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the 1940 Act, as qualified to serve as a custodian for a registered investment
company and (ii) has been approved as a custodian by the Board of Trustees of
the Fund (a "Designated Custodian").
The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments may,
however, be arranged through private negotiations between potential assignees
and potential assignors, and the rights and obligations acquired by the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
When the Fund is an Original Lender originating a Senior Loan it may share
in a fee paid to the Original Lenders. The Fund will never act as the Agent or
principal negotiator or administrator of a Senior Loan. When the Fund is a
Lender, it will have a direct contractual relationship with the Borrower, may
enforce compliance by the Borrower with the terms of the Loan Agreement and may
have rights with respect to any funds acquired by other Lenders through set-off.
Lenders also have full voting and consent rights under the applicable Loan
Agreement. Action subject to Lender vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan. Certain decisions, such as reducing the
amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor, frequently require
the unanimous vote or consent of all Lenders affected.
17
The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. Further, the
Fund will not purchase interests in Senior Loans unless such Agent, Lender or
interpositioned person has entered into an agreement which provides for the
holding of assets in safekeeping for, or the prompt disbursement of assets to,
the Fund.
Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters Federal Deposit Insurance Corporation
("FDIC") receivership or, if not FDIC insured, enters into bankruptcy. Should
such an Agent, Lender or assignor with respect to an Assignment interpositioned
between the Fund and the Borrower become insolvent or enter FDIC receivership or
bankruptcy, any interest in the Senior Loan of such person and any loan payment
held by such person for the benefit of the Fund should not be included in such
person's estate. If, however, any such amount were included in such person's
estate, the Fund would incur certain costs and delays in realizing payment or
could suffer a loss of principal or interest. In such event, the Fund could
experience a decrease in NAV.
The Fund may be required to pay and may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment penalties
when a Borrower prepays all or part of a Senior Loan. The Fund will receive
these fees directly from the Borrower if the Fund is an Original Lender, or, in
the case of commitment fees and prepayment penalties, if the Fund acquires an
interest in a Senior Loan by way of Assignment. Whether or not the Fund receives
a facility fee from the Lender in the case of an Assignment, or any fees in the
case of a Participation, depends upon negotiations between the Fund and the
Lender selling such interests. When the Fund is an assignee, it may be required
to pay a fee, or forgo a portion of interest and any fees payable to it, to the
Lender selling the Assignment. Occasionally, the assignor will pay a fee to the
assignee based on the portion of the principal amount of the Senior Loan which
is being assigned. A Lender selling a Participation to the Fund may deduct a
portion of the interest and any fees payable to the Fund as an administrative
fee prior to payment thereof to the Fund. The Fund may be required to pay over
or pass along to a purchaser of an interest in a Senior Loan from the Fund a
portion of any fees that the Fund would otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
Because the interest rates on Senior Loans are periodically redetermined at
relatively short intervals, the Fund and the Adviser believe that the prepayment
of, and subsequent reinvestment by the Fund in, Senior Loans will not have a
materially adverse impact on the yield on the Fund's portfolio and may have a
beneficial impact on income due to receipt of prepayment penalties, if any, and
any facility fees earned in connection with reinvestment.
A Lender may have certain obligations pursuant to a Loan Agreement, which
may include the obligation to make additional loans in certain circumstances.
The Fund currently intends to reserve against such contingent obligations by
segregating cash, liquid securities and/or liquid Senior Loans sufficient to
cover such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments in the aggregate would exceed 20% of the Fund's total assets or
would cause the Fund to fail to meet the diversification requirements set forth
under the heading "Investment Restrictions" in the SAI.
Under normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and
18
junior debt securities acquired in connection with the Fund's investments in
Senior Loans. Such high quality, short-term securities may include commercial
paper rated at least in the top two rating categories of either S&P or Moody's,
or unrated commercial paper considered by the Adviser to be of similar quality,
interests in short-term loans of Borrowers having short-term debt obligations
rated or a short-term credit rating at least in such top two rating categories
or having no such rating but determined by the Adviser to be of comparable
quality, certificates of deposit and bankers' acceptances and securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities. Such
high quality, short-term securities may pay interest at rates which are
periodically redetermined or may pay interest at fixed rates. If the Adviser
determines that market conditions temporarily warrant a defensive investment
policy, the Fund may invest, subject to its ability to liquidate its relatively
illiquid portfolio of Senior Loans, up to 100% of its assets in cash and such
high quality, short-term debt securities. The Fund will acquire such warrants,
equity and junior debt securities only as an incident to the purchase or
intended purchase of interests in collateralized Senior Loans. Although the Fund
generally will acquire interests in warrants, equity and junior debt securities
only when the Adviser believes that the relative value being given by the Fund
in exchange for such interests is substantially outweighed by the potential
value of such instruments, investment in warrants, equity and junior debt
securities entail certain risks in addition to those associated with investments
in Senior Loans. Warrants and equity securities have a subordinate claim on a
Borrower's assets as compared with debt securities, and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans.
The Fund also may invest up to 5% of its total assets in structured notes
with rates of return determined by reference to the total rate of return on one
or more loans referenced in such notes. The rate of return on the structured
note may be determined by applying a multiplier to the rate of total return on
the referenced loan or loans. Application of a multiplier is comparable to the
use of financial leverage, a speculative technique. Leverage magnifies the
potential for gain and the risk of loss; as a result, a relatively small decline
in the value of a referenced note could result in a relatively large loss in the
value of a structured note. Structured notes will be treated as Senior Loans for
purposes of the Fund's policy of normally investing at least 80% of its assets
in Senior Loans.
USE OF LEVERAGE
The Fund uses financial leverage for investment purposes. The Fund has
authority to do so through borrowings, including the issuance of debt
securities, or the issuance of preferred shares, or through the use of certain
other transactions which have the effect of financial leverage.
Including the proceeds of the offering of the Preferred Shares, it is
currently anticipated that the amount of leverage will represent approximately
32% (and in no event will it exceed 50%) of the Fund's total assets. In addition
to issuing Preferred Shares, the Fund borrows money through a commercial paper
program. The Fund's obligations under the commercial paper program are senior to
the Preferred Shares. Payments to Preferred Shareholders in liquidation or
otherwise will be subject to the prior payment of all outstanding indebtedness,
including the Fund's obligations under the commercial paper program. There can
be no assurance that the commercial paper will remain outstanding or that the
Fund will continue such borrowing.
The Fund currently has a fundamental investment restriction that the Fund
may not issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any liabilities
and indebtedness not constituting senior securities), except that the Fund may
borrow up to an additional 5% of its total assets for temporary purposes, or
pledge its assets other than to secure such issuance or in connection with
hedging transactions, when-issued and delayed delivery transactions and similar
investment strategies. The Fund has filed a proxy statement seeking a
shareholder vote to amend the aforementioned
19
investment restriction regarding the Fund's use of financial leverage to allow
the Fund to utilize financial leverage to the maximum extent allowable under the
1940 Act (see the 1940 Act limitations described below). Until the Fund receives
shareholder approval to amend its fundamental investment restriction regarding
the use of financial leverage, the Fund may issue senior securities (which
includes the Preferred Shares and any borrowing under its existing commercial
paper program) up to the current limitation (i.e. 33% of its total assets) and,
upon receiving such approval, may increase its use of senior securities (by
maintaining the Preferred Shares and increasing borrowing under the commercial
paper program) up to the leverage limitations under the 1940 Act. See
"Description of Commercial Paper Program." The Fund expects to hold a
shareholder meeting to vote on this proposal on April 8, 2004.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of at least
300% of the aggregate outstanding principal balance of indebtedness (i.e., such
indebtedness may not exceed 33 1/3% of the Fund's total assets). Additionally,
under the 1940 Act, the Fund may not declare any dividend or other distribution
upon any class of its capital shares, or purchase any such capital shares,
unless the aggregate indebtedness of the Fund has, at the time of the
declaration of any such dividend or distribution or at the time of any such
purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be. Under the 1940
Act, the Fund is not permitted to issue preferred shares unless immediately
after such issuance the net asset value of the Fund's portfolio is at least 200%
of the liquidation value of the outstanding preferred shares (i.e., such
liquidation value may not exceed 50% of the Fund's total assets). In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its common shares unless, at the time of such declaration, the net asset value
of the Fund's portfolio (determined after deducting the amount of such dividend
or other distribution) is at least 200% of such liquidation value.
The use of financial leverage creates the opportunity for increased net
income and NAV appreciation for the Fund's common shares. The concept of
leveraging is based on the premise that the return on the underlying portfolio
assets (including assets obtained from the leverage) will exceed the costs
related to such leverage. As the difference between the return on the underlying
assets and costs of leverage narrow, the return provided by leverage is reduced
and a decline in the value of portfolio assets may completely offset any
benefits of leverage. Leverage creates risks for common shareholders, including
the likelihood of greater volatility of NAV and market price of the common
shares and the possibility that fluctuations in interest rates on borrowings and
short-term debt or in the dividend rates on any preferred shares may affect the
return to common shareholders. To the extent the income or capital growth
derived from securities purchased with funds received from leverage exceeds the
cost of leverage, the Fund's return will be greater than if leverage had not
been used. Conversely, if the income or capital growth from the securities
purchased with such funds is not sufficient to cover the cost of leverage, the
Fund's return will be less than if leverage had not been used, and therefore the
amount available for distribution to common shareholders as dividends and other
distributions will be reduced. The Fund generally will not utilize financial
leverage if it anticipates that it would result in a lower return to common
shareholders over time. As discussed under "Management of the Fund," the fees
paid to the Adviser and the Administrator are calculated on the basis of the
Fund's average daily managed assets, including proceeds from borrowings for
leverage and the issuance of preferred shares, and thus those fees will be
higher when leverage is utilized.
Certain types of borrowings, including borrowings under the Fund's
commercial paper program, may result in the Fund being subject to covenants in
credit agreements, including those relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies which may issue
ratings for corporate debt securities or any additional series of preferred
shares issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the 1940 Act. It is not anticipated that these covenants or guidelines will
impede the Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies. See "Description of Commercial Paper
Program" and "Description of Preferred Shares."
20
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on the Adviser's ability to predict correctly interest rates and market
movements, and there is no assurance that a leveraging strategy will be
successful during any period in which it is employed.
The amount of outstanding leverage may vary with prevailing market or
economic conditions.
OTHER INVESTMENT PRACTICES
In connection with the investment objective and policies described above,
the Fund may engage in interest rate and other hedging transactions, lend
portfolio holdings, purchase and sell interests in Senior Loans and other
portfolio debt securities on a "when issued" or "delayed delivery" basis and
enter into repurchase and reverse repurchase agreements. These investment
practices involve certain special risk considerations. The Adviser may use some
or all of the following investment practices when, in the opinion of the
Adviser, their use is appropriate. Although the Adviser believes that these
investment practices may further the Fund's investment objective, no assurance
can be given that these investment practices will achieve this result.
Interest Rate and Other Hedging Transactions. The Fund may enter into
various interest rate hedging and risk management transactions. Certain of these
interest rate hedging and risk management transactions may be considered to
involve derivative instruments. A derivative is a financial instrument whose
performance is derived at least in part from the performance of an underlying
index, security or asset. The values of certain derivatives can be affected
dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives, with many
different uses. The Fund expects to enter into these transactions primarily to
seek to preserve a return on a particular investment or portion of its
portfolio, and may also enter into such transactions to seek to protect against
decreases in the anticipated rate of return on floating or variable rate
financial instruments the Fund owns or anticipates purchasing at a later date,
or for other risk management strategies such as managing the effective
dollar-weighted average duration of the Fund's portfolio. In addition, the Fund
may also engage in hedging transactions to seek to protect the value of its
portfolio against declines in NAV resulting from changes in interest rates or
other market changes. The Fund does not intend to engage in such transactions to
enhance the yield on its portfolio or to increase income available for
distributions. Market conditions will determine whether and in what
circumstances the Fund would employ any of the hedging and risk management
techniques described below. The Fund will not engage in any of the transactions
for speculative purposes and will use them only as a means to hedge or manage
the risks associated with assets held in, or anticipated to be purchased for,
the Fund's portfolio or obligations incurred by the Fund. The successful
utilization of hedging and risk management transactions requires skills
different from those needed in the selection of the Fund's portfolio securities.
The Fund believes that the Adviser possesses the skills necessary for the
successful utilization of hedging and risk management transactions. The Fund
will incur brokerage and other costs in connection with its hedging
transactions.
The Fund may enter into interest rate swaps or purchase or sell interest
rate caps or floors. The Fund will not sell interest rate caps or floors that it
does not own. Interest rate swaps involve the exchange by the Fund with another
party of their respective obligations to pay or receive interest, e.g., an
exchange of an obligation to make floating rate payments for an obligation to
make fixed rate payments. For example, the Fund may seek to shorten the
effective interest rate redetermination period of a Senior Loan in its portfolio
the Borrower of which has selected an interest rate redetermination period of
one year. The Fund could exchange the Borrower's obligation to make fixed rate
payments for one year for an obligation to make payments that readjust monthly.
In such event, the Fund would consider the interest rate redetermination period
of such Senior Loan to be the shorter period.
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 at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
21
interest obligations are determined although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not enter
into swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Fund.
In circumstances in which the Adviser anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases an interest rate swap, if the floating rate payments fell below the
level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.
The successful use of swaps, caps and floors to preserve the rate of return
on a portfolio of financial instruments depends on the Adviser's ability to
predict correctly the direction and extent of movements in interest rates.
Although the Fund believes that use of the hedging and risk management
techniques described above will benefit the Fund, if the Adviser's judgment
about the direction or extent of the movement in interest rates is incorrect,
the Fund's overall performance would be worse than if it had not entered into
any such transactions. For example, if the Fund had purchased an interest rate
swap or an interest rate floor to hedge against its expectation that interest
rates would decline but instead interest rates rose, the Fund would lose part or
all of the benefit of the increased payments it would receive as a result of the
rising interest rates because it would have to pay amounts to its counterparty
under the swap agreement or would have paid the purchase price of the interest
rate floor.
Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and the
Fund will segregate an amount of cash or liquid assets having an aggregate NAV
at least equal to the accrued excess. If the Fund enters into a swap on other
than a net basis, the Fund will segregate an amount of cash or liquid assets
equal to the full amount of the Fund's obligations under such swap. Accordingly,
the Fund does not treat swaps as senior securities. The Fund may enter into
swaps, caps and floors with member banks of the Federal Reserve System, members
of the NYSE or other entities determined by the Adviser, pursuant to procedures
adopted and reviewed on an ongoing basis by the Board of Trustees, to be
creditworthy. If a default occurs by the other party to such transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction, but such remedies may be subject to bankruptcy and insolvency laws
which could affect the Fund's rights as a creditor. The swap market has grown
substantially in recent years with a large number of banks and financial
services firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations and they are less liquid than swaps.
There can be no assurance, however, that the Fund will be able to enter into
interest rate swaps or to purchase interest rate caps or floors at prices or on
terms the Adviser believes are advantageous to the Fund. In addition, although
the terms of interest rate swaps, caps and floors may provide for termination,
there can be no assurance that the Fund will be able to terminate an interest
rate swap or to sell or offset interest rate caps or floors that it has
purchased.
New financial products continue to be developed and the Fund may invest in
any such products as may be developed to the extent consistent with its
investment objective and the regulatory and federal tax requirements applicable
to investment companies.
22
Lending of Portfolio Holdings. The Fund may seek to increase its income by
lending financial instruments in its portfolio in accordance with present
regulatory policies, including those of the Board of Governors of the Federal
Reserve System and the SEC. Such loans may be made, without limit, to brokers,
dealers, banks or other recognized institutional borrowers of financial
instruments and would be required to be secured continuously by collateral,
including cash, cash equivalents or U.S. Treasury bills maintained on a current
basis at an amount at least equal to the market value of the financial
instruments loaned. The Fund would have the right to call a loan and obtain the
financial instruments loaned at any time on five days' notice. For the duration
of a loan, the Fund would continue to receive the equivalent of the interest
paid by the issuer on the financial instruments loaned and also may receive
compensation from the investment of the collateral.
The Fund would not have the right to vote any financial instruments having
voting rights during the existence of the loan, but the Fund could call the loan
in anticipation of an important vote to be taken among holders of the financial
instruments or in anticipation of the giving or withholding of their consent on
a material matter affecting the financial instruments. As with other extensions
of credit, risks of delay in recovery or even loss of rights in the collateral
exist should the borrower of the financial instruments fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing and when, in the judgment of the Adviser, the consideration which
can be earned currently from loans of this type justifies the attendant risk.
The creditworthiness of firms to which the Fund lends its portfolio holdings
will be monitored on an ongoing basis by the Adviser pursuant to procedures
adopted and reviewed, on an ongoing basis, by the Board of Trustees of the Fund.
No specific limitation exists as to the percentage of the Fund's assets which
the Fund may lend.
"When Issued" and "Delayed Delivery" Transactions. The Fund may also
purchase and sell interests in Senior Loans and other portfolio securities on a
"when issued" and "delayed delivery" basis. No income accrues to the Fund on
such interests or securities in connection with such purchase transactions prior
to the date the Fund actually takes delivery of such interests or securities.
These transactions are subject to market fluctuation; the value of the interests
in Senior Loans and other portfolio debt securities at delivery may be more or
less than their purchase price, and yields generally available on such interests
or securities when delivery occurs may be higher or lower than yields on the
interests or securities obtained pursuant to such transactions. Because the Fund
relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will segregate cash and/or liquid assets having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interests or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
Repurchase Agreements. The Fund may enter into repurchase agreements (a
purchase of, and a simultaneous commitment to resell, a financial instrument at
an agreed upon price on an agreed upon date) only with member banks of the
Federal Reserve System and member firms of the NYSE. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreements are deemed to be collateralized loans of money by the Fund
to the seller. In evaluating whether to enter into a repurchase agreement, the
Adviser will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the
23
U.S. Bankruptcy Code, the law regarding the rights of the Fund is unsettled. The
securities underlying a repurchase agreement will be marked to market every
business day so that the value of the collateral is at least equal to the value
of the loan, including the accrued interest thereon, and the Adviser will
monitor the value of the collateral. No specific limitation exists as to the
percentage of the Fund's assets which may be used to participate in repurchase
agreements.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by the
Fund. A reverse repurchase agreement is an instrument under which the Fund may
sell an underlying debt instrument and simultaneously obtain the commitment of
the purchaser (a commercial bank or a broker or dealer) to sell the security
back to the Fund at an agreed upon price on an agreed upon date. The Fund will
segregate an amount of cash or liquid assets at least equal to its obligations
with respect to reverse repurchase agreements. The Fund receives payment for
such securities only upon physical delivery or evidence of book entry transfer
by its custodian. Regulations of the SEC require either that securities sold by
the Fund under a reverse repurchase agreement be segregated pending repurchase
or that the proceeds be segregated on the Fund's books and records pending
repurchase. Reverse repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing as described herein and in the SAI under "Investment Restrictions."
The Fund will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.
RISK FACTORS
Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in Preferred
Shares.
Payment and Redemption Restrictions. Under the terms of the credit
agreement governing the commercial paper program, the Fund is not permitted to
declare dividends or other distributions, including dividends and distributions
with respect to Preferred Shares, or purchase or redeem shares, including
Preferred Shares, unless (i) at the time thereof the Fund meets the Credit
Agreement Asset Coverage Test (as defined herein) and (ii) there is no event of
default under the credit facility program. See "Description of Commercial Paper
Program."
Leverage Risk. The Fund uses financial leverage for investment purposes by
employing leverage instruments (e.g., borrowing, issuing commercial paper or
notes and preferred shares of beneficial interest). The amount of leverage
represented by the commercial paper program as of December 31, 2003 was
approximately 29% of the Fund's total assets. It is currently anticipated that,
after issuing the Preferred Shares offered in this Prospectus and paying down a
portion of the commercial paper program with the proceeds, the amount of
leverage will represent approximately 32% (and in no event will it exceed 50%)
of the Fund's total assets. If the proposal to amend the Fund's fundamental
investment restriction on senior securities is approved by shareholders, the
Fund may increase its leverage ratio to the maximum amount allowed under the
1940 Act. Under the requirements of the 1940 Act, the value of the Fund's total
assets, less all liabilities and indebtedness of the Fund not represented by
senior securities, must be at least equal, immediately after any borrowing, to
300% of the aggregate value of borrowings represented by senior securities. Any
lender with respect to borrowings by the Fund may require additional asset
coverage provisions as well as restrictions on the Fund's investment practices.
Under the requirements of the 1940 Act, the value of the Fund's total assets,
less all liabilities and indebtedness of the Fund not represented by senior
securities, must at least be equal, immediately after the issuance of any
preferred shares, to 200% of the aggregate liquidation value of the preferred
shares plus the aggregate amount of senior securities representing indebtedness.
24
The liquidation value of the Preferred Shares offered hereby is equal their
aggregate original purchase price plus a redemption premium, if any, together
with any accrued and unpaid dividends thereon (on a cumulative basis), whether
or not earned or declared. The Fund seeks an "Aaa" rating by Moody's and an
"AAA" rating from Fitch for the Preferred Shares, and to obtain such ratings,
asset coverage provisions in addition to and more stringent than those required
by the 1940 Act have been imposed. In addition, restrictions have been imposed
on certain investment practices in which the Fund may otherwise engage. The
rating agency requirements impose certain minimum issue size, issuer
geographical diversification and other requirements for determining portfolio
assets that are eligible for computing compliance with their asset coverage
requirements. A rating of the Preferred Shares does not reflect a direct
assessment of the credit quality of the Fund's portfolio and is not an
assessment of the investment characteristics of the Preferred Shares. If the
Fund's ratings on the Preferred Shares are subsequently lowered or withdrawn,
the Fund would likely be required to pay higher dividends on the Preferred
Shares. See "Description of Preferred Shares."
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies.
Borrowed funds pursuant to any credit facility constitute a substantial lien and
burden on the Preferred Shares by reason of their prior claim against the income
of the Fund and against the total assets of the Fund in liquidation. In the
event of a default under the commercial paper program, the lenders have the
right to cause a liquidation of the collateral (i.e., sell Senior Loans and
other assets of the Fund), and if any such default is not cured within five days
of written notice by the lenders, the lenders can control the liquidation as
well.
Investors should note that there are risks associated with issuing
Preferred Shares or borrowing in an effort to increase the yield on the common
shares, including higher volatility of both the NAV and the market value of the
common shares, and that fluctuations in the dividend rates on the Preferred
Shares or interest rates on the borrowing may affect the yield to common
shareholders. So long as the Fund is able to realize a higher return after
expenses on its investment of the proceeds of the Preferred Shares offering or
of any borrowing than the then current dividend rates on the Preferred Shares or
interest rates on the borrowing, the effect of the leverage will be to cause the
common shareholders to realize a higher current rate of return than if the Fund
were not so leveraged. On the other hand, to the extent that the then current
dividend rates on the Preferred Shares or interest rates on the borrowing
approaches the return on such proceeds after expenses or the value of portfolio
securities otherwise declines, the benefit of leverage to the common
shareholders may be reduced or eliminated and could even result in a lower rate
of return to the common shareholders than if the Fund were not leveraged. Since
any decline in the net asset value of the Fund's investments is borne entirely
by the common shareholders, the effect of leverage in a declining market would
result in a greater decrease in net asset value to the common shareholders than
if the Fund were not so leveraged. Any such decrease would likely be reflected
in a decline in the market price for common shares. The floating or variable
rate nature of Senior Loans in which the Fund invests helps mitigate against the
risks of increased dividend or interest costs as a result of increasing interest
rates. The Adviser may also seek to manage certain of the risks of financial
leverage in anticipation of changes in interest rates in a number of ways,
including extending the length of the dividend period on the Preferred Shares or
the interest rate period on any borrowing so as to fix a dividend or an interest
rate for a period of time, "deleveraging" the Fund by redeeming all or a portion
of the outstanding Preferred Shares or repaying all or a portion of any
outstanding borrowing, entering into certain transactions in an effort to hedge
against changes in interest rates and purchasing securities the terms of which
have elements of, or are similar in effect to, certain hedging transactions in
which the Fund may engage. There can be no assurance that the Adviser can
successfully manage the risks of leverage.
The issuance of the Preferred Shares or borrowing by the Fund entails
certain initial costs and expenses and certain ongoing administrative and
accounting expenses. These costs and expenses will be borne by the Fund and will
reduce the income or net assets available to common shareholders. If the Fund's
current investment income were not sufficient to meet dividend requirements on
the Preferred Shares or interest expenses on any borrowing, the Fund might have
to liquidate certain of its investments in order to meet required dividend or
interest payments, thereby reducing the net asset value attributable
25
to the Fund's common shares. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its common shares unless, at the time
of such declaration, the Fund meets certain asset coverage requirements
(determined after deducting the amount of such dividend or distribution). Such
prohibition on the payment of dividends or other distributions might impair the
ability of the Fund to maintain its qualification, for federal income tax
purposes, as a regulated investment company. The Fund intends, however, to the
extent possible, to purchase or redeem Preferred Shares from time to time or to
repay borrowing, which may involve the payment by the Fund of a premium and the
sale by the Fund of portfolio securities at a time when it may be
disadvantageous to do so, to maintain such asset coverage requirements. Subject
to the restrictions of the 1940 Act, the Fund may "releverage" through the
reissuance of preferred shares or incurrence of new borrowing, and in connection
with which the Fund, and indirectly the common shareholders, would incur the
expenses of such releveraging.
If there are no preferred shares issued and outstanding, common
shareholders elect all of the trustees of the Fund. If there are preferred
shares issued and outstanding, holders of any preferred shares, including the
Preferred Shares, elect two trustees. Under the 1940 Act, upon failure by the
Fund to pay dividends on the preferred shares in an amount equal to two full
years' dividends arrearage, the holders of preferred shares, including the
Preferred Shares, are entitled to elect a majority of the Board of Trustees
until all such dividends arrearage has been paid or provided for. The lenders
with respect to any borrowing by the Fund may be entitled to elect a majority of
the Board of Trustees if certain asset coverage requirements are not maintained.
Restrictions imposed on the declaration and payment of dividends or other
distributions to the holders of the Fund's common shares and preferred shares,
both by the 1940 Act and by reason of requirements imposed by lenders and rating
agencies, might impair the Fund's ability to maintain its qualification as a
regulated investment company for federal income tax purposes. While the Fund
intends to pay down borrowings and redeem Preferred Shares in order to permit
the Fund to distribute its income as required to maintain its qualification as a
regulated investment company under the Code, there can be no assurance that such
actions can be effected in time to meet Code requirements. See "Federal
Taxation."
Because the fees paid to the Adviser and the Administrator will be
calculated on the basis of the Fund's average daily managed assets, those fees
are higher when leverage is utilized, giving the Adviser an incentive to utilize
leverage.
Auction Risk. You may not be able to sell your Preferred Shares at an
auction if the auction fails, that is, if there are more Preferred Shares
offered for sale than there are buyers for those shares. Also, if you place hold
orders (orders to retain Preferred Shares) at an auction only at a specified
rate, and that bid rate exceeds the rate set at the auction, you will not retain
your Preferred Shares. Finally, if you buy Preferred Shares or elect to retain
Preferred Shares without specifying a rate below which you would not wish to
continue to hold those shares, and the auction sets a below-market rate, you may
receive a lower rate of return on your Preferred Shares than the market rate.
Secondary Market Risk. Preferred Shares will not be listed on a stock
exchange or the NASDAQ Stock Market. Broker-dealers may maintain a secondary
trading market in Preferred Shares outside of auctions, but may discontinue this
activity any time. You may transfer Preferred Shares outside of auctions only to
or through a broker-dealer or such other persons who may be permitted by the
Fund. If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them for
$25,000 per share or $25,000 per share plus accumulated dividends. If the Fund
has designated a special dividend period (a dividend period of more than 7
days), changes in interest rates could affect the price you would receive if you
sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for Preferred Shares are not required to maintain this
market, and the Fund is not required to redeem Preferred Shares if an auction or
an attempted secondary market sale fails because of a lack of buyers. If you
sell your Preferred Shares to a broker-dealer between auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen since the last auction and especially during a special dividend
period.
26
Ratings and Asset Coverage Risk. While Moody's and Fitch assign ratings of
"Aaa" or "AAA" to the Preferred Shares, respectively, the ratings do not
eliminate or necessarily mitigate the risks of investing in Preferred Shares. A
rating agency could downgrade the Preferred Shares, which may make the shares
less liquid at an auction or in the secondary market. If a rating agency
downgrades the Preferred Shares, the dividend rate on the Preferred Shares will
be the applicable maximum rate based on the credit rating of the Preferred
Shares. See "Description of Preferred Shares" for a description of the asset
maintenance tests the Fund must meet.
The following are general risks of investing in the Fund:
Credit Risks and Realization of Investment Objective. Senior Loans, like
other corporate debt obligations, are subject to the risk of non-payment of
scheduled interest or principal. Issuers of Senior Loans may have either issued
debt securities that are rated lower than investment grade, i.e., rated lower
than "Baa" by Moody's or "BBB" by Fitch, or, if they had issued debt securities,
such debt securities would likely be rated lower than investment grade. Debt
securities rated lower than investment grade are frequently called "junk bonds,"
and are generally considered predominantly speculative with respect to the
issuing company's ability to meet principal and interest payments. Such
non-payment would result in a reduction of income to the Fund, a potential
reduction in the value of the Senior Loan experiencing non-payment and a
potential decrease in the NAV of the Fund. Because the primary source of income
for the Fund is the interest and principal payments on the Senior Loans in which
it invests, any payment default by an issuer of a Senior Loan would have a
negative impact on the Fund's ability to pay dividends on the common shares or
the Preferred Shares, and could result in the redemption of some or all of the
Preferred Shares. As of December 31, 2003, approximately 3% of the Fund's net
assets and 2% of total assets consisted of non-performing Senior Loans.
Although, with respect to collateralized Senior Loans, the Fund generally
will invest only in Senior Loans that the Adviser believes are secured by
specific collateral, which may include guarantees, the value of which exceeds
the principal amount of the Senior Loan at the time of initial investment, there
can be no assurance that the liquidation of any such collateral would satisfy
the Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of the bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. In the event that the Fund does not believe that a perfected
security interest has been obtained with respect to a collateralized Senior
Loan, the Fund will only obtain an interest in such Senior Loan if the Agent is
a Designated Custodian. Some Senior Loans in which the Fund may invest are
subject to the risk that a court, pursuant to fraudulent conveyance or other
similar laws, could subordinate such Senior Loans to presently existing or
future indebtedness of the Borrower or take other action detrimental to the
holders of Senior Loans, such as the Fund, including, under certain
circumstances, invalidating such Senior Loans. Lenders commonly have certain
obligations pursuant to the Loan Agreement, which may include the obligation to
make additional loans or release collateral in certain circumstances.
On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however, may not obtain an independent appraisal as to the value of assets
pledged as collateral in all cases. The Fund normally will rely primarily on the
Agent (where the Fund is an Original Lender or owns an Assignment) or the
selling Lender (where the Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Fund usually will rely on the Agent
(where the Fund is an Original Lender or owns an Assignment) or the selling
Lender (where the Fund owns a Participation) to monitor compliance by the
Borrower with the restrictive covenants in the Loan Agreement and notify the
Fund of any adverse change
27
in the Borrower's financial condition or any declaration of insolvency.
Collateralized Senior Loans will frequently be secured by all assets of the
Borrower that qualify as collateral, which may include common stock of the
Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement may
require the Borrower to pledge additional collateral to secure the Senior Loan,
and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation
proceeds pro rata among the Lenders. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Fund will be exposed to the risk
that the value of the collateral will not at all times equal or exceed the
amount of the Borrower's obligations under the Senior Loan. Lenders that have
sold Participation interests in such Senior Loan will distribute liquidation
proceeds received by the Lenders pro rata among the holders of such
Participations. The Adviser will also monitor these aspects of the Fund's
investments and, where the Fund is an Original Lender or owns an Assignment,
will be directly involved with the Agent and the other Lenders regarding the
exercise of credit remedies.
Senior Loans in which the Fund will invest historically have not been rated
by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and will not be
listed on any national securities exchange. Although the Fund will generally
have access to financial and other information made available to the Lenders in
connection with Senior Loans, the amount of public information available with
respect to Senior Loans will generally be less extensive than that available for
rated, registered or exchange-listed securities. As a result, the performance of
the Fund and its ability to meet its investment objective is more dependent on
the analytical ability of the Adviser than would be the case for an investment
company that invests primarily in rated, registered or exchange-listed
securities.
To the extent that legislation or state or federal regulations governing
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of financing for
certain Borrowers. Further, to the extent that legislation or federal or state
regulations governing certain financial institutions require such institutions
to dispose of Senior Loan interests relating to highly leveraged transactions or
subject such Senior Loan interests to increased regulatory scrutiny, such
financial institutions may determine to sell such Senior Loan interests in a
manner that results in a price which, in the opinion of the Adviser, is not
indicative of fair value. Were the Fund to attempt to sell a Senior Loan
interest at a time when a financial institution was engaging in such a sale with
respect to such Senior Loan interest, the price at which the Fund could
consummate such a sale might be adversely affected.
Limited Secondary Market For Senior Loans. Although it is growing, the
secondary market for Senior Loans is currently limited. Senior Loans, at
present, generally are not readily marketable and may be subject to restrictions
on resale. Interests in Senior Loans generally are not listed on any national
securities exchange or automated quotation system and no active trading market
may exist for many of the Senior Loans in which the Fund will invest. To the
extent that a secondary market may exist for certain of the Senior Loans in
which the Fund invests, such market may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods. Senior
Loans are thus relatively illiquid, which illiquidity may impair the Fund's
ability to realize the full value of its assets in the event of a voluntary or
involuntary liquidation of such assets. Liquidity relates to the ability of the
Fund to sell an investment in a timely manner. The market for relatively
illiquid securities tends to be more volatile than the market for more liquid
securities. The Fund has no limitation on the amount of its assets which may be
invested in securities which are not readily marketable or are subject to
restrictions on resale. The substantial portion of the Fund's assets invested in
Senior Loan interests may restrict the ability of the Fund to dispose of its
investments in a timely fashion and at a fair price, and could result in capital
losses to the Fund and common shareholders. However, many of the Senior Loans in
which the Fund expects to purchase interests are of a relatively large principal
amount and are held by a relatively large number of owners which should, in the
Adviser's opinion, enhance the relative liquidity of such interests.
28
Interest Rate Risk. When interest rates decline, the value of a portfolio
invested in Senior Loans may rise. Conversely, when interest rates rise, the
value of a portfolio invested in Senior Loans may decline. Interest rates are
near historical lows and, as a result, it is likely that they will rise. Because
floating or variable rates on Senior Loans only reset periodically, changes in
prevailing interest rates may cause some fluctuations in the Fund's NAV.
Similarly, a sudden and significant increase in market interest rates may cause
a decline in the Fund's NAV. A material decline in the Fund's NAV may impair the
Fund's ability to maintain required levels of asset coverage.
Investment in Non-U.S. Issuers. The Fund may invest in Senior Loans and
debt securities of Borrowers that are organized or located in countries other
than the United States, provided that such Senior Loans and debt securities are
denominated in U.S. dollars and provide for the payment of interest and
repayment of principal in U.S. dollars. Investments in non-U.S. issuers involve
special risks, including that non-U.S. issuers may be subject to less rigorous
accounting and reporting requirements than U.S. issuers, less rigorous
regulatory requirements, differing legal systems and laws relating to creditors'
rights, the potential inability to enforce legal judgments and foreclose on
collateral, possible restrictions on expatriation and repatriation of capital
and the potential for political, social and economic adversity.
Leverage. The Fund uses financial leverage for investment purposes. The
use of financial leverage will, among other things, result in greater volatility
in the net asset value of the Fund's common shares and may, in certain
circumstances, result in periods in which the Fund may not earn sufficient
income from investments to pay interest on indebtedness or dividends. See the
discussion of the risks of leverage above under the subheading "Leverage Risks."
Income Risk. The Fund invests primarily in Senior Loans whose interest
rates reset frequently. If market interest rates fall, these interest rates will
be reset at lower levels, reducing the Fund's income.
Non-Diversification. The Fund has registered as a "non-diversified"
investment company so that, subject to its investment restrictions, it will be
able to invest more than 5% of the value of its assets in the obligations of any
single issuer, including Senior Loans of a single Borrower or Participations
purchased from a single Lender. See "Investment Restrictions" in the SAI. The
Fund does not intend, however, to invest more than 5% of the value of its assets
in interests in Senior Loans of a single Borrower. To the extent the Fund
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Fund will be more susceptible than a more widely
diversified investment company to any single corporate, economic, political or
regulatory occurrence.
DESCRIPTION OF COMMERCIAL PAPER PROGRAM
The Fund has entered into a $700 million revolving credit agreement with
Corporate Receivables Corporation and Preferred Receivables Funding Corporation
(together with their permitted successors and assigns, the "Conduit Lenders")
and with Citicorp North America, Inc. and Bank One, NA (Main Office Chicago)
(together with their permitted assigns, the "Secondary Lenders") whereby the
Conduit Lenders and the Secondary Lenders from time to time agree to make
advances to the Fund on the terms and subject to the conditions in the revolving
credit agreement (the "Credit Agreement"). Each of the Conduit Lenders has the
authority to lend a maximum of $350 million to the Fund, and a Secondary Lender
may lend to the Fund in the event a related Conduit Lender declines to make
advances to the Fund. The Credit Agreement is secured by the assets of the Fund.
For the fiscal year ended July 31, 2003, the average daily balance of borrowings
under the Credit Agreement was $472,686,578 with a weighted average interest
rate of 1.35%.
A copy of the Credit Agreement is filed as an exhibit to the Registration
Statement relating to the Preferred Shares and the description of the Credit
Agreement herein is qualified by reference to the Credit Agreement. The Credit
Agreement includes usual and customary covenants for their respective type of
transaction, including limits on the Fund's ability to (i) incur liens or pledge
portfolio securities, (ii) change its investment objective or fundamental
investment restrictions without the approval of lenders, (iii) participate in
any merger, consolidation, reorganization, liquidation or sale of substantially
all of the
29
Fund's assets without the consent of the lenders, (iv) make certain changes in
its capital structure, (v) amend the Fund documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders,
(vi) engage in any business other than as contemplated by the Fund's prospectus,
investment policies and investment restrictions, (vii) create, incur, assume or
permit to exist certain debt except for certain specified types of debt and
(viii) permit any of its affiliates under the Employee Retirement Income
Security Act of 1974 ("ERISA") to cause or permit to occur an event that could
result in the imposition of a lien under the Code or ERISA. In addition, the
Credit Agreement does not permit the Fund's asset coverage ratio (as defined in
the Credit Agreements) to fall below 300% at any time (the "Credit Agreement
Asset Coverage Test").
The Credit Agreement limits the Fund's ability to pay dividends or make
other distributions, including with respect to the Preferred Shares, or purchase
or redeem shares, including Preferred Shares, unless the Fund complies with the
Credit Agreement Asset Coverage Test. In addition, the Credit Agreement does not
permit the Fund to declare dividends or other distributions with respect to the
Preferred Shares or purchase or redeem Preferred Shares (i) at any time that an
event of default under a Credit Agreement for the credit facility program has
occurred and is continuing or (ii) if, after giving effect to such declaration,
the Fund would not meet the asset coverage ratios set forth in the Credit
Agreement.
Under the requirements of the 1940 Act, the Fund must have asset coverage
of at least 300% immediately after any borrowing, including borrowings under the
credit facility program. For this purpose, asset coverage means the ratio which
the value of the total assets of the Fund, less liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount of borrowings
representing indebtedness of the Fund.
The Credit Agreement has specified events of default which permit the
lenders to seek remedies against the assets of the Fund. These events of default
are customary for the types of transaction reflected by the Credit Agreement and
include: (i) cross-default and cross-acceleration events with respect to the
Fund or the Adviser; (ii) a bankruptcy or insolvency event with respect to the
Fund or the Adviser; (iii) specified judgments against the Fund or the Adviser;
(iv) misrepresentations by the Fund or the Adviser to the lenders; (v) liens by
certain governmental agencies against the Fund or the Adviser; (vi) failure for
the lenders to have a first priority perfected security interest in the assets
of the Fund; (vii) material modifications of certain specified transaction
documents; (viii) a material reduction in the value of the Fund's investments;
(ix) change of control or change of management in the Adviser; and (x) failure
to comply with terms of the Credit Agreement.
Without preferred shares issued and outstanding, common shareholders elect
all of the trustees of the Fund. With preferred shares issued and outstanding,
holders of any preferred shares, including the Preferred Shares, will elect two
trustees. Under the 1940 Act, upon failure by the Fund to pay dividends on
preferred shares in an amount equal to two full years' dividends arrearage, the
holders of preferred shares, including the Preferred Shares, shall be entitled
to elect a majority of the Board of Trustees until all such dividends arrearage
has been paid or provided for.
The lenders with respect to any borrowing by the Fund may be entitled to
elect a majority of the Board of Trustees if certain asset coverage requirements
are not maintained. In addition, failure to maintain certain asset coverage
requirements may result in a default under the terms of any preferred shares or
borrowing. The terms of any borrowing or preferred share issuance may entitle
holders of any preferred shares or lenders, as the case may be, to elect a
majority of the Board of Trustees in certain other circumstances. See
"Description of Capital Structure."
NET ASSET VALUE
The NAV per share of the Fund's common shares is determined by calculating
the total value of the Fund's assets, including assets attributable to any
preferred shares outstanding, deducting its total liabilities and the
liquidation preference of any preferred shares outstanding, including the
Preferred Shares (without giving effect to any potential redemption premium with
respect to such preferred shares), and dividing the
30
result by the number of common shares outstanding. The NAV is computed on each
business day as of 5:00 p.m. Eastern time. The Fund reserves the right to
calculate the NAV more frequently if deemed desirable.
Senior Loans are valued by the Fund following valuation guidelines
established and periodically reviewed by the Fund's Board of Trustees. Under the
valuation guidelines, Senior Loans and securities for which reliable market
quotes are readily available are valued at the mean of such bid and ask quotes,
and all other Senior Loans, securities and assets of the Fund are valued at fair
value in good faith following procedures established by the Board of Trustees.
Subject to criteria established by the Fund's Board of Trustees about the
availability and reliability of market indicators obtained from independent
pricing sources approved by the Board of Trustees, certain Senior Loans will be
valued on the basis of such indicators. Other Senior Loans will be valued by
independent pricing sources approved by the Fund's Board of Trustees based upon
pricing models developed, maintained and operated by those pricing sources or
valued by the Adviser by considering a number of factors including consideration
of market indicators, transactions in instruments which the Adviser believes may
be comparable (including comparable credit quality, interest rate, interest rate
redetermination period and maturity), the credit worthiness of the Borrower, the
current interest rate, the period until next interest rate redetermination and
the maturity of such Senior Loan interests. Consideration of comparable
instruments may include commercial paper, negotiable certificates of deposit and
short-term variable rate securities which have adjustment periods comparable to
the Senior Loan interests in the Fund's portfolio. The fair value of Senior
Loans are reviewed and approved by the Fund's Valuation Committee and by the
Fund's Board of Trustees. To the extent that an active secondary trading market
in Senior Loan interests develops to a reliable degree, the Fund may rely to an
increasing extent on market prices and quotations in valuing Senior Loan
interests in the Fund's portfolio. The Fund and the Board of Trustees will
continue to monitor developments in the Senior Loan market and will make
modifications to the current valuation methodology as deemed appropriate.
It is expected that the Fund's NAV will fluctuate as a function of interest
rate and credit factors. Because of the short-term, adjustable rate nature of
such instruments held by the Fund, however, the Fund's NAV is expected to
fluctuate less in response to changes in interest rates than the net asset
values of investment companies with portfolios consisting primarily of
traditional longer-term, fixed-income securities. In light of the senior nature
of Senior Loan interests that may be included in the Fund's portfolio, and
taking into account the Fund's access to non-public information with respect to
Borrowers relating to such Senior Loan interests, the Fund does not currently
believe that consideration on a systematic basis of ratings provided by any
nationally recognized statistical rating organization or price fluctuations with
respect to long- or short-term debt of such Borrowers subordinate to the Senior
Loans of such Borrowers is necessary for a determination of the value of such
Senior Loan interests. Accordingly, the Fund generally will not systematically
consider (but may consider in certain instances) and, in any event, will not
rely upon such ratings or price fluctuations in determining the value of Senior
Loan interests in the Fund's portfolio.
Securities other than Senior Loans held in the Fund's portfolio (other than
short-term obligations, but including listed issues) may be valued on the basis
of prices furnished by one or more pricing services that determine prices for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders. In
certain circumstances, portfolio securities will be valued at the last sale
price on the exchange that is the primary market for the securities, or the last
quoted bid price for those securities for which the over-the-counter market is
the primary market or for listed securities in which there were no sales during
the day. The value of interest rate swaps will be determined in accordance with
a discounted present value formula and then confirmed by obtaining a bank
quotation.
Short-term obligations held by the Fund that mature in 60 days or less are
valued at amortized cost if their original term to maturity when acquired by the
Fund was 60 days or less, or are valued at amortized cost using their value on
the 61st day prior to maturity if their original term to maturity when acquired
by the Fund was more than 60 days, unless in each case this is determined not to
represent fair value.
31
Repurchase agreements will be valued at cost plus accrued interest. Securities
for which there exist no price quotations or valuations and all other assets are
valued at fair value as determined in good faith by or on behalf of the Board of
Trustees.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, you may refer to the Fund's
Certificate attached as Appendix B to the Fund's SAI.
The Fund's Declaration of Trust authorizes the issuance of up to
100,000,000 shares of beneficial interest with preference rights, including the
Preferred Shares, having a par value of $0.01 per share, in one or more series,
with rights as determined by the Board of Trustees, by action of the Board of
Trustees without the approval of the common shareholders.
Under the requirements of the 1940 Act, the Fund must, immediately after
the issuance of the Preferred Shares, have an "asset coverage" of at least 200%.
With respect to the Preferred Shares, asset coverage means the ratio which the
value of the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of senior securities representing indebtedness of the Fund, if
any, plus the aggregate liquidation preference of the Preferred Shares.
LIQUIDATION PREFERENCE
Subject to the rights of holders of any series ranking on a parity with
Preferred Shares with respect to the distribution of assets upon liquidation of
the Fund, whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled to receive and to be paid out of the assets of the
Fund available for distribution to its shareholders, before any payment or
distribution shall be made on the common shares but after payments are made on
the Fund's commercial paper program and other senior obligations, a preferential
liquidating distribution equal to the liquidation preference with respect to
such shares ($25,000 per share), plus redemption premium, if any, plus an amount
equal to all dividends thereon (whether or not earned or declared) accumulated
but unpaid to and including the date of final distribution. After the payment of
the full preferential amounts provided for as described herein, Preferred
Shareholders as such shall have no right or claim to any of the remaining assets
of the Fund.
Neither the consolidation nor merger of the Fund with or into any other
corporation or corporations, nor the sale, lease, exchange or transfer by the
Fund of all or substantially all of its property and assets, shall be deemed to
be a liquidation, dissolution or winding up of the Fund for the purposes of the
foregoing paragraph.
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures. They are
described in more detail in the SAI. The auction determines the dividend rate
for Preferred Shares, but the dividend rate will not be higher than the maximum
rate. See "-- Dividends and Dividend Periods" below. You may buy, sell or hold
Preferred Shares in the auction.
If you own Preferred Shares, you may instruct, orally or in writing, a
broker-dealer to enter an order in the auction. Existing Preferred Shareholders
can enter three kinds of orders regarding their Preferred Shares: sell, bid, and
hold.
- Sell Order -- If you enter a sell order, you indicate that you want to
sell shares of such series at $25,000 per share, without regard to the
applicable rate for such series for the next dividend period.
- Bid -- If you enter a bid (or "hold at a rate") order, you indicate that
you want to sell shares of such series at $25,000 per share only if the
next dividend period's dividend rate is less than the rate you specify in
a bid.
32
- Hold Order -- If you enter a hold order, you indicate that you want to
continue to own such series, without regard to the applicable rate for
shares of such series for the next dividend period.
You may submit different types of orders for your Preferred Shares, as well
as orders for additional Preferred Shares. All orders must be for whole shares.
All orders you submit are irrevocable. There are a fixed number of Preferred
Shares, and the dividend rate likely will vary from auction to auction depending
on the number of bidders, the number of shares the bidders seek to buy and
general economic conditions, including current interest rates. If you own
Preferred Shares and submit a bid higher than the maximum rate, your bid will be
treated as a sell order. If you do not enter an order, the broker-dealer will
assume that you want to continue to hold Preferred Shares, but if you fail to
submit an order and the dividend period is longer than 7 days, the broker-dealer
will treat your failure to submit a bid as a sell order.
If you do not currently own Preferred Shares, or want to buy more shares,
you may instruct a broker-dealer to enter a bid order to buy shares in an
auction at $25,000 per share at or above a specified dividend rate. If your bid
specifies a rate higher than the maximum rate, your order will not be accepted.
Broker-dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Fund nor the auction agent will be responsible
for a broker-dealer's failure to submit orders from existing shareholders and
potential shareholders. A broker-dealer's failure to submit orders for Preferred
Shares held by it or its customers will be treated in the same manner as a
shareholder's failure to submit an order to the broker-dealer. A broker-dealer
may submit orders to the auction agent for its own account provided it is not an
affiliate of the Fund.
The auction agent after each auction for Preferred Shares will pay to each
broker-dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding a 7-day
dividend period, or a percentage agreed to by the Fund and the broker-dealers,
in the case of any auction immediately preceding a special dividend period, of
the purchase price of Preferred Shares placed by the broker-dealers at the
auction.
If the number of Preferred Shares subject to bid orders with a dividend
rate equal to or lower than the maximum rate for Preferred Shares is at least
equal to the number of Preferred Shares subject to sell orders, then the
dividend rate for the next dividend period will be the lowest rate submitted
which, taking into account that rate and all lower rates submitted in order from
existing and potential shareholders, would result in existing and potential
shareholders owning all the Preferred Shares available for purchase in the
auction.
If the number of Preferred Shares subject to bid orders with a dividend
rate equal to or lower than the maximum rate for Preferred Shares is less than
the number of Preferred Shares subject to sell orders, then the auction is
considered to be a failed auction, and the dividend rate will be the maximum
rate. In that event, existing shareholders that have submitted sell orders (or
are treated as having submitted sell orders) may not be able to sell any or all
of the shares for which they submitted sell orders.
The auction agent will not accept a bid above the maximum rate. The purpose
of the maximum rate is to place an upper limit on dividends of Preferred Shares
and in so doing to help protect the earnings available to pay common share
dividends, and to serve as the dividend rate in the event of a failed auction
(that is, an auction where there are more Preferred Shares offered for sale than
there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding Preferred Shares, that is considered an "all hold" auction and the
dividend rate for the next dividend period will be the all hold rate. The "all
hold rate" is 80% of the LIBOR Rate. The Reference Rate is, with respect to a
dividend period having 364 or fewer days, the LIBOR Rate and, with respect to a
dividend period having 365 or more days, the Treasury Index Rate (each as
defined below).
The auction procedures include a pro rata allocation of shares for purchase
and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of shares in its order. If this happens, broker-dealers will be
required to make appropriate pro rata allocations among their customers.
33
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
broker-dealers in same-day funds to The Depository Trust Company against
delivery to the broker-dealers. The Depository Trust Company will make payment
to the sellers' broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the NYSE is open
for trading, and which is neither a Saturday, Sunday nor any other day on which
banks in New York, New York are authorized or obligated by law to close.
The auctions for each series of Preferred Shares will normally be held
every seven days, and each subsequent dividend period will normally begin on the
following business day.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares, and three current
shareholders. The three current shareholders and three potential shareholders
submit orders through broker-dealers at the auction:
Current Shareholder A Owns 500 shares, wants to sell Bid order of 1.5% for all 500
all 500 shares if auction rate shares
is less than 1.5%
Current Shareholder B Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Shareholder C Owns 200 shares, wants to sell Bid order of 1.3% rate for all
all 200 shares if auction rate 200 shares
is less than 1.3%
Potential Shareholder D Wants to buy 200 shares Places order to buy at or above
1.4%
Potential Shareholder E Wants to buy 300 shares Places order to buy at or above
1.3%
Potential Shareholder F Wants to buy 200 shares Places order to buy at or above
1.5%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held by either current or potential Preferred Shareholders is
1.4% (the offer by D). Therefore, the dividend rate will be 1.4%. Current
Shareholders B and C will continue to own their shares. Current Shareholder A
will sell its shares because A's dividend rate bid was higher than the dividend
rate. Potential Shareholder D will buy 200 shares and Potential Shareholder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential Shareholder F will not buy any shares because its bid rate was above
the dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The broker-dealers (including the underwriters) expect, but are not
obligated, to maintain a secondary trading market in Preferred Shares outside of
auctions, and may discontinue such activity at any time. There can be no
assurance that a secondary trading market for Preferred Shares will develop or,
if it does develop, that it will provide owners with liquidity of investment.
The Preferred Shares will not be registered on any stock exchange or on the
NASDAQ Stock Market. Investors who purchase Preferred Shares in an auction for a
special dividend period should note that because the dividend rate on such
shares will be fixed for the length of that dividend period, the value of such
shares may fluctuate in response to the changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next auction thereof, depending on market conditions.
An existing shareholder may sell, transfer, or otherwise dispose of
Preferred Shares only in whole shares and only (1) pursuant to a bid or sell
order placed with the auction agent in accordance with the auction procedures or
(2) to or through a broker-dealer; provided, however, that (a) a sale, transfer
or other disposition of Preferred Shares from a customer of a broker-dealer who
is listed on the records of that broker-dealer as the holder of such shares to
that broker-dealer or another customer of that broker-dealer shall not be deemed
to be a sale, transfer or other disposition for purposes of the foregoing if
such broker-dealer remains the existing shareholder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to auctions,
34
the broker-dealer (or other person, if permitted by the Fund) to whom such
transfer is made shall advise the auction agent of such transfer.
DIVIDENDS AND DIVIDEND PERIODS
General. The following is a general description of dividends and dividend
periods for the Preferred Shares. See the SAI for a more detailed discussion of
this topic. The dividend rate for the initial dividend period for Preferred
Shares offered in this Prospectus will be the rate set out on the inside front
cover of this Prospectus. For subsequent dividend periods, Preferred Shares will
pay dividends based on a rate set at the auction, normally held weekly, but the
rate set at the auction will not exceed the maximum rate. Dividend periods
generally will be 7 days, and a dividend period generally will begin on the
first business day after an auction for such series. In most instances,
dividends are also paid weekly, on the business day following the end of the
dividend period. The Fund, subject to some limitations, may change the length of
dividend periods, designating them as "special dividend periods." See
"-- Designation of Special Dividend Periods" below.
Dividend Payments. Except as provided below, the dividend payment date
will be the first business day after the dividend period ends. The dividend
payment date for special dividend periods of more than 7 days will be set out in
the notice designating a special dividend period. See "-- Designation of Special
Dividend Periods" below for a discussion of payment dates for a special dividend
period.
Dividends on Preferred Shares will be paid on the dividend payment date to
holders of record as their names appear on the Fund's record books on the
business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time to holders of record as their
names appear on the Fund's record books on such date, not more than 15 days
before the payment date, as the Fund's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit in same-day funds on each dividend payment date dividends
received from the Fund to the accounts of broker-dealers who act on behalf of
Preferred Shareholders. Such broker-dealers, in turn, are expected to distribute
dividend payments to the person for whom they are acting as agents. If a
broker-dealer does not make dividends available to holders of Preferred Shares
in same-day funds, these shareholders will not have funds available until the
next business day.
Dividend Rate Set at Auction. Preferred Shares pay dividends based on a
rate set at auction. The auction usually is held weekly, but may be held less
frequently. The auction sets the dividend rate, and Preferred Shares may be
bought and sold at the auction. The Bank of New York, the auction agent, reviews
orders from broker-dealers on behalf of existing shareholders that wish to sell,
hold at the auction rate or hold only at a specified rate, and on behalf of
potential shareholders that wish to buy Preferred Shares. The auction agent then
determines the lowest dividend rate that will result in all of the outstanding
Preferred Shares continuing to be held. The Preferred Shares in this offering
will trade at auctions starting in the week following this offering. See
"-- Summary of Auction Procedures" above.
Determination of Dividend Rates. The Fund computes the dividends per share
of each series of Preferred Shares by multiplying the dividend rate determined
at the auction by a fraction, the numerator of which normally is 7 and the
denominator of which is 360. This rate is then multiplied by $25,000 to arrive
at the dividend per share. The numerator may be different if the dividend period
includes a holiday.
If an auction for any subsequent dividend period of Preferred Shares is not
held for any reason other than as described below, the dividend rate on those
shares will be the maximum rate on the auction date for that subsequent dividend
period.
Maximum Rate. The dividend rate that results from an auction for Preferred
Shares will not be greater than the "maximum rate." The maximum rate for any
regular dividend period will be the higher of the applicable percentage of the
reference rate, or the applicable spread plus the reference rate. The reference
rate will be the applicable LIBOR Rate (as defined below) (for a dividend period
of fewer than 365 days) or the Treasury Index Rate (as defined below) (for a
dividend period of 365 days or more).
35
The applicable percentage and applicable spread for any regular dividend period
will generally be determined on the credit ratings assigned to the Preferred
Shares by Moody's and Fitch on the auction date for such period (as set forth in
the table below). If Moody's and/or Fitch shall not make such rating available,
the rate shall be determined by reference to equivalent ratings issued by a
substitute rating agency. In the case of a special dividend period, (1) the
maximum applicable rate will be specified by the Fund in the notice of special
dividend period for such dividend payment period, (2) the applicable percentage
and applicable spread will be determined on the date two business days before
the first day of such special dividend period and (3) the reference rate will be
the applicable LIBOR Rate (for a dividend period of fewer than 365 days) or the
Treasury Index Rate (for a dividend period of 365 days or more). In no event
shall the maximum rate be more than 18%.
MOODY'S CREDIT RATING FITCH'S CREDIT RATING APPLICABLE PERCENTAGE APPLICABLE SPREAD
--------------------- --------------------- --------------------- -----------------
Aaa.................. AAA 150% 150 bps
Aa3 to Aa1........... AA- to AA+ 250% 250 bps
A3 to A1............. A- to A+ 350% 350 bps
Baa1 and lower....... BBB+ and lower 550% 550 bps
The Fund will take all reasonable action necessary to enable Moody's and
Fitch to provide ratings for each series of Preferred Shares. If such ratings
are not made available by Moody's or Fitch, the underwriters or their affiliates
and successors, after consultation with the Fund, will select one or more other
rating agencies to act as substitute rating agencies.
The "LIBOR Rate" is the applicable London Inter-Bank Offered Rate for
deposits in U.S. dollars for the period most closely approximating the
applicable dividend period for a series of Preferred Shares. For a more detailed
description, please see the Certificate.
The "Treasury Index Rate" is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for a series of Preferred Shares. For a more detailed
description, please see the Certificate.
Assuming the Fund maintains an Aaa/AAA rating on the Preferred Shares, the
practical effect of the different methods used to calculate the maximum rate is
shown in the table below:
METHOD USED TO
MAXIMUM RATE USING MAXIMUM RATE USING DETERMINE MAXIMUM
REFERENCE RATE APPLICABLE PERCENTAGE APPLICABLE SPREAD RATE
-------------- --------------------- ------------------ -----------------
1% 1.50% 2.50% Spread
2% 3.00% 3.50% Spread
3% 4.50% 4.50% Either
4% 6.00% 5.50% Percentage
5% 7.50% 6.50% Percentage
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund fails
to pay, in a timely manner, the auction agent the full amount of any dividend on
any Preferred Shares, but the Fund cures the failure and pays any late charge
before 12:00 noon New York City time on the third business day following the
date the failure occurred, no auction will be held for Preferred Shares of that
series for the first subsequent dividend period thereafter, and the dividend
rate for Preferred Shares of that series for that subsequent dividend period
will be the maximum rate.
However, if the Fund does not effect a timely cure, no auction will be held
for Preferred Shares of that series for the first subsequent dividend period
thereafter (and for any dividend period thereafter, to and including the
dividend period during which the failure is cured and the late charge is paid),
and the dividend rate for Preferred Shares of that series for each subsequent
dividend period will be the default rate.
36
The default rate means 300% of the LIBOR Rate for a dividend period of
fewer than 184 days and 300% of the applicable Treasury Index Rate for a
dividend period of 184 days or more. Late charges are also calculated at the
applicable default rate.
Restrictions on Dividends and Other Distributions. When the Fund has any
Preferred Shares outstanding, the Fund may not pay any dividend or distribution
(other than a dividend or distribution paid in shares, or options, warrants or
rights to subscribe for or purchase, common shares) in respect of common shares
or call for redemption, redeem, purchase or otherwise acquire for consideration
any common shares (except by conversion into or exchange for shares of the Fund
ranking junior to the Preferred Shares as to the payment of dividends and the
distribution of assets upon liquidation), unless (1) it has paid all cumulative
dividends on Preferred Shares; (2) it has redeemed any Preferred Shares that it
has called for mandatory redemption; and (3) after paying the dividend, the Fund
meets both asset coverage requirements described under "Rating Agency
Guidelines."
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any series of shares of the Fund ranking, as to
the payment of dividends, on a parity with the Preferred Shares for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid on the Preferred Shares through their most recent dividend payment date.
When dividends are not paid in full upon the Preferred Shares through their most
recent dividend payment date or upon any other series of shares ranking on a
parity as to the payment of dividends with Preferred Shares through their most
recent respective dividend payment dates, all dividends declared upon Preferred
Shares and any other such series of shares ranking on a parity as to the payment
of dividends with Preferred Shares shall be declared pro rata so that the amount
of dividends declared per share on Preferred Shares and such other series of
preferred shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other series of
preferred shares bear to each other.
DESIGNATION OF SPECIAL DIVIDEND PERIODS
The Fund may instruct the auction agent to hold auctions and pay dividends
less frequently than weekly. The Fund may do this if, for example, the Fund
expects that short-term rates might increase or market conditions otherwise
change, in an effort to optimize the effect of the Fund's leverage on common
shareholders. The Fund does not currently expect to hold auctions and pay
dividends less frequently than weekly in the near future. If the Fund designates
a special dividend period, changes in interest rates could affect the price
received if the Preferred Shares were sold in the secondary market.
Before the Fund designates a special dividend period: (1) at least 7
business days (or 2 business days in the event the duration of the dividend
period prior to such special dividend period is less than 8 days) and not more
than 30 business days before the first day of the proposed special dividend
period, the Fund must issue a press release stating its intention to designate a
special dividend period and inform the auction agent of the proposed special
dividend period by telephonic or other means and confirm it in writing promptly
thereafter and (2) the Fund must inform the auction agent of the proposed
special dividend period by 3:00 p.m. New York City time on the second business
day before the first day of the proposed special dividend period.
VOTING RIGHTS
In addition to voting rights described below under "Description of Capital
Structure" and in the SAI under "Investment Restrictions," holders of preferred
shares, including the Preferred Shares, voting as a separate class, are entitled
to elect (1) two trustees of the Fund at all times and (2) a majority of the
trustees if at any time dividends on any preferred shares shall be unpaid in an
amount equal to two years' dividends thereon, and to continue to be so
represented until all dividends in arrears shall have been paid or otherwise
provided for. Common shareholders will elect the remaining trustees. So long as
any of the Preferred Shares are outstanding, the Fund will not, without the
affirmative vote of the holders of a majority of the outstanding Preferred
Shares: (i) amend, alter or repeal any of the preferences, rights or
37
powers of such class so as to affect materially and adversely such preferences,
rights or powers; (ii) increase the authorized number of Preferred Shares; (iii)
create, authorize or issue shares of any class of shares ranking senior to or on
parity with the Preferred Shares or any other series of preferred shares with
respect to the payment of dividends or the distribution of assets on
liquidation; (iv) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (v) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Fund's assets as a whole, except (A) liens the validity
of which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares, (D) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness permitted under clause (vi) below and (E) liens to secure payment
for services rendered including, without limitation, services rendered by the
Fund's dividend paying agent and the auction agent; or (vi) create, authorize,
issue, incur or suffer to exist any indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness, except the Fund may borrow as
may be permitted by the Fund's investment restrictions; provided, however, that
transfers of assets by the Fund subject to an obligation to repurchase shall not
be deemed to be indebtedness for purposes of this provision to the extent that
after any such transaction the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance Amount
as of the immediately preceding valuation date. For a description of the
Preferred Shares Basic Maintenance Amount, see "Rating Agency Guidelines."
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act. In the event a vote of Preferred Shareholders is
required pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund
shall, not later than ten business days prior to the date on which such vote is
to be taken, notify each rating agency that such vote is to be taken and the
nature of the action with respect to which such vote is to be taken and shall,
not later than ten business days after the date on which such vote is taken,
notify each rating agency of the results of such vote.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares of any series, voting separately from any other series, shall
be required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of that series in a manner different from that of
other series or classes of the Fund's shares of beneficial interest. For
purposes of the foregoing, no matter shall be deemed to adversely affect any
right, preference or power unless such matter: (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right
in respect of redemption of such series; or (iii) creates or alters (other than
to abolish) any restriction on transfer applicable to such series. The vote of
holders of any series described in this paragraph will in each case be in
addition to a separate vote of the requisite percentage of common shares and/or
preferred shares necessary to authorize the action in question.
REDEMPTION
Mandatory Redemption. In the event the Fund does not timely cure a failure
to (1) maintain a discounted value of its portfolio equal to the Preferred
Shares Basic Maintenance Amount, (2) maintain
38
the 1940 Act Preferred Shares Asset Coverage (as defined under "Rating Agency
Guidelines" below) or (3) file a required certificate related to asset coverage
on time, the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor in accordance with the Declaration of Trust,
the Certificate and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption. Any
such redemption will be limited to the number of Preferred Shares necessary to
restore the required discounted value or the 1940 Act Preferred Shares Asset
Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among the Preferred Shares and other preferred shares of the Fund, subject to
redemption or retirement. If fewer than all outstanding shares of any series
are, as a result, to be redeemed, the Fund may redeem such shares by lot or
other method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem Preferred Shares having a
dividend period of one year or less, in whole or in part, on the business day
after the last day of such dividend period upon not less than 15 calendar days
and not more than 40 calendar days prior notice. The optional redemption price
per share shall be $25,000 per share, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date fixed
for redemption. Preferred Shares having a dividend period of more than one year
are redeemable at the option of the Fund, in whole or in part, prior to the end
of the relevant dividend period, subject to any specific redemption provisions,
which may include the payment of redemption premiums to the extent required
under any applicable specific redemption provisions. The Fund shall not effect
any optional redemption unless after giving effect thereto (i) the Fund has
available certain deposit securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of
Preferred Shares by reason of the redemption of Preferred Shares on such date
fixed for the redemption and (ii) the Fund would have eligible assets with an
aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount.
Notwithstanding the foregoing, no Preferred Shares may be redeemed at the
option of the Fund unless all dividends in arrears on all outstanding preferred
shares, including the Preferred Shares, have been or are being contemporaneously
paid or set aside for payment; provided however, that the foregoing shall not
prevent the purchase or acquisition of outstanding preferred shares pursuant to
the successful completion of an otherwise lawful purchase or exchange offer made
on the same terms to holders of all outstanding preferred shares.
RATING AGENCY GUIDELINES
The Fund is required under Moody's and Fitch guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount. Moody's and Fitch have each established
separate guidelines for determining discounted value. To the extent any
particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by such rating agency). The Moody's
and Fitch guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The Preferred Shares Basic Maintenance Amount includes
the sum of (i) the aggregate liquidation preference of the Preferred Shares then
outstanding, (ii) the total principal of any senior debt (plus accrued and
projected dividends), (iii) certain Fund expenses and (iv) certain other current
liabilities.
The Fund is also required under rating agency guidelines to maintain, with
respect to the Preferred Shares, as of the last business day of each month in
which any Preferred Shares are outstanding, asset coverage of at least 200% with
respect to senior securities which are shares of beneficial interest in the
39
Fund, including Preferred Shares (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Preferred
Shares Asset Coverage"). Based on the Fund's assets and liabilities as of
December 31, 2003 the 1940 Act Preferred Shares Asset Coverage with respect to
Preferred Shares, assuming the issuance of all Preferred Shares offered hereby
and the use of the proceeds as intended would be computed as follows:
Value of Fund assets less liabilities not
constituting senior securities $2,222,106,303
--------------------------------------------- = -------------- = 317%
Senior securities representing indebtedness $700,000,000
plus
liquidation value of the Preferred Shares
In the event the Fund does not timely cure a failure to maintain (i) a
discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (ii) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Fund will be required to redeem Preferred
Shares as described above under "Description of Preferred Shares -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. The Board of Trustees may, without shareholder
approval, amend, alter, add to or repeal any or all of the definitions and
related provisions which have been adopted by the Fund pursuant to the rating
agency guidelines in the event the Fund receives written confirmation from
Moody's or Fitch, or both, as appropriate, that any such change would not impair
the ratings then assigned by Moody's and Fitch to Preferred Shares.
As described by Moody's and Fitch, a preferred share rating is an
assessment of the capacity and willingness of an issuer to pay preferred share
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell Preferred Shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an auction or otherwise.
The ratings are based on current information furnished to Moody's and Fitch by
the Fund and the Adviser, and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
The rating agency guidelines will apply to Preferred Shares only so long as
such rating agency is rating such shares. The Fund will pay fees to Moody's or
Fitch, or both, for rating Preferred Shares.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Fund's Board of Trustees is responsible for the overall management and
supervision of the Fund's business, including the review and supervision of the
duties performed by the Adviser under the Fund's investment advisory agreement.
THE ADVISER
Van Kampen Asset Management is the Fund's Adviser. On November 30, 2003,
the Fund's investment adviser, Van Kampen Investment Advisory Corp., was merged
with and into its affiliate, Van Kampen Asset Management. The Adviser is a
wholly-owned subsidiary of Van Kampen Investments. Van Kampen Investments is a
diversified asset management company that administers more than
40
three million retail investor accounts, has extensive capabilities for managing
institutional portfolios and has more than $84 billion under management or
supervision as of December 31, 2003. Van Kampen Investments has more than 50
open-end funds, more than 30 closed-end funds and more than 2,700 unit
investment trusts that are distributed by authorized dealers nationwide. Van
Kampen Investments is an indirect wholly-owned subsidiary of Morgan Stanley.
Morgan Stanley is a full service securities firm engaged in securities trading
and brokerage activities, investment banking, research and analysis, financing
and financial advisory services. The Adviser's principal place of business is
located at 1221 Avenue of the Americas, New York, New York 10020.
INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase, hold or sell and the selection of financial institutions through whom
the Fund's portfolio transactions are executed. For the services provided by the
Adviser under the Advisory Agreement, the Fund pays the Adviser a monthly fee
(accrued daily and paid monthly) computed based upon an annual rate equal to
0.85% applied to the average daily managed assets of the Fund (which for
purposes of determining such fee, shall mean the average daily gross asset value
of the Fund, minus the sum of accrued liabilities other than the aggregate
amount of any borrowings undertaken by the Fund). Because leverage will increase
the amount of total assets, the Fund will pay a greater amount of advisory fees
when leverage is utilized. Under the Advisory Agreement, the Adviser also
furnishes offices and necessary facilities and equipment, and permits its
officers and employees to serve without compensation as trustees and officers of
the Fund if duly elected to such positions. The Fund pays all other expenses
incurred in the operation of the Fund including, but not limited to, direct
charges relating to the purchase and sale of financial instruments in its
portfolio, interest charges, fees and expenses of legal counsel and independent
auditors, taxes and governmental fees, cost of share certificates, expenses
(including clerical expenses) of issuance, sale or repurchase of any of the
Fund's portfolio holdings, expenses in connection with the Fund's dividend
reinvestments, membership fees in trade associations, expenses of registering
and qualifying the common shares of the Fund for sale under federal and state
securities laws, expenses of printing and distributing reports, notices and
proxy materials to existing holders of common shares, expenses of filing reports
and other documents filed with governmental agencies, expenses of annual and
special meetings of common shareholders, fees and disbursements of the transfer
agents, custodians and sub-custodians, expenses of disbursing dividends and
distributions, fees, expenses and out-of-pocket costs of trustees of the Fund
who are not affiliated with the Adviser, insurance premiums, indemnification and
other expenses not expressly provided for in the Advisory Agreement or the
Administration Agreement (as defined below) and any extraordinary expenses of a
non-recurring nature. The Adviser may in its sole discretion from time to time
waive all or a portion of the advisory fee or reimburse the Fund for all or a
portion of its other expenses.
The Advisory Agreement continues from year to year, unless earlier
terminated as described below, if approved annually (a) by the Board of Trustees
of the Fund or by a majority of the Fund's common shares and (b) by a majority
of the trustees who are not parties to the agreement or interested persons of
any such party, in compliance with the requirements of the 1940 Act. The
Advisory Agreement may be terminated without penalty upon 60 days written notice
by either party and will automatically terminate in the event of assignment. The
Advisory Agreement provides that the Adviser shall not be liable for any error
of judgment or of law, or for any loss suffered by the Fund in connection with
the matters to which the Advisory Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the Advisory Agreement.
41
PORTFOLIO MANAGEMENT
Howard Tiffen, Senior Vice President of the Adviser and Vice President of
the Senior Loan funds advised by the Adviser, is primarily responsible for the
day-to-day management of the Fund. Mr. Tiffen assumed portfolio management
responsibilities for the Fund in December 1999. Mr. Tiffen also has primary
responsibility for the day-to-day management of Van Kampen Senior Loan Fund, a
continuously offered closed-end investment company investing primarily in Senior
Loans and having investment objectives and policies substantially similar to
those of the Fund. Mr. Tiffen has over 25 years of investment experience and
manages, as of December 31, 2003, over $3.7 billion in Senior Loan assets for
Van Kampen. Prior to joining the Adviser, Mr. Tiffen was a senior portfolio
manager for the Senior Loan fund of another investment management company from
1995 to 1999. From 1982 to 1995, Mr. Tiffen held positions in the lending and
capital markets functions at Bank of America and its predecessor, Continental
Bank. Mr. Tiffen received a bachelor's degree from Northwestern University,
Chicago, Illinois. He also is an associate of the Chartered Institute of Bankers
and a member of the Economic Club of Chicago.
THE ADMINISTRATOR
The Administrator for the Fund is Van Kampen Investments. The
Administrator's principal business address is 1221 Avenue of the Americas, New
York, New York 10020. The Administrator is an indirect wholly-owned subsidiary
of Morgan Stanley. The Administrator maintains offices and regional
representatives in major cities across the nation.
Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative fee, the Administrator will (i) monitor the provisions of the
Loan Agreements and any agreements with respect to Participations and
Assignments and be responsible for recordkeeping with respect to Senior Loans in
the Fund's portfolio; (ii) arrange for the printing and dissemination of proxies
and reports to holders of the Fund's shares; (iii) in connection with the
issuance of any preferred shares by the Fund, calculate, monitor and provide to
any rating agencies rating any preferred shares such asset coverage and
liquidity reports as the Board of Trustees deems advisable; (iv) negotiate the
terms and conditions under which custodian services will be provided to the Fund
and the fees to be paid by the Fund in connection therewith; (v) negotiate the
terms and conditions under which dividend disbursing services will be provided
to the Fund, and the fees to be paid by the Fund in connection therewith and
review the provision of dividend disbursing services to the Fund; (vi) provide
the Fund's dividend disbursing agent and custodian with such information as is
required for such parties to effect payment of dividends and distributions and
to implement the Fund's dividend reinvestment plan; (vii) make such reports and
recommendations to the Board of Trustees as the trustees reasonably request or
deem appropriate; and (viii) provide certain shareholder services to holders or
potential holders of the Fund's securities.
For the services rendered to the Fund and related expenses borne by the
Administrator, the Fund pays the Administrator a monthly fee (accrued daily and
paid monthly) computed based upon an annual rate equal to 0.20% applied to the
Fund's average daily managed assets (which for purposes of determining such fee,
shall mean the average daily gross asset value of the Fund, minus the sum of
accrued liabilities other than the aggregate amount of any borrowings undertaken
by the Fund). Because leverage will increase the amount of total assets, the
Fund will pay a greater amount of administration fees when leverage is utilized.
CUSTODIAN AND AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held pursuant to a custodian agreement
by State Street Bank and Trust Company, whose principal place of business is 225
West Franklin Street, Boston, Massachusetts 02015-1713. Boston Equiserve, L.P.,
whose principal place of business is Blue Hills Office Park, 150 Royal Street,
Canton, Massachusetts 02021, serves as transfer agent, dividend paying agent and
registrar for the Fund's common shares. The Depository Trust Company will act as
securities depository for the Preferred
42
Shares. The Bank of New York, whose principal place of business is 101 Barclay
St. New York, New York 10286, will act as auction agent, transfer agent,
dividend paying agent and registrar for the Preferred Shares.
FEDERAL TAXATION
The following federal tax discussion is only a summary of certain federal
income tax considerations generally applicable to investments in the Fund. It is
based on the Code, existing Treasury regulations, rulings published by the
Internal Revenue Service (the "Service") and other applicable authority, as of
the date of this Prospectus. These authorities are subject to change by
legislative or administrative action (retroactively or prospectively). For
additional information regarding tax considerations, see the SAI. There may be
other tax considerations applicable to particular investors. In addition, income
earned through an investment in the Fund may be subject to state, local and
foreign taxes.
FEDERAL TAXATION OF THE FUND
The Fund has elected to be and intends to qualify each year for taxation as
a regulated investment company under Subchapter M of the Code. Provided that the
Fund so qualifies and distributes at least 90% of the sum of its investment
company taxable income (as that term is defined in the Code, but without regard
to the deduction for dividends paid) and certain other income, it will not be
subject to federal income tax on income distributed timely to its shareholders
in the form of dividends or capital gain dividends. The Fund intends to
distribute all of its investment company taxable income and net capital gain
(which is the excess of net long-term capital gain over net short-term capital
loss) each year.
To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
its Preferred Shareholders, must qualify for the dividends-paid deduction. In
certain circumstances, the Service could take the position that dividends paid
on the Preferred Shares constitute preferential dividends under Section 562(c)
of the Code, and thus do not qualify for the dividends-paid deduction. If this
position were upheld, the Fund could be subject to tax and/or could fail to
qualify to be taxed as a regulated investment company. The Fund believes,
however, that such a position, if asserted by the Service, would be unlikely to
prevail if the issue were properly litigated.
If at any time the Fund does not meet applicable asset coverage
requirements, it may be required to suspend distributions until the requisite
asset coverage is restored. Any such suspension may prevent the Fund from
qualifying as a regulated investment company or may cause the Fund to pay a
nondeductible 4% federal excise tax (imposed on regulated investment companies
that fail to distribute for a given calendar year, generally, at least 98% of
their net investment income and capital gain net income plus certain other
amounts). The Fund may call Preferred Shares to maintain or restore the
requisite asset coverage.
If the Fund were to fail to qualify as a regulated investment company, the
Fund would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, the Fund's distributions, to the
extent derived from the Fund's current or accumulated earnings and profits,
would be taxable to shareholders as ordinary dividends. Such distributions
generally will be eligible (i) for the dividends received deduction in the case
of corporate shareholders and (ii) for treatment as "qualified dividend income"
in the case of individual shareholders.
FEDERAL INCOME TAXATION OF PREFERRED SHAREHOLDERS
The Fund believes that the Preferred Shares will constitute stock of the
Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of Preferred Shares that are treated as exchanges of
stock under Section 302(b) of the Code) thus will constitute dividends to the
extent attributable to the Fund's current and accumulated earnings and profits.
It is possible, however, that the
43
Service might take a contrary position asserting, for example, that the
Preferred Shares constitute debt of the Fund. If this position were upheld,
distributions by the Fund to Preferred Shareholders would constitute interest,
whether or not they exceeded the Fund's earnings and profits, and would be taxed
as ordinary income. The Fund believes, however, that such a position, if
asserted by the Service, would be unlikely to prevail if the issue were properly
litigated. On May 28, 2003, President Bush signed into the law the Jobs and
Growth Tax Relief Reconciliation Act of 2003, which contains provisions that
reduce the U.S. federal income tax rates on (1) long-term capital gains received
by individuals and (2) "qualified dividend income" received by individuals from
certain domestic and foreign corporations. The reduced rates apply to long-term
capital gains from sales or exchanges in taxable years ending on or after May 6,
2003 and cease to apply for taxable years beginning after December 31, 2008.
Because the Fund intends to invest primarily in Senior Loans and other senior
debt securities, ordinary income dividends paid by the Fund generally will not
be eligible for the reduced rates applicable to "qualified dividend income" and
generally will not qualify for the dividends received deduction available to
corporations. Distributions from the Fund designated as capital gain dividends
will be eligible for the rate applicable to long-term capital gains.
Distributions, if any, in excess of the Fund's current and accumulated earnings
and profits will first reduce the tax basis of the Preferred Shares and, after
such basis has been reduced to zero, will constitute capital gains (assuming
such Preferred Shares are held as a capital asset).
Distributions of net capital gain that are designated by the Fund as
capital gain dividends will be treated as long-term capital gains in the hands
of holders regardless of the holders' respective holding periods for their
Preferred Shares. The Service currently takes the position that a regulated
investment company that has two or more classes of stock must allocate to each
such class proportionate amounts of each type of its income (such as ordinary
income and capital gains). Accordingly, the Fund intends to designate the
portion of its distributions as capital gain dividends in compliance with this
position.
The sale of Preferred Shares will be a taxable transaction for federal
income tax purposes. Selling Preferred Shareholders will generally recognize
gain or loss in an amount equal to the difference between the amount received in
exchange for the Preferred Shares and their basis in the Preferred Shares. If
such Preferred Shares are held as a capital asset, the gain or loss will
generally be a capital gain or loss. Similarly, a redemption (including a
redemption resulting from liquidation of the Fund), if any, of Preferred Shares
by the Fund generally will give rise to capital gain or loss if the redemption
is treated as an exchange of stock under Section 302(b) of the Code. Generally,
a holder's gain or loss will be a long-term gain or loss if the shares have been
held for more than one year. Any loss realized upon a taxable disposition of
Preferred Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder with respect to such shares. Also, any loss realized upon a taxable
disposition of Preferred Shares may be disallowed if other Preferred Shares are
acquired within a 61-day period beginning 30 days before and ending 30 days
after the date the shares are disposed of. If disallowed, the loss will be
reflected by an upward adjustment to the basis of the shares acquired.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income taxes, a
certain percentage of all dividends and redemption proceeds payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or who fail to make required certifications, or if the
Fund or a shareholder has been notified by the Service that they are subject to
backup withholding. Corporate shareholders and other shareholders specified in
the Code are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability if the appropriate information is provided to
the Service.
OTHER TAXATION
Foreign shareholders, including shareholders who are non-resident aliens,
may be subject to U.S. withholding tax on certain distributions at a rate of 30%
or such lower rate as may be prescribed by any applicable treaty. (This U.S.
federal tax rate may significantly exceed the effective U.S. federal tax
44
that would apply if such foreign investors held their share of the Fund's assets
directly rather than indirectly through their investment in the Fund.) Investors
are advised to consult their own tax advisors with respect to the application to
their own circumstances of the above-described general U.S. federal taxation
rules and with respect to the state, local or foreign tax consequences to them
of an investment in Preferred Shares.
TAX SHELTER REPORTING REGULATIONS
Under recently promulgated Treasury regulations, if a shareholder
recognizes a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder in any single
taxable year (or a greater loss over a combination of years), the shareholder
must file with the Service a disclosure statement on Form 8886. Direct
shareholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance, shareholders of a regulated
investment company are not excepted. Future guidance may extend the current
exception from this reporting requirement to shareholders of most or all
regulated investment companies. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer's
treatment of the loss is proper. Preferred Shareholders should consult their tax
advisors to determine the applicability of these regulations in light of their
individual circumstances.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by the Declaration of Trust dated April 7,
1998. The Declaration of Trust provides that the Board of Trustees of the Fund
may authorize separate classes of shares of beneficial interest. The Board of
Trustees has authorized an unlimited number of shares of beneficial interest,
par value $0.01 per share, all of which were initially classified as common
shares. The Declaration of Trust also authorizes 100,000,000 shares of
beneficial interest with preference rights, including preferred shares, having a
par value of $0.01 per share, in one or more series, with rights as determined
by the Board of Trustees, by action of the Board of Trustees without the
approval of the common shareholders. The following table shows the amount of (i)
shares authorized, (ii) shares held by the Fund for its own account and (iii)
shares outstanding, for each class of authorized securities of the Fund as of
December 31, 2003.
AMOUNT HELD
BY FUND FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OWN ACCOUNT AMOUNT OUTSTANDING
-------------- ----------------- --------------- ------------------
Common shares................................ Unlimited 0 180,010,000
Preferred Shares, Series M................... 5,600 0 0
Preferred Shares, Series T................... 5,600 0 0
Preferred Shares, Series W................... 5,600 0 0
Preferred Shares, Series TH.................. 5,600 0 0
Preferred Shares, Series F................... 5,600 0 0
Each common share represents an equal proportionate interest in the assets
of the Fund with each other common share in the Fund. Common shareholders will
be entitled to the payment of dividends when, as and if declared by the Board of
Trustees. The 1940 Act or the terms of any borrowings or Preferred Shares may
limit the payment of dividends to the common shareholders. Each whole common
share shall be entitled to one vote as to matters on which it is entitled to
vote pursuant to the terms of the Fund's Declaration of Trust on file with the
SEC. Upon liquidation of the Fund, after paying or adequately providing for the
payment of all liabilities of the Fund and the liquidation preference with
respect to any outstanding Preferred Shares, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Board of Trustees may distribute the remaining assets of the
Fund among the common shareholders.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Fund, requires inclusion of a clause to that effect in every
agreement entered into by the Fund and indemnifies
45
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote. The Declaration of Trust further provides that obligations of
the Fund are not binding upon trustees individually but only upon the property
of the Fund and that the trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
While there are any Preferred Shares or borrowings outstanding, the Fund
may not declare any cash dividend or other distribution on its common shares,
unless at the time of such declaration, (1) all accrued dividends on Preferred
Shares or accrued interest on borrowings has been paid and (2) the value of the
Fund's total assets (determined after deducting the amount of such dividend or
other distribution), less all liabilities and indebtedness of the Fund not
represented by senior securities, is at least 300% of the aggregate amount of
such securities representing indebtedness and at least 200% of the aggregate
amount of securities representing indebtedness plus the aggregate liquidation
value of the Preferred Shares (expected to equal the aggregate original purchase
price of the Preferred Shares plus redemption premium, if any, together with any
accrued and unpaid dividends thereon, whether or not earned or declared and on a
cumulative basis). In addition, the Fund is required to comply with other asset
coverage requirements as a condition of the Fund obtaining a rating of the
Preferred Shares from a nationally recognized statistical rating organization
and as a condition to borrowing money. This limitation on the Fund's ability to
make distributions on its common shares could in certain circumstances impair
the ability of the Fund to maintain its qualification for taxation as a
regulated investment company. The Fund intends, however, to the extent possible
to purchase or redeem Preferred Shares or to repay borrowings from time to time
to maintain compliance with such asset coverage requirements and may pay special
dividends to Preferred Shareholders in certain circumstances in connection with
any such impairment of the Fund's status as a regulated investment company.
Depending on the timing of any such redemption or repayment, the Fund may be
required to pay a premium in addition to the liquidation preference of the
Preferred Shares or the principal amount of the borrowings to the holders
thereof. See "-- Borrowings" below.
The Fund has no present intention of offering additional common shares.
Other offerings of its common shares, if made, will require approval of the
Fund's Board of Trustees. Any additional offering will not be sold at a price
per common share below the then current NAV (exclusive of underwriting discounts
and commissions) except in connection with an offering to existing common
shareholders or with the consent of a majority of the Fund's outstanding common
shares. The common shares have no preemptive rights.
The common shares trade on the NYSE under the symbol "VVR." The following
table shows for the Fund's common shares for the periods indicated: (1) the high
and low closing prices as shown on the NYSE Composite Transaction Tape; (2) the
NAV per common share represented by each of the high and low closing prices as
shown on the NYSE Composite Transaction Tape; and (3) the discount from or
premium to NAV per common share (expressed as a percentage) represented by these
closing prices. The table also sets forth the average daily volume of shares
traded as shown on the NYSE Composite Transaction Tape during the respective
quarter.
PREMIUM/(DISCOUNT)
MARKET PRICE
PRICE NAV TO NAV AVERAGE
------------- ------------- ------------------ DAILY
CALENDAR QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW VOLUME
---------------------- ----- ----- ----- ----- ------- -------- -------
March 31, 2003............... $7.29 $6.71 $7.74 $7.64 (5.81)% (12.17)% 343,721
June 30, 2003................ $7.89 $7.23 $8.03 $7.70 (1.74)% (6.10)% 435,211
September 30, 2003........... $8.19 $7.73 $8.24 $8.04 (0.61)% (3.86)% 438,798
December 31, 2003............ $8.74 $7.93 $8.46 $8.26 3.31% (4.00)% 408,890
46
On December 31, 2003, the last reported sales price of the Fund's common
shares on the NYSE was $8.63 and the Fund's NAV was $8.46, representing a 2%
premium of market price to NAV as of that date.
BORROWINGS
The Fund's current fundamental investment restriction regarding senior
securities allows the Fund, without prior approval of the common shareholders,
to borrow money in an amount up to 33 1/3% of the Fund's total assets. In this
connection, the Fund may issue notes or other evidence of indebtedness
(including bank borrowings or commercial paper) and may secure any such
borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate. Under the requirements of the
1940 Act, the Fund, immediately after any such borrowings, must have an "asset
coverage" of at least 300%. With respect to any such borrowing, asset coverage
means the ratio which the value of the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing represented by
senior securities by the Fund. Certain types of borrowing may result in the Fund
being subject to covenants in credit agreements relating to asset coverages or
portfolio composition or otherwise. Such restrictions may be more stringent than
those imposed by the 1940 Act. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such borrowings will be senior to
those of the common shareholders, and the terms of any such borrowings may
contain provisions which limit certain activities of the Fund, including the
payment of dividends to common shareholders in certain circumstances. In the
event that such provisions would impair the Fund's status as a regulated
investment company, the Fund, subject to its ability to liquidate its relatively
illiquid portfolio, intends to repay the borrowings. Further, the terms of any
such borrowing may and the 1940 Act does (in certain circumstances) require that
the lenders to the Fund have certain voting rights in the event of a failure to
maintain certain asset coverage requirements. Any borrowing will likely rank
senior to or pari passu with all other existing and future borrowings of the
Fund. The Fund may also borrow up to an additional 5% of its total assets for
temporary purposes. See "Investment Restrictions" in the SAI.
The Fund has filed a proxy statement seeking a shareholder vote to amend
the aforementioned investment restriction regarding the Fund's use of financial
leverage to allow the Fund to utilize financial leverage to the maximum extent
allowable under the 1940 Act. The Fund expects to hold a shareholder meeting to
vote on this proposal on April 8, 2004.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time by
an amendment to the Declaration of Trust. The Declaration of Trust provides that
such an amendment would require the approval of (a) a majority of the trustees,
including the approval by a majority of the disinterested trustees of the Fund
and (b) the lesser of (i) 67% or more of the Fund's common shares and preferred
shares, each voting as a class, present at a meeting at which holders of more
than 50% of the outstanding shares of each class are present in person or by
proxy or (ii) more than 50% of the outstanding common shares and preferred
shares, each voting as a class. If approved in the foregoing manner, conversion
of the Fund could not occur until 90 days after the shareholders' meeting at
which such conversion was approved and would also require at least 30 days'
prior notice to all shareholders. The composition of the Fund's portfolio likely
would prohibit the Fund from complying with regulations of the SEC applicable to
open-end investment companies. Accordingly, conversion likely would require
significant changes in the Fund's investment policies and liquidation of a
substantial portion of its relatively illiquid portfolio. Conversion of the Fund
to an open-end investment company also would require the redemption of all
outstanding preferred shares, including the Preferred Shares, and could require
the repayment of borrowings, which would eliminate the leveraged capital
structure of the Fund with respect to the common shares. In the event of
conversion, the common shares would cease to be listed on the NYSE or other
national securities
47
exchange or market system. 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 1940 Act) at their NAV, less such
redemption charge, if any, as might be in effect at the time of a redemption.
The Fund expects to pay all such redemption requests in cash, but intends to
reserve the right to pay redemption requests in a combination of cash or
securities. If such partial payment in securities were made, investors may incur
brokerage costs in converting such securities to cash. If the Fund were
converted to an open-end fund, it is likely that new common shares will be sold
at NAV plus a sales load.
REPURCHASE OF COMMON SHARES
Shares of closed-end management investment companies frequently trade at a
discount to their NAVs but in some cases trade at a premium. In recognition of
the possibility that the Fund's common shares might similarly trade at a
discount, the Fund's Board of Trustees has determined that from time to time it
may be in the interest of common shareholders for the Fund to take action to
attempt to reduce or eliminate a market value discount from NAV. The Board of
Trustees, in consultation with the Adviser, will review on a quarterly basis the
possibility of open market repurchases and/or tender offers for the common
shares and will consider such factors as the market price of the common shares,
the NAV of the common shares, the liquidity of the assets of the Fund, whether
such transactions would impair the Fund's status as a regulated investment
company or result in a failure to comply with applicable asset coverage
requirements, general economic conditions and such other events or conditions
which may have a material effect on the Fund's ability to consummate such
transactions. There are no assurances that the Board of Trustees will, in fact,
decide to undertake either of these actions or, if undertaken, that such actions
will result in the Fund's common shares trading at a price which is equal to or
approximates their NAV. In addition, the Board of Trustees will not necessarily
announce when it has given consideration to these matters. Common shares will
not be repurchased unless after such repurchase the Fund would continue to
satisfy the 1940 Act asset coverage requirements with respect to the Preferred
Shares or any borrowing and any asset coverage requirements which may be imposed
by any rating service as a condition of its rating of the Preferred Shares or by
any lender with respect to any borrowing.
Although the Board of Trustees believes that common share repurchases and
tenders generally could have a favorable effect on the market price of the
Fund's common shares, it should be recognized that the acquisition of common
shares by the Fund will decrease the total assets of the Fund and, therefore,
have the effect of increasing the Fund's expense ratio and decreasing the asset
coverage available with respect to the Preferred Shares and any borrowing.
Because of the nature of the Fund's investment objective and policies and the
Fund's portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the common shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tender offers. Interest on any such borrowings will reduce the
Fund's net investment income. See "Description of Capital Structure --
Borrowings." Disposition of portfolio securities may increase the Fund's
portfolio turnover rate and will result in related costs to the Fund.
Even if a tender offer has been made, it is the Board of Trustees'
announced policy, which may be changed by the Board of Trustees, that the Fund
cannot accept tenders or effect repurchases if (1) such transactions, if
consummated, would (a) result in the delisting of the Fund's common shares from
the NYSE or other national securities exchange (the Fund understands that the
NYSE would consider delisting if the aggregate market value of the Fund's
outstanding common shares is less than $5,000,000, the number of publicly held
common shares falls below 600,000 or the number of round-lot holders falls below
1,200), (b) impair the Fund's status as a regulated investment company under the
Code (which would make the Fund a taxable entity, causing the Fund's taxable
income to be taxed at the Fund level) or (c) result in a failure to comply with
applicable asset coverage requirements; (2) the amount of securities tendered
would require liquidation of such a substantial portion of the Fund's securities
that the Fund would not be able to liquidate portfolio securities in an orderly
manner in light of the existing market conditions and such liquidation would
have an adverse effect on the NAV of the Fund to the detriment of non-tendering
shareholders; or (3) there is, in the Board of Trustees' judgment, any (a)
material legal
48
action or proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Fund, (b) suspension of or
limitation on prices for trading in securities generally on the NYSE, the
American Stock Exchange or other national securities exchange or national market
system, (c) declaration of a banking moratorium by federal or state authorities
or any suspension of payment by banks in the United States or New York State,
(d) limitation affecting the Fund or the issuers of its portfolio securities
imposed by federal or state authorities on the extension of credit by lending
institutions, (e) threatened or actual conditions of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or (f) any other event or condition which would have a material
adverse effect on the Fund or its shareholders if common shares were
repurchased. The Board of Trustees may modify these conditions in light of
experience.
Under the requirements of the 1940 Act, the Fund cannot accept tenders or
effect repurchases of the common shares unless, after deducting the amount of
the tender or repurchase price, the value of the Fund's total assets, less all
liabilities and indebtedness of the Fund not represented by senior securities,
is at least 300% of the aggregate amount of such securities representing
indebtedness and at least 200% of the aggregate amount of securities
representing indebtedness plus the aggregate liquidation value of the Preferred
Shares (expected to equal the aggregate original purchase price of the Preferred
Shares plus redemption premium, if any, together with any accrued and unpaid
dividends thereon, whether or not earned or declared and on a cumulative basis).
In addition, the Fund may be precluded from accepting tenders or effecting
repurchases at any time dividends on the Preferred Shares or payment of interest
or repayment of principal on any borrowings are in arrears. Any tender offer
made by the Fund for its common shares will be at a price equal to the NAV of
the common shares determined at the close of business on the day the offer ends.
During the pendency of any tender offer by the Fund, the Fund will calculate
daily the NAV of the common shares and will establish procedures which will be
specified in the tender offer documents, to enable common shareholders to
ascertain readily such NAV. The relative illiquidity of some of the Fund's
portfolio securities could adversely impact the Fund's ability to calculate NAV
in connection with determinations of pricing for tender offers, if any. Each
offer will be made and common shareholders notified in accordance with the
requirements of the Securities Exchange Act of 1934, as amended, and the 1940
Act, either by publication or mailing or both. Each offering document will
contain such information as is prescribed by such laws and the rules and
regulations promulgated thereunder.
Should the Fund determine to make a tender offer for its common shares, a
notice describing the tender offer, containing information common shareholders
should consider in deciding whether to tender their common shares and including
instructions on how to tender common shares will be sent to shareholders of
record. Information concerning the purchase price to be paid by the Fund and the
manner in which shareholders may ascertain NAV during the pendency of a tender
offer will also be set forth in the notice. When a tender offer is authorized to
be made by the Fund's Board of Trustees, a common shareholder wishing to accept
the offer will be required to tender all (but not less than all) of the common
shares owned by such shareholder (or attributed to him for federal income tax
purposes under Section 318 of the Code). The Fund will purchase all common
shares tendered in accordance with the terms of the offer unless it determines
in accordance with the terms of the offer to accept none of them. Each person
tendering common shares will pay to the Fund a reasonable service charge,
currently anticipated to be $25.00, subject to change, to help defray certain
costs, including the processing of tender forms, effecting payment, postage and
handling. It is the position of the staff of the SEC that such service charge
may not be deducted from the proceeds of the purchase. The Fund's transfer agent
will receive a fee as an offset to these costs. The Fund expects that the cost
to the Fund of effecting a tender offer will exceed the aggregate of all service
charges received from those who tender their common shares. Costs associated
with the tender will be charged against capital. Tendered common shares that
have been accepted and purchased by the Fund will be held in treasury and may be
retired by the Board of Trustees. Treasury common shares will be recorded and
reported as an offset to shareholders' equity and accordingly will reduce the
Fund's total assets. If treasury common shares are retired, common shares issued
and outstanding and capital in excess of par value will be reduced accordingly.
49
PREFERRED SHARES
Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Neither holders of common shares nor holders of preferred shares have
pre-emptive rights to purchase any Preferred Shares or any other preferred
shares that might be issued.
The Fund's Declaration of Trust authorizes the issuance of a class of
preferred shares (which class may be divided into two or more series) as the
Board of Trustees may, without shareholder approval, authorize. The Preferred
Shares have such preferences, voting powers, terms of redemption, if any, and
special or relative rights or privileges (including conversion rights, if any)
as the Board of Trustees may determine and as are set forth in the Fund's
Certificate establishing the terms of the Preferred Shares. The number of shares
of the preferred class or series authorized is limited to 100,000,000 and the
shares authorized may be represented in part by fractional shares. Under the
Fund's Certificate, the Board of Trustees has authorized the creation of 28,000
Auction Rate Cumulative Preferred Shares, having a par value of $0.01 per share,
with a liquidation preference of $25,000 per share, classified as Series M, T,
W, TH and F Auction Rate Cumulative Preferred Shares.
50
UNDERWRITING
Citigroup Global Markets Inc. is acting as a representative of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions in the underwriting agreement dated the date hereof (the
"Underwriting Agreement"), each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Preferred Shares set forth opposite the name of such Underwriter.
UNDERWRITERS SERIES M SERIES T SERIES W SERIES TH SERIES F
------------ -------- -------- -------- --------- --------
Citigroup Global Markets Inc. ................. 2,520 2,520 2,520 2,520 2,520
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................... 1,400 1,400 1,400 1,400 1,400
Lehman Brothers Inc. .......................... 672 672 672 672 672
Wachovia Capital Markets, LLC.................. 672 672 672 672 672
A.G. Edwards & Sons, Inc. ..................... 336 336 336 336 336
Total................................... 5,600 5,600 5,600 5,600 5,600
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Preferred Shares if they
purchase any of the Preferred Shares.
The Underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this Prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $137.50 per share. The sales load the Fund will pay
of $225 per share is equal to 0.90% of the initial offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $37.50 per share on sales to certain other dealers. If all of the Preferred
Shares are not sold at the initial offering price, the representative may change
the public offering price and other selling terms. Investors must pay for any
Preferred Shares purchased on or before February 20, 2004.
The Fund and the Adviser have each agreed that, for a period of 180 days
from the date of the Underwriting Agreement, they will not, without the prior
written consent of Citigroup Global Markets Inc., on behalf of the Underwriters,
sell, contract to sell, or otherwise dispose of any senior securities (as
defined in the 1940 Act) of the Fund, or any securities convertible into or
exchangeable for senior securities or grant any options or warrants to purchase
senior securities of the Fund other than Preferred Shares. Citigroup Global
Markets Inc., on behalf of the Underwriters, in its sole discretion may release
any of the securities subject to those lock-up agreements at any time without
notice.
Because an affiliate of Citigroup Global Markets Inc. will receive a
portion of the net proceeds, this offering is being conducted pursuant to
conduct Rule 2710(c)(8) of the National Association of Securities Dealers, Inc.
The Fund anticipates that from time to time certain Underwriters may act as
brokers or dealers in connection with the execution of the Fund's portfolio
transaction after they have ceased to be Underwriters and, subject to certain
conditions, may act as brokers while they are Underwriters.
The Fund anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees set forth under "Description of Preferred Shares" and in the SAI.
The Fund and the Adviser have agreed to indemnify the Underwriters in
connection with this offering 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. Insofar
as indemnification for liability arising under the Securities Act of 1933, as
amended (the "Securities Act"), may be permitted to trustees, officers and
controlling persons of the registrant pursuant to the foregoing
51
provisions, or otherwise, the registrant has been advised that in the opinion of
the SEC 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 Fund 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.
The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, New York 10013.
LEGAL MATTERS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom
LLP, Chicago, Illinois, and for the Underwriters by Simpson Thacher & Bartlett
LLP, New York, New York.
EXPERTS
The financial statements of the Fund at July 31, 2003 and the selected per
share data and ratios set forth under the caption "Financial Highlights" for
each of the fiscal years ended 2000 through 2003 have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report incorporated by
reference in the SAI, and are included in reliance upon their report given upon
Deloitte & Touche LLP's authority as experts in accounting and auditing. The
address of Deloitte & Touche LLP is 180 North Stetson Avenue, Chicago, Illinois.
The selected per share data and ratios set forth under the caption "Financial
Highlights" for the fiscal year ended July 31, 1999 and for the fiscal period
ended July 31, 1998 were audited by the Fund's former independent auditors.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, DC, a registration statement
under the Securities Act with respect to the Preferred Shares offered hereby.
Further information concerning these securities and the Fund may be found in the
registration statement, of which this Prospectus constitutes a part, on file
with the SEC. The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance
therewith files other Fund-related reports and information with the SEC. The
Fund's registration statement, reports, proxy and information statements and
other information may be inspected without charge at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or any
part thereof may be obtained from such officer after payment of the fees
prescribed by the SEC. Call 1-800-SEC-0330 for information about the SEC's
public reference room. Such reports and other information concerning the Fund
may also be inspected at the offices of the NYSE located at 20 Broad Street, New
York, New York 10005.
52
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
The Fund.................................................... B-2
Investment Restrictions..................................... B-2
Trustees and Officers....................................... B-4
Portfolio Transactions...................................... B-10
Investment Management and Other Services.................... B-12
Repurchase Of Shares........................................ B-13
Fund Structure.............................................. B-14
Portfolio Turnover Rate..................................... B-15
Number of Holders of Securities............................. B-15
Additional Information Concerning the Auctions for Preferred
Shares.................................................... B-15
Description of Preferred Shares............................. B-22
Federal Taxation............................................ B-29
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Form of Certificate of Vote..................... B-1
Appendix C: Proxy Voting Policies and Procedures............ C-1
Financial Statements........................................ F-1
53
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$700,000,000
VAN KAMPEN SENIOR INCOME TRUST
AUCTION RATE CUMULATIVE PREFERRED SHARES
5,600 SHARES, SERIES M
5,600 SHARES, SERIES T
5,600 SHARES, SERIES W
5,600 SHARES, SERIES TH
5,600 SHARES, SERIES F
$25,000 LIQUIDATION PREFERENCE PER SHARE
---------------------
PROSPECTUS
FEBRUARY 18, 2004
---------------------
CITIGROUP
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
WACHOVIA SECURITIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VAN KAMPEN SENIOR INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 18, 2004
Van Kampen Senior Income Trust (the "Fund") is a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to corporations, partnerships and other entities
("Borrowers") which operate in a variety of industries and geographical regions.
The Fund's investment adviser is Van Kampen Asset Management ("Asset Management"
or the "Adviser").
The Fund is offering 5,600 Series M, 5,600 Series T, 5,600 Series W, 5,600
Series TH and 5,600 Series F Auction Rate Cumulative Preferred Shares, par value
$0.01 per share, liquidation preference $25,000 per share (collectively
"Preferred Shares").
This Statement of Additional Information ("SAI") relating to this offering
does not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated February 18, 2004. This SAI does not include
all information that a prospective investor should consider before purchasing
Preferred Shares in this offering, 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) 847-2424 (or (800) 421-2833 for the
hearing impaired) or by writing to the Fund at 1 Parkview Plaza, PO Box 5555,
Oakbrook Terrace, Illinois 60181-5555.
Capitalized terms used in this SAI and not otherwise defined are defined in
the Fund's Certificate of Vote (the "Certificate") attached hereto as Appendix
B.
TABLE OF CONTENTS
PAGE
----
The Fund.................................................... B-2
Investment Restrictions..................................... B-2
Trustees and Officers....................................... B-4
Portfolio Transactions...................................... B-10
Investment Management and Other Services.................... B-12
Repurchase of Shares........................................ B-13
Fund Structure.............................................. B-14
Portfolio Turnover Rate..................................... B-15
Number of Holders of Securities............................. B-15
Additional Information Concerning the Auctions for Preferred B-15
Shares....................................................
Description of Preferred Shares............................. B-22
Federal Taxation............................................ B-29
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Form of Certificate of Vote..................... B-1
Appendix C: Proxy Voting Policy and Procedures.............. C-1
Financial Statements........................................ F-1
The Prospectus and SAI omit certain information contained in the
registration statement filed with the Securities and Exchange Commission
("SEC"), Washington, D.C. The registration statement may be obtained from the
SEC upon payment of the fee prescribed or inspected at the SEC's office for no
charge. The registration statement is also available on the SEC's website
(WWW.SEC.GOV).
THE FUND
The Fund changed its name from "Van Kampen American Capital Senior Income
Trust" to "Van Kampen Senior Income Trust" in 1998. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of interests in floating rate or
variable rate senior loans ("Senior Loans") to corporations, partnerships, and
other entities ("Borrowers") which operate in a variety of industries and
geographical regions (including domestic and foreign entities). Senior Loans in
which the Fund invests generally pay interest at rates which are periodically
redetermined by reference to a base lending rate plus a premium. These base
lending rates are generally the prime rate offered by one or more major United
States banks ("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or other base lending rates used by
commercial lenders. The value of the Fund's portfolio may be affected by changes
in the credit quality of Borrowers with respect to Senior Loan interests in
which the Fund invests. No assurance can be given that the Fund will achieve its
investment objective.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions
are fundamental and cannot be changed without the approval of the holders of a
majority of the Fund's outstanding shares (defined as the lesser of (i) 67% or
more of the voting securities present at a meeting of shareholders, if the
holders of more than 50% of the outstanding voting securities are present or
represented by proxy at such meeting, or (ii) more than 50% of the outstanding
voting securities). All other investment policies or practices are considered by
the Fund not to be fundamental and accordingly may be changed without
shareholder approval. If a percentage restriction on investment or use of assets
set forth below is adhered to at the time a transaction is effected, later
changes in percentage resulting from changing market values will not be
considered a deviation from policy (except with respect to restriction number 3
below). In accordance with the foregoing, the Fund may not:
1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities) if as a
result more than 5% of the Fund's total assets would then be invested in
securities of a single issuer or if as a result the Fund would hold more than
10% of the outstanding voting securities of any single issuer; provided that,
with respect to 50% of the Fund's assets, the Fund may invest up to 25% of its
assets in the securities of any one issuer. For purposes of this restriction,
the term issuer includes both the Borrower under a loan agreement and the lender
selling a participation to the Fund together with any other persons
interpositioned between such lender and the Fund with respect to a
participation.
2. Purchase any security if, as a result of such purchase, 25% or more of
the Fund's total assets (taken at current value) would be invested in the
securities of Borrowers and other issuers having their principal business
activities in the same industry (the electric, gas, water and telephone utility
industries, commercial banks, thrift institutions and finance companies being
treated as separate industries for purposes of this restriction); provided, that
this limitation shall not apply with respect to obligations issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities.
3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any liabilities
and indebtedness not constituting senior securities) except that the Fund may
borrow up to an additional 5% of its total assets for temporary purposes, or
pledge its assets other than to secure such issuance or in connection with
hedging transactions, when-issued and delayed delivery transactions and similar
investment strategies.
B-2
4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective, through
loans of portfolio securities or the acquisition of securities subject to
repurchase agreements.
5. Buy any security "on margin." Neither the deposit of initial or
variation margin in connection with hedging transactions nor short-term credits
as may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.
6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options, except
to the extent that the hedging transactions in which the Fund may engage would
be deemed to be any of the foregoing transactions.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Fund.
8. Make investments for the purpose of exercising control or participation
in management, except to the extent that exercise by the Fund of its rights
under loan agreements would be deemed to constitute such control or
participation.
9. Invest in securities of other investment companies, except that the Fund
may purchase securities of other investment companies to the extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
10. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts except pursuant to the exercise by the Fund of its rights under loan
agreements. In addition, the Fund may purchase securities of issuers which deal
in, represent interests in or are secured by interests in such leases, rights or
contracts.
11. Purchase or sell real estate, commodities or commodities contracts
except pursuant to the exercise by the Fund of its rights under loan agreements,
except to the extent the interests in Senior Loans the Fund may invest in are
considered to be interests in real estate, commodities or commodities contracts
and except to the extent that hedging instruments the Fund may invest in are
considered to be commodities or commodities contracts.
12. Notwithstanding the investment policies and restrictions of the Fund,
upon approval of the Board of Trustees, the Fund may invest all or part of its
investable assets in a management investment company with substantially the same
investment objective, policies and restrictions as the Fund.
For purposes of investment restriction numbers 1 and 2, the Fund will
consider all relevant factors in determining whether to treat the lender selling
a participation and any persons interpositioned between such lender and the Fund
as an issuer, including: the terms of the loan agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such lender or
interpositioned person; general economic conditions applicable to such lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such lender or interpositioned person incurred by the Fund.
For purposes of investment restriction number 9, as of the date of this
SAI, the 1940 Act generally limits a fund's ability to invest in other
investment companies as follows: the Fund and companies it controls cannot own
more than 3% of an acquired fund's voting stock in; the securities of an
acquired fund cannot exceed more than 5% of the assets of the Fund and companies
it controls; and the securities of acquired funds as a group cannot exceed more
than 10% of the assets of the Fund and companies it controls. The Fund will rely
on representations of Borrowers in loan agreements in determining whether such
Borrowers are investment companies.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual
B-3
portfolio turnover rate of the Fund will not be in excess of 100%. A high rate
of portfolio turnover involves correspondingly greater expenses than a lower
rate, which expenses must be borne by the Fund and its shareholders.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Asset Management, Van Kampen Funds Inc. (the
"Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van
Kampen Investor Services Inc. ("Investor Services"). The term "Fund Complex"
includes each of the investment companies advised by Asset Management or its
affiliates as of the date of this Statement of Additional Information. Trustees
serve until reaching their retirement age or until their successors are duly
elected and qualified. Officers are annually elected by the trustees.
INDEPENDENT TRUSTEES
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
David C. Arch (58) Trustee Trustee since Chairman and Chief Executive Officer of 88
Blistex Inc. 1998 Blistex Inc., a consumer health care products
1800 Swift Drive manufacturer. Former Director of the World
Oak Brook, IL 60523 Presidents Organization-Chicago Chapter.
Director of the Heartland Alliance, a
nonprofit organization serving human needs
based in Chicago.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee/Director/
Blistex Inc. Managing General
1800 Swift Drive Partner of funds in
Oak Brook, IL 60523 the Fund Complex.
B-4
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Rod Dammeyer (63) Trustee Trustee since President of CAC, llc., a private company 88
CAC, llc. 1998 offering capital investment and management
4350 LaJolla Village Drive advisory services. Prior to July 2000,
Suite 980 Managing Partner of Equity Group Corporate
San Diego, CA 92122-6223 Investment (EGI), a company that makes
private investments in other companies.
Howard J Kerr (68) Trustee Trustee since Prior to 1998, President and Chief Executive 88
736 North Western Avenue 1998 Officer of Pocklington Corporation, Inc., an
P.O. Box 317 investment holding company. Director of the
Lake Forest, IL 60045 Marrow Foundation.
Hugo F. Sonnenschein (63) Trustee Trustee since President Emeritus and Honorary Trustee of 88
1126 E. 59th Street 1998 the University of Chicago and the Adam Smith
Chicago, IL 60637 Distinguished Service Professor in the
Department of Economics at the University of
Chicago. Prior to July 2000, President of the
University of Chicago. Trustee of the
University of Rochester and a member of its
investment committee. Member of the National
Academy of Sciences, the American
Philosophical Society and a fellow of the
American Academy of Arts and Sciences.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Rod Dammeyer (63) Trustee/Director/
CAC, llc. Managing General
4350 LaJolla Village Drive Partner of funds in
Suite 980 the Fund Complex.
San Diego, CA 92122-6223 Director of
Stericycle, Inc.,
TheraSense, Inc.,
GATX Corporation,
Vantana Medical
Systems, Inc. and
Trustee of The
Scripps Research
Institute and the
University of Chicago
Hospitals and Health
Systems. Prior to
January 2004,
Director of TeleTech
Holdings Inc. and
Arris Group, Inc.
Prior to May 2002,
Director of Peregine
Systems Inc. Prior to
February 2001, Vice
Chairman and Director
of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser Communications
Corp., Matria
Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety,
Corp. and Grupo
Azcarero Mexico
(GAM). Prior to April
1999, Director of
Metal Management,
Inc.
Howard J Kerr (68) Trustee/Director/
736 North Western Avenue Managing General
P.O. Box 317 Partner of funds in
Lake Forest, IL 60045 the Fund Complex.
Director of the Lake
Forest Bank & Trust.
Hugo F. Sonnenschein (63) Trustee/Director/
1126 E. 59th Street Managing General
Chicago, IL 60637 Partner of funds in
the Fund Complex.
Director of Winston
Laboratories, Inc.
B-5
INTERESTED TRUSTEES*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Richard F. Powers, III* (58) Trustee Trustee since Advisory Director of Morgan Stanley. Prior to 88
1 Parkview Plaza 1999 December 2002, Chairman, Director, President,
P.O. Box 5555 Chief Executive Officer and Managing Director
Oakbrook Terrace, IL 60181 of Van Kampen Investments and its investment
advisory, distribution and other
subsidiaries. Prior to December 2002,
President and Chief Executive Officer of
funds in the Fund Complex. Prior to May 1998,
Executive Vice President and Director of
Marketing at Morgan Stanley and Director of
Dean Witter, Discover & Co. and Dean Witter
Realty. Prior to 1996, Director of Dean
Witter Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee since Partner in the law firm of Skadden, Arps, 88
333 West Wacker Drive 1998 Slate, Meagher & Flom LLP, legal counsel to
Chicago, IL 60606 funds in the Fund Complex.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (58) Trustee/Director/
1 Parkview Plaza Managing General
P.O. Box 5555 Partner of funds in
Oakbrook Terrace, IL 60181 the Fund Complex.
Wayne W. Whalen* (64) Trustee/Director/
333 West Wacker Drive Managing General
Chicago, IL 60606 Partner of funds in
the Fund Complex.
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of certain funds in the
Fund Complex by reason of his firm currently acting as legal counsel to such
funds in the Fund Complex. Mr. Powers is an interested person of funds in the
Fund Complex and the Adviser by reason of his former positions with Morgan
Stanley or its affiliates.
OFFICERS
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Mitchell Merin (50) President and Officer President and Chief Executive Officer of funds in the Fund
1221 Avenue of the Americas Chief Executive since 2002 Complex since November 2002. Trustee/Director/Managing
New York, NY 10020 Officer General Partner of certain funds in the Fund Complex since
1999. Chairman, President, Chief Executive Officer and
Director of the Adviser and Van Kampen Advisors Inc. since
December 2002. Chairman, President and Chief Executive
Officer of Van Kampen Investments since December 2002.
Director of Van Kampen Investments since December 1999.
Chairman and Chief Executive Officer and Director of Van
Kampen Funds Inc. since December 2002. President, Director
and Chief Operating Officer of Morgan Stanley Investment
Management since December 1998. President and Director since
April 1997 and Chief Executive Officer since June 1998 of
Morgan Stanley Investment Advisors Inc. and Morgan Stanley
Services Company Inc. Chairman, Chief Executive Officer and
Director of Morgan Stanley Distributors Inc. since June
1998. Chairman since June 1998, and Director since January
1998 of Morgan Stanley Trust. Director of various Morgan
Stanley subsidiaries and President of the Morgan Stanley
Funds since May 1999. Chief Executive Officer from September
2002 to April 2003 and Vice President from May 1997 to April
1999 of the Morgan Stanley Funds. Chief Strategic Officer of
Morgan Stanley Investment Advisors Inc. and Morgan Stanley
Services Company Inc. and Executive Vice President of Morgan
Stanley Distributors Inc. from April 1997 to June 1998.
B-6
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (63) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Adviser and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Adviser and Van Kampen Advisors Inc. Prior to December 2000,
Executive Vice President and Chief Investment Officer of Van
Kampen Investments, and President and Chief Operating
Officer of the Adviser. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Adviser. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (37) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (61) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Adviser
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Adviser and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
Ronald E. Robison (65) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (47) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the Adviser,
New York, NY 10020 Van Kampen Advisors Inc., the Distributor, Investor Services
and certain other subsidiaries of Van Kampen Investments.
Managing Director and General Counsel-Mutual Funds of Morgan
Stanley Investment Advisors, Inc. Vice President and
Secretary of funds in the Fund Complex. Prior to July 2001,
Managing Director, General Counsel, Secretary and Director
of Van Kampen Investments, the Adviser, the Distributor,
Investor Services, and certain other subsidiaries of Van
Kampen Investments. Prior to December 2000, Executive Vice
President, General Counsel, Secretary and Director of Van
Kampen Investments, the Adviser, Van Kampen Advisors Inc.,
the Distributor, Investor Services and certain other
subsidiaries of Van Kampen Investments. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willke Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
B-7
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Adviser, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Adviser and Van
Kampen Advisors Inc.
Each trustee who is not an affiliated person (as defined in the 1940 Act)
of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his compensation into the funds. Each fund
in the Fund Complex (except Van Kampen Exchange Fund) provides a retirement plan
to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met. Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from the Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60 is
eligible to receive a retirement benefit per year for each of the 10 years
following such retirement from the Fund. Non-Affiliated Trustees retiring prior
to the age of 60 or with fewer than 10 years but more than 5 years of service
may receive reduced retirement benefits from the Fund.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
---------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Complex Upon Fund
Name(1) Fund(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------- ------------- -------------
David C. Arch 17,977 $18,589 $147,500 $193,811
Rod Dammeyer 17,977 31,814 147,500 177,971
Howard J Kerr 17,977 58,713 147,500 193,811
Hugo F. Sonnenschein 17,977 32,178 147,500 193,811
Wayne W. Whalen 17,977 63,604 147,500 251,811
---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to the Fund's fiscal year ended July 31, 2003. The
following trustees deferred compensation from the Fund during the fiscal
year ended July 31, 2003: Mr. Dammeyer, $17,977; Mr. Sonnenschein, $17,977;
and
B-8
Mr. Whalen, $17,977. The cumulative deferred compensation (including
interest) accrued with respect to each trustee, including former trustees,
from the Fund as of the Fund's fiscal year ended July 31, 2003 is as
follows: Mr. Dammeyer, $74,882; Mr. Kerr, $8,033; Mr. Sonnenschein, $72,263;
and Mr. Whalen, $82,459. The deferred compensation plan is described above
the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2003. The
retirement plan is described above the Compensation Table. In 2003, the
boards of the various Van Kampen-related funds in the Fund Complex were
combined. Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners were elected or appointed, as
appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he oversaw for the period mentioned above; and thus
it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2003, before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. In 2003, the boards
of the various Van Kampen-related funds in the Fund Complex were combined.
Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners were elected or appointed, as
appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he oversaw for the period mentioned above; and thus
it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
During the Fund's last fiscal year, the Board of Trustees had two standing
committees (an audit committee and a retirement plan committee) and one ad hoc
committee (a nominating committee). The Fund's audit committee consists of
Messrs. Arch, Dammeyer, Kerr and Sonnenschein, all of whom are not interested
persons of the Fund. The audit committee makes recommendations to the Board of
Trustees concerning the selection of the Fund's independent public accountants,
reviews with such accountants the scope and results of the Fund's annual audit
and considers any comments which the accountants may have regarding the Fund's
financial statements, books of account or internal controls. The Fund's audit
committee financial expert is Mr. Dammeyer. The Board's retirement plan
committee consists of Messrs. Arch, Dammeyer and Sonnenschein, all of whom are
not interested persons of the Fund. The retirement plan committee is responsible
for reviewing the terms of the Fund's retirement plan and reviews any
administrative matters which arise with respect thereto. During the Fund's last
fiscal year, the audit committee of the Board held two meetings. The retirement
plan committee of the Board does not meet on a regular basis, but does meet on
an ad hoc basis as necessary to administer the retirement plan.
The non-interested trustees of the Fund select and nominate any other
non-interested trustees of the Fund. While the non-interested trustees of the
Fund expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Board of Trustees as they deem
appropriate, they will review nominations from shareholders to fill any
vacancies. Nominations from shareholders should be in writing and addressed to
the non-interested trustees at the Fund's office.
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2003, the most recently completed
calendar year prior to the date of this SAI, each trustee of the Fund
B-9
beneficially owned equity securities of the Fund and of all of the funds in the
Fund Complex overseen by the trustee in the dollar range amounts specified
below.
2003 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN ALL REGISTERED INVESTMENT
EQUITY SECURITIES COMPANIES OVERSEEN BY TRUSTEE
NAME OF TRUSTEE IN THE FUND IN THE FUND COMPLEX
--------------- ----------------- ---------------------------------------
David C. Arch $1 - $10,000 $50,001 - $100,000
Rod Dammeyer $1 - $10,000 Over $100,000
Howard J Kerr $1 - $10,000 $1 - $10,000
Hugo F. Sonnenschein $1 - $10,000 Over $100,000
INTERESTED TRUSTEES
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN ALL REGISTERED INVESTMENT
EQUITY SECURITIES COMPANIES OVERSEEN BY TRUSTEE
NAME OF TRUSTEE IN THE FUND IN THE FUND COMPLEX
--------------- ----------------- ---------------------------------------
Richard F. Powers, III $1 - $10,000 Over $100,000
Wayne W. Whalen $1 - $10,000 Over $100,000
As of December 31, 2003, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
CODE OF ETHICS
The Fund and the Adviser have adopted a code of ethics (the "Code of
Ethics") that sets forth general and specific standards relating to the
securities trading activities of their employees. The Code of Ethics does not
prohibit employees from acquiring securities that may be purchased or held by
the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of the Fund or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
The Code of Ethics can be reviewed and copied at the Securities and
Exchange Commission's public reference room in Washington, DC (call
1-202-942-8090 for information on the operation of the public reference room);
on the EDGAR Database on the SEC's Internet site (http://www.sec.gov); or
payment of copying fees, by writing the SEC's public reference section,
Washington, DC 20549-0102, or by electronic mail at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
With respect to interests in Senior Loans, the Fund generally will engage
in privately negotiated transactions for purchase or sale in which the Adviser
will negotiate on behalf of the Fund, although a more
B-10
developed market may exist for certain Senior Loans. The Fund may be required to
pay fees, or forgo a portion of interest and any fees payable to the Fund, to
the lender selling participations or assignments to the Fund. The Adviser will
determine the lenders from whom the Fund will purchase assignments and
participations by considering their professional ability, level of service,
relationship with the Borrower, financial condition, credit standards and
quality of management. Although the Fund intends generally to hold interests in
Senior Loans until maturity or prepayment of the Senior Loan, the illiquidity of
many Senior Loans may restrict the ability of the Adviser to locate in a timely
manner persons willing to purchase the Fund's interests in Senior Loans at a
fair price should the Fund desire to sell such interests. See sections entitled
"Investment Objective and Investment Policies and "Risk Factors" in the
Prospectus.
With respect to investments other than in Senior Loans, the Adviser will
place orders for portfolio transactions for the Fund with broker-dealer firms
giving consideration to the quality, quantity and nature of each firm's
professional services. These services include execution, clearance procedures,
wire service quotations and statistical and other research information provided
to the Fund and the Adviser, including quotations necessary to determine the
value of the Fund's net assets. Any research benefits so obtained are available
for all clients of the Adviser. Because statistical and other research
information only supplements the research efforts of the Adviser and still must
be analyzed and reviewed by its staff, the receipt of research information is
not expected to reduce materially its expenses. In selecting among the firms
believed to meet the criteria for handling a particular transaction, the Adviser
may take into consideration the fact that certain firms have sold common shares
of the Fund and that certain firms provide market, statistical or other research
information to the Fund and the Adviser and may select firms that are affiliated
with the Fund, the Adviser or Van Kampen Investments.
If it is believed to be in the best interest of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if the Adviser did not
consider the broker's furnishing of such services. This will be done, however,
only if, in the opinion of the Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.
If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. In this regard allocations of Senior Loans by the
Adviser will be made taking into account a variety of factors, including the
assets of such clients then available for investment in Senior Loans, such
clients' relative net assets and such clients' investment objectives, policies
and limitations. Although in some cases this procedure could have a detrimental
effect on the price paid by the Fund for the financial instrument or the volume
of the financial instrument purchased by the Fund, the ability to participate in
volume transactions and to negotiate lower commissions, fees and expenses
possibly could benefit the Fund.
Although the Adviser will be responsible for the management of the Fund's
portfolio, the policies and practices in this regard must be consistent with the
foregoing and will be subject at all times to review by the Board of Trustees of
the Fund. The Fund anticipates that the annual portfolio turnover rate will not
exceed 100%.
The Board of Trustees has adopted certain policies incorporating the
standards of Rule 17e-1 issued by the SEC under the 1940 Act, which requires
that the commissions paid to affiliates of the Fund, or to affiliates of such
persons, be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar financial instruments during a
comparable period of time. The rule and procedures also contain review
requirements and require the Adviser to furnish reports to the Board of Trustees
and to maintain records in connection with such reviews. After review of all
factors deemed relevant, the Board of Trustees will consider from time to
B-11
time whether the advisory fee will be reduced by all or a portion of the
brokerage commissions given to brokers that are affiliated with the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
THE ADVISER
The Adviser is a wholly-owned subsidiary of Van Kampen Investments. Van
Kampen Investments is an indirect wholly-owned subsidiary of Morgan Stanley. The
Adviser's principal office is located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Van Kampen Investments is a diversified asset management company that
administers more than three million retail investor accounts, has extensive
capabilities for managing institutional portfolios, and has more than $84
billion under management or supervision as of December 31, 2003. Van Kampen
Investments has more than 50 open-end and 30 closed-end funds and more than
2,700 unit investment trusts that are distributed by authorized dealers
nationwide.
Morgan Stanley is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund will continue in effect from year to year, unless
terminated as described below, if approved annually (a) by the Board of Trustees
of the Fund or by a majority of the Fund's common shares and (b) by a majority
of the trustees who are not parties to the agreement or interested persons of
any such party, in compliance with the requirements of the 1940 Act. The
Advisory Agreement may be terminated without penalty upon 60 days written notice
by either party (in the case of the Fund, such termination may be effected by
the Board of Trustees or by a majority of the common shares) and will
automatically terminate in the event of assignment. The Adviser may in its sole
discretion from time to time waive all or a portion of the advisory fee or
reimburse the Fund for all or a portion of its other expenses.
In approving the Advisory Agreement, the Board of Trustees, including the
non-interested trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of the Fund
compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving third party research paid for by Fund assets and the propriety of such
an arrangement and evaluated other benefits the Adviser derives from its
relationship with the Fund. The Board of Trustees considered the extent to which
any economies of scale experienced by the Adviser are shared with the Fund's
shareholders. The Board of Trustees considered comparative advisory fees of the
Fund and other investment companies. The Board of Trustees reviewed reports from
third parties about the foregoing factors. The Board of Trustees discussed the
financial strength of the Adviser and its affiliated companies and the
capability of the personnel of the Adviser. The Board of Trustees reviewed the
statutory and regulatory requirements for approval of advisory agreements. The
Board of Trustees, including the non-interested trustees, evaluated all of the
foregoing and determined, in the exercise of its business judgment, that
approval of the Advisory Agreement was in the best interests of the Fund and its
shareholders.
The Advisory Agreement provides that the Adviser will supply investment
research and portfolio management, including the selection of securities for the
Fund to purchase, hold or sell and the selection of financial institutions
through whom the Fund's portfolio transactions are executed. For the services
provided by the Adviser under the Advisory Agreement, the Fund pays the Adviser
a monthly fee (accrued daily and paid monthly) computed based upon an annual
rate equal to 0.85% applied to the average daily managed assets of the Fund
(which for purposes of determining such fee, shall mean the average daily gross
asset value of the Fund, minus the sum of accrued liabilities other than the
aggregate amount of any borrowings undertaken by the Fund). Because leverage
will increase the amount of total assets, the Fund will pay a
B-12
greater amount of advisory fees when leverage is utilized. Under the Advisory
Agreement, the Adviser also furnishes offices and necessary facilities and
equipment, and permits its officers and employees to serve without compensation
as trustees and officers of the Fund if duly elected to such positions. The Fund
pays all other expenses incurred in the operation of the Fund including, but not
limited to, direct charges relating to the purchase and sale of financial
instruments in its portfolio, interest charges, fees and expenses of legal
counsel and independent auditors, taxes and governmental fees, cost of share
certificates, expenses (including clerical expenses) of issuance, sale or
repurchase of any of the Fund's portfolio holdings, expenses in connection with
the Fund's dividend reinvestments, membership fees in trade associations,
expenses of registering and qualifying the common shares of the Fund for sale
under federal and state securities laws, expenses of printing and distributing
reports, notices and proxy materials to existing holders of common shares,
expenses of filing reports and other documents filed with governmental agencies,
expenses of annual and special meetings of holders of common shares, fees and
disbursements of the transfer agents, custodians and sub-custodians, expenses of
disbursing dividends and distributions, fees, expenses and out-of-pocket costs
of trustees of the Fund who are not affiliated with the Adviser, insurance
premiums, indemnification and other expenses not expressly provided for in the
Advisory Agreement or the administration agreement and any extraordinary
expenses of a nonrecurring nature. The Adviser may in its sole discretion from
time to time waive all or a portion of the advisory fee or reimburse the Fund
for all or a portion of its other expenses.
The Advisory Agreement provides that the Adviser shall not be liable for
any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.
The trustees are responsible for the overall management and supervision of
the Fund's affairs. The Adviser's activities are subject to the review and
supervision of the trustees to whom the Adviser renders periodic reports of the
Fund's investment activities.
THE ADMINISTRATOR
The administrator for the Fund is Van Kampen Investments.
OTHER AGREEMENTS
LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services
Agreements pursuant to which Van Kampen Investments provides legal services,
including without limitation: accurate maintenance of the Funds' minute books
and records, preparation and oversight of the Funds' regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the funds. Payment by the Fund for such services is
made on a cost basis for the salary and salary related benefits, including but
not limited to bonuses, group insurances and other regular wages for the
employment of personnel, as well as overhead and the expenses related to the
office space and the equipment necessary to render the legal services. Certain
other funds advised by the Adviser are distributed by the Distributors, an
indirect affiliate of the Fund, and also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributors one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
REPURCHASE OF SHARES
Shares of closed-end management investment companies frequently trade at a
discount to their NAVs but in some cases trade at a premium. In recognition of
the possibility that the Fund's common shares might similarly trade at a
discount, the Fund's Board of Trustees has determined that from time to time it
may be in the interest of common shareholders for the Fund to take action to
attempt to reduce or eliminate a market value discount from NAV. The Board of
Trustees, in consultation with the Adviser, will review on a quarterly basis the
possibility of open market repurchases and/or tender offers for the common
shares and will consider
B-13
such factors as the market price of the common shares, the NAV of the common
shares, the liquidity of the assets of the Fund, whether such transactions would
impair the Fund's status as a regulated investment company or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions which may have a material effect
on the Fund's ability to consummate such transactions. There are no assurances
that the Board of Trustees will, in fact, decide to undertake either of these
actions or if undertaken, that such actions will result in the Fund's common
shares trading at a price which is equal to or approximates their NAV. In
addition, the Board of Trustees will not necessarily announce when it has given
consideration to these matters. common shares will not be repurchased unless
after such repurchase the Fund would continue to satisfy the 1940 Act asset
coverage requirements with respect to the Preferred Shares or any borrowing and
any asset coverage requirements which may be imposed by any rating service as a
condition of its rating of the Preferred Shares or by any lender with respect to
any borrowing.
Even if a tender offer has been made, the announced policy of the Board of
Trustees, which may be changed by the Board of Trustees, is that the Fund cannot
accept tenders if (1) in the reasonable judgment of the Board of Trustees, there
is not sufficient liquidity of the assets of the Fund; (2) such transactions, if
consummated, would (a) impair the Fund's status as a regulated investment
company under the Internal Revenue Code (the "Code") (which would make the Fund
a taxable entity, causing the Fund's taxable income to be taxed at the Fund
level, as more fully described in "Taxation") or (b) result in a failure to
comply with applicable asset coverage requirements; or (3) there is, in the
Board of Trustees' reasonable judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on any United States national securities
exchange or in the over-the-counter market, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States or New York State, (d) limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition which would have a
material adverse effect on the Fund or the holders of its common shares if
common shares were repurchased. The Board of Trustees may modify these
conditions in light of experience.
Any tender offer made by the Fund for its common shares will be at a price
equal to the NAV of the common shares determined at the close of business on the
day the offer ends. During the pendency of any tender offer by the Fund, the
Fund will calculate daily the NAV of the common shares and will establish
procedures which will be specified in the tender offer documents, to enable
common shareholders to ascertain readily such NAV. The relative illiquidity of
some of the Fund's portfolio securities could adversely impact the Fund's
ability to calculate NAV in connection with determinations of pricing for tender
offers, if any. Each offer will be made and common shareholders notified in
accordance with the requirements of the Securities Exchange Act of 1934, as
amended, and the 1940 Act, either by publication or mailing or both. Each
offering document will contain such information as is prescribed by such laws
and the rules and regulations promulgated thereunder.
Tendered common shares that have been accepted and repurchased by the Fund
will be held in treasury and may be retired by the Board of Trustees. Treasury
common shares will be recorded and reported as an offset to shareholders' equity
and accordingly will reduce the Fund's total assets. If Treasury common shares
are retired, common shares issued and outstanding and capital in excess of par
value will be reduced accordingly.
If the Fund must liquidate portfolio securities in order to repurchase
common shares tendered, the Fund may realize gains and losses.
FUND STRUCTURE
The Fund's fundamental investment policies and restrictions give the Fund
the flexibility to pursue its investment objective through the future conversion
to a fund structure commonly known as a "master-feeder"
B-14
structure. If the Fund converts to a master-feeder structure, the existing
shareholders of the Fund would continue to hold their shares of the Fund and the
Fund would become a feeder-fund of the master-fund. The value of a shareholder's
shares would be the same immediately after any conversion as the value
immediately before such conversion. Use of this master-feeder structure
potentially would result in increased assets invested among the collective
investment vehicle of which the Fund would be a part, thus allowing operating
expenses to be spread over a larger asset base, potentially achieving economies
of scale. The Fund's Board of Trustees presently does not intend to effect any
conversion of the Fund to a master-feeder structure. In addition, the Fund's
Board of Trustees presently does not intend to effect any conversion in which
(i) the master fund does not have substantially the same management team,
investment objective, investment policies and investment restrictions as the
Fund just prior to the conversion, (ii) the value of the shareholder's
investment in Fund would not be the same immediately after the conversion as it
was immediately before such conversion or (iii) an increase in the Fund's
expense ratios is expected as a result of the conversion.
PORTFOLIO TURNOVER RATE
The annual rates of the Fund's total portfolio turnover for the periods
ended July 31, 2000, July 31, 2001, July 31, 2002 and July 31, 2003, were 57%,
55%, 65% and 78%, respectively. The annual turnover rate of the Fund is
generally expected to be between 50% and 100%, although as part of its
investment policies, the Fund places no restrictions on portfolio turnover and
the Fund may sell any portfolio security without regard to the period of time it
has been held. The annual turnover rate of the Fund also includes Senior Loans
for which the full payment on the Senior Loan has been prepaid by the borrower.
NUMBER OF HOLDERS OF SECURITIES
At January 31, 2004:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common shares of beneficial interest, par value $0.01 per
share..................................................... 894
Preferred shares of beneficial interest, par value $0.01 per
share..................................................... 0
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL
The Certificate provides that the Applicable Rate for each Dividend Period
of shares of each series shall be equal to the rate per annum that the Auction
Agent advises has resulted on the Business Day preceding the first day of a
Dividend Period for each such series (an "Auction Date") from implementation of
the Auction Procedures set forth in the Certificate and summarized below, in
which persons determine to hold or offer to sell or, based on dividend rates bid
by them, offer to purchase or sell shares of such series. Each periodic
implementation of the Auction Procedures is referred to herein as an "Auction."
The following summary is qualified by reference to the Auction Procedures set
forth in the Certificate. Capitalized terms used but not defined have the
definitions set forth in the Certificate.
AUCTION AGENCY AGREEMENT. The Fund has entered into an auction agency
agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of Preferred Shares so long as the
Applicable Rate for shares of such series is to be based on the results of the
Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provides for the participation of those
Broker-Dealers in Auctions for shares of a series of Preferred Shares. See
"Broker-Dealers" below.
B-15
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as the
Securities Depository for the Agent Members with respect to shares of each
series of Preferred Shares. One certificate for all of the shares of each series
of Preferred Shares will be registered in the name of Cede & Co., as nominee of
the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of Preferred Shares contained in the Certificate. The Fund will also issue
stop-transfer instructions to the transfer agent for shares of each series of
Preferred Shares. Prior to the commencement of the right of Holders of preferred
shares to elect a majority of the Fund's Trustees, as described under
"Description of Preferred Shares -- Voting Rights" in the Prospectus, Cede & Co.
will be the Holder of all shares of each series of Preferred Shares and owners
of such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York chartered limited purpose trust company, performs services
for its participants (including Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such Agent Member in
shares of each series of Preferred Shares, whether for its own account or as a
nominee for another person.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares:
(a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of Outstanding shares, if any, of
such series that such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for such shares of such series for the next
succeeding Dividend Period of such shares;
(ii) "Bid" -- indicating the number of Outstanding shares, if any, of such
series that such Beneficial Owner offers to sell if the Applicable Rate for such
shares of such series for the next succeeding Dividend Period shall be less than
the rate per annum specified by such Beneficial Owner in such Bid; and/or
(iii) "Sell Order" -- indicating the number of Outstanding shares, if any,
of such that such Beneficial Owner offers to sell without regard to the
Applicable Rate for such shares of such series for the next succeeding Dividend
Period; and
(b) Broker-Dealers shall contact customers who are Potential Beneficial
Owners by telephone or otherwise to determine whether such customers desire to
submit Bids, in which they will indicate the number of shares, if any, of such
series that they offer to purchase if the Applicable Rate for shares of such
series for the next succeeding Dividend Period is not less than the rate per
annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then held
by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate
higher than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of such series an Order or Orders
covering all the Outstanding shares of such series held by such Beneficial Owner
will be deemed to have submitted a Hold Order to its Broker-Dealer covering the
number of Outstanding shares of such series held by such Beneficial Owner and
not subject to Orders submitted to its
B-16
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of a series of
Preferred Shares an Order or Orders covering all of the Outstanding shares of
such series held by such Beneficial Owner for an Auction relating to a Special
Dividend Period consisting of more than 7 Days, such Beneficial Owner will be
deemed to have submitted a Sell Order to its Broker-Dealer covering the number
of Outstanding shares of such series held by such Beneficial Owner and not
subject to Orders submitted to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell the shares of such series of Preferred Shares
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of a series of Preferred Shares that offers to become the Beneficial
Owner of additional shares of such series of Preferred Shares is, for purposes
of such offer, a Potential Beneficial Owner.
A Potential Beneficial Owner of shares of a series of Preferred Shares may
submit to its Broker-Dealer Bids in which it offers to purchase shares of a
series if the Applicable Rate for the next Dividend Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of a series of Preferred
Shares specified in such Bid if the rate determined in the Auction is equal to
or greater than the rate specified in such Bid.
As described more fully below under "-- Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Fund) as Existing Holders in respect of shares of such series of
Preferred Shares subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares of such series
subject to Orders submitted to them by Potential Beneficial Owners. However,
neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with the foregoing. Any Order placed with the Auction Agent by
a Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will
be treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner, as described in the preceding
paragraph. Similarly, any failure by a Broker-Dealer to submit to the Auction
Agent an Order in respect of any shares of a series of Preferred Shares held by
it or its customers who are Beneficial Owners will be treated in the same manner
as a Beneficial Owner's failure to submit to its Broker-Dealer an Order in
respect of shares of a series of Preferred Shares held by it, as described in
the second preceding paragraph. For information concerning the priority given to
different types of Orders placed by Existing Holders, see "-- Submission of
Orders by Broker-Dealers to Auction Agent" below.
Neither the Fund nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Fund may submit Orders
in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of Preferred
Share that is fewer than the number of shares of such series specified in its
Order. See "-- Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as Existing
Holders or Potential Holders in respect of customer Orders will be required to
make appropriate pro rata allocations among their respective customers. Each
purchase or sale shall be made for settlement on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See
"-- Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
will (i) be treated as a Sell Order if submitted by a Beneficial Owner or an
Existing Holder and (ii) not be accepted if submitted by a Potential Beneficial
Owner or a Potential Holder. Accordingly, the Auction Procedures establish the
Maximum Rate as a maximum rate per annum that can result from an Auction. See
"-- Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and "-- Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below.
B-17
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the Auction Agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the Auction Agency Agreement and will not be liable for any error of judgment
made in good faith unless the Auction Agent will have been grossly negligent in
ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of a series of Preferred Shares, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other person, if permitted by the Fund) with respect to
transfers described under "Description of Preferred Shares -- Secondary Market
Trading and Transfer of Preferred Shares" in the Prospectus and notices from the
Fund. The Auction Agent is not required to accept any such notice for an Auction
unless it is received by the Auction Agent by 3:00 p.m., New York City time, on
the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent, provided that prior to such removal, the Fund shall have entered into
such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of a series of Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a Dividend Period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealers in the case of any Auction
immediately preceding a Dividend Period of one year or longer, of the purchase
price of shares of such series of Preferred Shares placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, shares of a series
of Preferred Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (ii) a Submitted Bid of a Potential Holder that resulted in such Potential
Holder purchasing such shares as a result of the Auction or (iii) a valid Hold
Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit Orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
Orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction. Such Broker-Dealer, however, would not have
knowledge of Orders submitted by other Broker-Dealers in that Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:00 P.M., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (i.e., the Submission
Deadline), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Fund) as the Existing
Holder or Potential Holder, as the case may be, in respect of the shares of a
series of Preferred Shares subject to such Orders. Any Order
B-18
submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders for shares of such series will be considered valid, but
only up to and including in the aggregate the number of Outstanding shares of
such series held by such Existing Holder, and, if the number of shares of such
series subject to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover the number of Outstanding
shares held by such Existing Holder;
(b) (i) any Bid for shares of such series will be considered valid up to
and including the excess of the number of shares of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing Holder
for shares of such series is submitted to the Auction Agent with the same rate
and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids will be considered valid up to and including
the amount of such excess, and the number of shares of such series subject to
each Bid with the same rate will be reduced pro rata to cover the number of
shares of such series equal to such excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and
(iv) in any such event, the number, if any, of such Outstanding shares of
such series subject to any portion of Bids considered not valid in whole or in
part under this clause (b) will be treated as the subject of a Bid for shares of
such series by or on behalf of a Potential Holder at the rate specified therein;
and
(c) all Sell Orders for shares of such series will be considered valid up
to and including the excess of the number of Outstanding shares of such series
held by such Existing Holder over the sum of shares of such series subject to
valid Hold Orders referred to in clause (a) above and valid Bids referred to in
clause (b) above.
If more than one Bid of a Potential Holder for shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted will be a separate Bid with the rate
and number of shares of such series therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for shares of
a series of Preferred Shares, the Auction Agent will assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (each such Hold Order,
Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer being
herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a
"Submitted Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and will determine the
excess of the number of Outstanding shares of such series over the number of
Outstanding shares of such series subject to Submitted Hold Orders (such excess
being herein referred to as the "Available Preferred Shares") and whether
Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing
Bids" will have been made if the number of Outstanding shares of such series
that are the subject of Submitted Bids of Potential Holders specifying rates not
higher than the Maximum Rate for all Dividend Periods equals or exceeds the
number of outstanding shares of such series that are the subject of Submitted
Sell Orders (including the
B-19
number of shares of such series subject to Bids of Existing Holders specifying
rates higher than the Maximum Rate).
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made, the Auction Agent will determine the lowest rate specified in such
Submitted Bids (the "Winning Bid Rate" for shares of such series) which, taking
into account the rates in the Submitted Bids of Existing Holders, would result
in Existing Holders continuing to hold an aggregate number of Outstanding shares
of such series which, when added to the number of outstanding shares of such
series to be purchased by Potential Holders, based on the rates in their
Submitted Bids, would equal not less than the Available Preferred Shares. In
such event, the Winning Bid Rate will be the Applicable Rate for the next
Dividend Period for all shares of such series.
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of a series of Preferred Shares are subject to Submitted
Hold Orders), the Applicable Rate for the next Dividend Period for all shares of
such series will be equal to the Maximum Rate. If Sufficient Clearing Bids have
not been made, Beneficial Owners that have submitted or that are deemed to have
submitted Sell Orders may not be able to sell in the Auction all shares of such
series subject to such Sell Orders but will continue to own shares of such
series for the next Dividend Period. See "-- Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
If all of the outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, the Applicable Rate for all shares of such
series for the next succeeding Dividend Period shall be the All Hold Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "-- Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of a series of
Preferred Shares will sell, continue to hold and/or purchase such shares as set
forth below. Existing Holders that submitted or were deemed to have submitted
Hold Orders (or on whose behalf Hold Orders were submitted or deemed to have
been submitted) will continue to hold the shares of such series subject to such
Hold Orders.
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate will sell the outstanding shares of such series subject to such
Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will continue to
hold the Outstanding shares of such series subject to such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will purchase
the number of outstanding shares of such series subject to such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will continue to
hold the shares of such series subject to such Submitted Bid, unless the number
of Outstanding Preferred Shares of such series subject to all such Submitted
Bids is greater than the number of Preferred Shares ("remaining shares") in
excess of the Available Preferred Shares over the number of Preferred Shares
accounted for in clauses (b) and (c) above, in which event each Existing Holder
with such a Submitted Bid will continue to hold Preferred Shares of such series
subject to such Submitted Bid determined on a pro rata basis based on the number
of Outstanding Preferred Shares subject to all such Submitted Bids of such
Existing Holders; and
B-20
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate for shares of such
series will purchase any shares of Available Preferred Shares not accounted for
in clauses (b) through (d) above on a pro rata basis based on the Outstanding
Preferred Shares subject to all such Submitted Bids.
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
not been made (unless this results because all Outstanding shares of such series
are subject to Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate for
shares of such series will continue to hold the Preferred Shares subject to such
Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate for
shares of such series will purchase the number of Preferred Shares subject to
such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate for shares of such
series or a Submitted Sell Order will sell a number of shares of such series
subject to such Submitted Bid or Submitted Sell Order determined on a pro rata
basis based on the number of Outstanding shares of such series subject to all
such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
Preferred Shares of a series, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of Preferred Shares of such series being sold or purchased on such
Auction Date so that the number of shares of such series sold or purchased by
each Existing Holder or Potential Holder will be whole shares of such series. If
as a result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of Preferred Shares, the Auction
Agent will, in such manner as, in its sole discretion, it will determine,
allocate shares of such series for purchase among Potential Holders so that only
whole shares of such series are purchased by any such Potential Holder, even if
such allocation results in one or more of such Potential Holders not purchasing
shares of such series.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an Order
for the account of a customer will then be required to advise such customer of
the Applicable Rate for the next Dividend Period and, if such Order was a Bid or
a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole
or in part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of such series as a result of the Auction and will
be required to advise each customer purchasing or selling Preferred Shares as a
result of the Auction to give instructions to its Agent Member of the Securities
Depository to pay the purchase price against delivery of such shares or to
deliver such shares against payment therefor, as appropriate. The Auction Agent
will be required to record each transfer of shares of a series of Preferred
Shares on the registry of Existing Holders to be maintained by the Auction
Agent.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of a
series of Preferred Shares as determined in the Auction. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in
B-21
accordance with its normal procedures, which now provide for payment against
delivery by their Agent Members in same-day funds.
If any Existing Holder selling shares of a series of Preferred Shares in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased such shares in such Auction may deliver to such person a
number of whole shares of such series that is less than the number of shares of
such series that otherwise was to be purchased by such person. In such event,
the number of shares of such series to be so delivered shall be determined by
such Broker-Dealer. Delivery of such lesser number of shares of such series
shall constitute good delivery.
DESCRIPTION OF PREFERRED SHARES
The descriptions of the Preferred Shares contained in this SAI do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration of Trust and the Certificate. A form of the
Certificate is attached as Appendix B to this SAI. A copy of the Declaration of
Trust is filed as an exhibit to the registration statement of which the
Prospectus and this SAI are a part and may be inspected, and a copy thereof may
be obtained, as described under "Further Information" in the Prospectus.
GENERAL
The Preferred Shares will rank on a parity with each other and with shares
of any other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. Holders of Preferred Shares will be entitled to receive, when, as
and if declared by the Board of Trustees, out of funds legally available
therefor, cumulative cash dividends on their shares, at the Applicable Rate
determined as described under "-- Determination of Dividend Rate," payable on
the respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the common
shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid by the Paying Agent to the Holder, which Holder
is expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "-- Determination of Dividend Rate." No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"-- Default Period."
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period (or in respect of dividends on
another date in connection with a redemption during such Dividend Period) shall
be computed by multiplying the Applicable Rate (or the Default Rate) for such
Dividend Period (or a portion thereof) by a fraction, the numerator of which
will be the number of days in such Dividend Period (or portion thereof) such
share was outstanding and for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will be 360, multiplying the amount so
obtained by the liquidation value, and rounding the amount so obtained to the
nearest cent.
B-22
DETERMINATION OF DIVIDEND RATE. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date for each Series
are set forth on the inside cover page of the Prospectus. For each subsequent
Dividend Period, subject to certain exceptions, the dividend rate will be the
Applicable Rate that the Auction Agent advises the Fund has resulted from an
Auction.
Dividend Periods after the initial Dividend Period shall either be Standard
Dividend Periods (7 days) or, subject to certain conditions and with notice to
Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient Clearing
Bids exist at the Auction in respect of such Special Dividend Period (that is,
in general, the number of shares subject to Bids by Potential Beneficial Owners
is at least equal to the number of shares subject to Sell Orders by Existing
Holders). If Sufficient Clearing Bids do not exist at any Auction in respect of
a Special Dividend Period, the Dividend Period commencing on the Business Day
succeeding such Auction will be the Standard Dividend Period, and the Holders of
the shares of the affected series will be required to continue to hold such
shares for such Standard Dividend Period.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. Dividends
will be paid through the Securities Depository on each Dividend Payment Date.
The Applicable Rate resulting from an Auction will not be greater than the
Maximum Rate. The Maximum Rate is subject to upward but not downward adjustment
in the discretion of the Board of Trustees after consultation with the
Broker-Dealers, provided that immediately following any such increase the Fund
would be in compliance with the Preferred Shares Basic Maintenance Amount and
with confirmation from each rating agency then rating the Preferred Shares that
such action will not impair such agency's then-current rating of the Preferred
Shares.
The Maximum Rate for the Preferred Shares will apply automatically
following an Auction for such shares in which Sufficient Clearing Bids have not
been made (other than because all Preferred Shares were subject to Submitted
Hold Orders) or following the failure to hold an Auction for any reason on the
Auction Date scheduled to occur (except for circumstances in which the Dividend
Rate is the Default Rate, as described below). The All Hold Rate will apply
automatically following an Auction in which all of the Outstanding Preferred
Shares for a particular Series are subject (or are deemed to be subject) to Hold
Orders.
Prior to each Auction, Broker-Dealers will notify Holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
NOTIFICATION OF DIVIDEND PERIOD. The Fund will designate the duration of
Dividend Periods of the Preferred Shares; provided, however, that no such
designation is necessary for a Standard Dividend Period and that any designation
of a Special Dividend Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in the timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, the Preferred Shares shall have been cured as set forth under "-- Default
Period," (iii) Sufficient Clearing Bids shall have existed in an Auction held on
the Auction Date immediately preceding the first day of such proposed Special
Dividend Period, (iv) if the Fund shall have mailed a notice of redemption with
respect to any shares, as described under "-- Redemption," the Redemption Price
with respect to such shares shall have been deposited with the Paying Agent, and
(v) the Fund has confirmed that, as of the Auction Date next preceding the first
day of such Special Dividend Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and has consulted with the Broker-Dealers and has provided notice and a
Preferred Shares Basic Maintenance Certificate to each Rating Agency which is
then rating the Preferred Shares and so requires.
If the Fund proposes to designate any Special Dividend Period, not fewer
than 7 Business Days (or two Business Days in the event the duration of the
Special Dividend Period is fewer than 8 days) nor more than 30 Business Days
prior to the first day of such Special Dividend Period, notice shall be (i) made
by press
B-23
release and (ii) communicated by the Fund by telephonic or other means to the
Auction Agent and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Fund proposes to exercise its option to designate a
succeeding Special Dividend Period, specifying the first and last days thereof
and (B) that the Fund will, by 3:00 p.m. New York City time, on the second
Business Day next preceding the first day of such Special Dividend Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Special Dividend Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Dividend Period in which latter event the succeeding Dividend
Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the next
succeeding Dividend Period as a Special Dividend Period, specifying the first
and last days thereof and (B) the terms of the Specific Redemption Provisions,
if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Dividend Period, the Fund shall be deemed to have delivered a notice to
the Auction Agent with respect to such Dividend Period to the effect set forth
in clause (ii) above, thereby resulting in a Standard Dividend Period.
DEFAULT PERIOD. A "Default Period" with respect to a particular Series will
commence on any date the Fund fails to deposit irrevocably in Fund in same-day
funds, with the Paying Agent by 12:00 noon, New York City time, (A) the full
amount of any declared dividend on that Series payable on the Dividend Payment
Date (a "Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default") and, (together, a Dividend Default and a
Redemption Default are hereinafter referred to as "Default").
A Default Period with respect to a Dividend Default or a Redemption Default
shall end on the Business Day on which, by 12:00 noon, New York City time, all
unpaid dividends and any unpaid Redemption Price shall have been deposited
irrevocably in Fund in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a Default
Period applicable to that Series and the Applicable Rate for each Dividend
Period commencing during a Default Period, will be equal to the Default Rate.
Each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Dividend Period. No Auction shall be held during a Default Period applicable
to that Series.
No Default Period with respect to a Dividend Default or Redemption Default
shall be deemed to commence if the amount of any dividend or any Redemption
Price due (if such default is not solely due to the willful failure of the Fund)
is deposited irrevocably in trust, in same-day funds with the Paying Agent by
12:00 noon, New York City time within three Business Days after the applicable
Dividend Payment Date or Redemption Date, together with an amount equal to the
Default Rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 360. The Default Rate shall be
equal to the Reference Rate multiplied by three (3).
B-24
RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect
to the Preferred Shares if, at the time of such declaration (and after giving
effect thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including all outstanding senior indebtedness of the
Fund, including the Fund's obligations under any credit facility program, would
be less than 200% (or such other percentage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its preferred stock) or (ii) declare any other
distribution on the Preferred Shares or purchase or redeem Preferred Shares if
at the time of the declaration (and after giving effect thereto), asset coverage
with respect to the Fund's senior securities representing indebtedness would be
less than 300% (or such higher percentage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring distributions, purchases or redemptions of its capital stock). A
declaration of a dividend or other distribution on or purchase or redemption of
Preferred Shares is prohibited unless there is no event of default under
indebtedness senior to the Preferred Shares, if any, and immediately after such
transaction, the Fund would have Eligible Assets with an aggregated Discounted
Value at least equal to the asset coverage requirements under indebtedness
senior to the Preferred Shares.
For so long as the Preferred Shares are Outstanding, except as otherwise
provided in the Certificate, the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, common shares or other shares, ranking junior to the Preferred
Shares as to dividends or upon liquidation) with respect to common shares or any
other shares of the Fund ranking junior to the Preferred Shares as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any common shares or other shares ranking junior to
the Preferred Shares (except by conversion into or exchange for shares of the
Fund ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Fund would have
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred Shares
Asset Coverage would be achieved, (ii) all cumulative and unpaid dividends due
on or prior to the date of the transaction have been declared and paid in full
with respect to the Fund's preferred shares, including the Preferred Shares, and
(iii) the Fund has redeemed the full number of preferred shares required to be
redeemed by any mandatory provision for redemption including shares of the
Preferred Shares required to be redeemed by any provision for mandatory
redemption contained in the Certificate.
For so long as the Preferred Shares are Outstanding, except as set forth in
the next sentence, the Fund will not declare, pay or set apart for payment on
any series of shares of the Fund ranking, as to the payment of dividends, on a
parity with the Preferred Shares for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the Preferred Shares
through their most recent Dividend Payment Date. When dividends are not paid in
full upon the Preferred Shares through their most recent Dividend Payment Date
or upon any other series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective Dividend
Payment Dates, all dividends declared upon Preferred Shares and any other such
series of shares ranking on a parity as to the payment of dividends with
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other series of preferred shares
shall in all cases bear to each other the same ratio that accumulated dividend
per share on the Preferred Shares and such other series of preferred shares bear
to each other.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem Preferred Shares having a
Dividend Period of one year or less, in whole or in part, on the Dividend
Payment Date upon not less than 15 days' and not more than 40 days' prior
notice. The optional redemption price per share shall be $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Preferred Shares having a
Dividend Period of more than one year are redeemable at the option of the Fund,
in whole or in part, prior to the end of the relevant Dividend Period, subject
to any Specific Redemption Provisions, which may include the payment of
redemption premiums to the extent required under any applicable Specific Redemp-
B-25
tion Provisions. The Fund shall not effect any optional redemption unless after
giving effect thereto (i) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to Holders of Preferred Shares by reason of the
redemption of Preferred Shares on such date fixed for the redemption and (ii)
the Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount.
MANDATORY REDEMPTION. If the Fund fails as of any Valuation Date to meet
the Preferred Shares Basic Maintenance Amount Test or, as of the last Business
Day of any month, the 1940 Act Preferred Shares Asset Coverage, and such failure
is not cured within five Business Days following the relevant Valuation Date in
the case of a failure to meet the Preferred Shares Basic Maintenance Amount Test
or the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Fund meeting the Preferred Shares Basic Maintenance Amount Test,
and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in either
case as of the relevant Asset Coverage Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have such result,
all Preferred Shares then Outstanding will be redeemed), and (B) the maximum
number of Preferred Shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory Redemption
Price.
Preferred shares may be subject to mandatory redemption in accordance with
the foregoing redemption provisions notwithstanding the terms of any Specific
Redemption Provision.
The Fund shall effect any required mandatory redemption pursuant to: (A)
the Preferred Shares Basic Maintenance Amount Test, no later than 30 days after
the Fund last met the Preferred Shares Basic Maintenance Amount Test or (B) the
1940 Act Preferred Shares Asset Coverage, no later than 30 days after the Asset
Coverage Cure Date (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of Preferred Shares
which are subject to mandatory redemption, or the Fund otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date, the Fund
will redeem those Preferred Shares on the earliest practicable date on which the
Fund will have such funds available, upon notice to record owners of Preferred
Shares and the Paying Agent. The Fund's ability to make a mandatory redemption
may be limited by the provisions of the 1940 Act or Massachusetts law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) any redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").
REDEMPTION PROCEDURE. Pursuant to Rule 23c-2 under the 1940 Act, the Fund
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of Preferred Shares called for
redemption not later than the close of business on the Business Day immediately
following the Business Day on which the Auction Agent determines the shares to
be redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the Fund). Such
telephonic notice will be confirmed promptly in writing not later than the close
of business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of Preferred Shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository ("Notice of Redemption"). Notice of Redemption will be
addressed to the
B-26
registered owners of the Preferred Shares at their addresses appearing on the
share records of the Fund. Such notice will set forth (i) the redemption date,
(ii) the number and identity of Preferred Shares to be redeemed, (iii) the
redemption price (specifying the amount of accumulated dividends to be included
therein), (iv) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date, and (v) the provision under which redemption
shall be made.
If fewer than all of the shares of a series of Preferred Shares are
redeemed on any date, the shares to be redeemed on such date will be selected by
the Fund on a pro rata basis in proportion to the number of shares held by such
Holders, by lot or by such other method as is determined by the Fund to be fair
and equitable, subject to the terms of any Specific Redemption Provisions.
Preferred Shares may be subject to mandatory redemption as described herein
notwithstanding the terms of any Specific Redemption Provisions. The Auction
Agent will give notice to the Securities Depository, whose nominee will be the
Holder of all of the Preferred Shares, and the Securities Depository will
determine the number of shares to be redeemed from the account of the Agent
Member of each beneficial owner. Each Agent Member will determine the number of
shares to be redeemed from the account of each beneficial owner for which it
acts as agent. An Agent Member may select for redemption shares from the
accounts of some beneficial owners without selecting for redemption any shares
from the accounts of other beneficial owners. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is Holder of all of the
shares, the particular shares to be redeemed shall be selected by the Fund by
lot, on a pro rata basis between each series or by such other method as the Fund
shall deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the Preferred Shares called for redemption on such date and
(ii) such other amounts, if any, to which Holders of Preferred Shares called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request; provided, however, the Paying Agent shall notify all owners of the
shares whose funds are unclaimed by placing a notice in the Wall Street Journal
concerning the availability of such funds for three consecutive weeks. Thereupon
the Paying Agent will be relieved of all responsibility to the owners of such
shares and such owners may look only to the Fund for payment.
So long as any Preferred Shares are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the person for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no Preferred
Shares may be redeemed at the option of the Fund unless all dividends in arrears
on the outstanding Preferred Shares, and all shares of beneficial interest of
the Fund ranking on a parity with the Preferred Shares with respect to the
payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment, except in connection with the
liquidation of the Fund in which case all Preferred Shares and all shares
ranking in a parity with the Preferred Shares must receive proportionate
amounts.
Except for the provisions described above, nothing contained in the
Certificate limits any legal right of the Fund to purchase or otherwise acquire
any Preferred Shares outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any Preferred Shares for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act Preferred Shares Asset
Coverage and has Eligible
B-27
Assets with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount after giving effect to such purchase or acquisition on
the date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the outstanding
Preferred Shares are redeemed or otherwise acquired by the Fund, the Fund shall
give notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Trustees.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements
in respect of the Preferred Shares: (i) the Fund must maintain assets in its
portfolio that have a value, discounted in accordance with Rating Agency
guidelines, at least equal to the aggregate liquidation preference of the
Preferred Shares plus specified liabilities, payment obligations and other
amounts; and (ii) the Fund must maintain asset coverage for Preferred Shares of
at least 200%.
PREFERRED SHARES BASIC MAINTENANCE AMOUNT. The Fund will be required under
Rating Agency guidelines to maintain, as of each Business Day on which the
Preferred Shares are outstanding, assets having in the aggregate a Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
established by the rating agency or agencies then rating the Preferred Shares.
If the Fund fails to meet such requirement on any Valuation Date and such
failure is not cured by the Asset Coverage Cure Date, the Fund will be required
under certain circumstances to redeem certain of the Preferred Shares.
"Preferred Shares Basic Maintenance Amount" as of any Valuation Date means
the dollar amount equal to the sum of (i)(A) the product of the number of
Outstanding shares of each Series of Preferred Shares on such date by the
Liquidation Preference (and redemption premium, if any) per share of such
Series; (B) the aggregate amount of dividends that will have accumulated at the
respective Applicable Rates (whether or not earned or declared) to (but not
including) the first respective Dividend Payment Dates for each Series of
Preferred Shares outstanding that follows such Valuation Date; (C) the aggregate
amount of dividends that would accumulate on Outstanding Preferred Shares from
such first Dividend Payment Dates therefor referenced in (B) of this paragraph
through the 45th day after such Valuation Date at the respective Applicable
Rates referenced in (B) of this paragraph; (D) the amount of anticipated
non-interest expenses of the Trust for the 90 days subsequent to such Valuation
Date; (E) the amount of the current outstanding balances of any indebtedness or
obligations of the Trust senior in right of payment to the Preferred Shares plus
interest actually accrued together with 30 days additional interest on the
current outstanding balances calculated at the current rate; and (F) any other
current liabilities payable during the 30 days subsequent to such Valuation
Date, including, without limitation, indebtedness due within one year and any
redemption premium due with respect to the Preferred Shares for which a Notice
of Redemption has been sent, as of such Valuation Date, to the extent not
reflected in any of (i)(A) through (i)(E) (including, without limitation, any
liabilities incurred for the purpose of clearing securities transactions) less
(ii) the sum of any cash plus the value of any of the Trust's assets irrevocably
deposited by the Trust for the payment of any of (i)(A) through (i)(F) ("value,"
for purposes of this clause (ii), means the Discounted Value of the security,
except that if the security matures prior to the relevant redemption payment
date and is either fully guaranteed by the U.S. Government or is rated P2 by
Moody's and A2 by Fitch, it will be valued at its face value).
The Discount Factors, the criteria used to value the Eligible Assets in the
Fund's portfolio for purposes of determining compliance with the Preferred
Shares Basic Maintenance Amount, and guidelines for determining the market value
of the Fund's portfolio holdings for purposes of determining compliance with the
Preferred Shares Basic Maintenance Amount, are based on the criteria established
in connection with the rating the Preferred Shares. The Moody's Discount Factor
and the Fitch Discount Factor relating to any asset of the Fund, the Preferred
Shares Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the Moody's Discount Factor and Fitch Discount Factor of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without shareholder
approval, but only in event that the Fund receives written confirmation from
each Rating Agency which is then rating the Preferred Shares and which so
requires that any such changes would not impair the "Aaa" credit rating from
Moody's or the "AAA" credit rating from Fitch.
B-28
A Rating Agency's guidelines will apply to the Preferred Shares only so
long as such Rating Agency is rating such shares. The Fund will pay certain fees
to Moody's and Fitch for rating the Preferred Shares. The ratings assigned to
Preferred Shares are not recommendations to buy, sell or hold Preferred Shares.
Such ratings may be subject to revision or withdrawal by the assigning Rating
Agency at any time. Any rating of Preferred Shares should be evaluated
independently of any other rating.
Upon any failure to maintain the required Discounted Value of the Fund's
Eligible Assets, the Fund will seek to alter the composition of its portfolio to
reattain the Preferred Shares Basic Maintenance Amount on or prior to the
Preferred Shares Basic Maintenance Cure Date, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of portfolio
securities.
1940 ACT PREFERRED SHARES ASSET COVERAGE. The Fund is also required to
maintain, as of the last Business Day on any month in which the Preferred Shares
are outstanding, asset coverage of at least 200% (or such other percentage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing shares of a closed-end company as a
condition of declaring dividends on its common shares). If the Fund fails to
maintain the 1940 Act Preferred Shares Asset Coverage as of the last Business
Day of any month and such failure is not cured as of the related Asset Coverage
Cure Date, the Fund will be required to redeem certain Preferred Shares.
VOTING
All voting rights (as described in the Prospectus under "Description of
Capital Structure" and "Description of Preferred Shares -- Voting Rights") will
not apply with respect to Preferred Shares if, at or prior to the time when a
vote is required, such shares have been (i) redeemed or (ii) called for
redemption and sufficient funds have been deposited in Fund to effect such
redemption.
The Board of Trustees may without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the Certificate or Declaration of Trust by the Rating Agencies in
the event the Fund receives written confirmation from Moody's or Fitch, or both,
as appropriate, that any such amendment, alteration or repeal would not impair
the ratings then assigned by Moody's or Fitch, as the case may be, to the
Preferred Shares.
RESTRICTIONS ON TRANSFER
Preferred Shares may be transferred only (a) pursuant to an Order placed in
an Auction, or (b) to or through a Broker-Dealer. Notwithstanding the foregoing,
a transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding Preferred Shares through
different Broker-Dealers, advises the Auction Agent of such transfer.
FEDERAL TAXATION
The following is intended to be a generally summary of certain federal
income tax considerations regarding the purchase, ownership and disposition of
Preferred Shares of the Fund. It is not intended as a complete discussion of all
of the potential federal income tax consequences that may be applicable to the
Fund or to all categories of investors, some of which may be subject to special
tax rules. Investors are therefore advised to consult with their tax advisors
before making an investment in the Fund. The summary is based on the laws in
effect on the date of this Statement of Additional Information and existing
judicial and administrative interpretations thereof, all of which are subject to
change, possible with retroactive effect.
FEDERAL TAXATION OF THE FUND
The Fund has elected to be, and intends to qualify each year for treatment
as, a regulated investment company, under the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must comply with certain requirements of the Code relating to, among other
things, the sources of its income and diversification of its assets.
B-29
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including ordinary
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss), it will
generally not be required to pay federal income taxes on any income (including
any net capital gain) it distributes to shareholders. The Fund intends to
distribute at least the minimum amount necessary to satisfy the 90% distribution
requirement.
In order to qualify as a regulated investment company, the Fund must derive
at least 90% of its annual gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including but not limited
to gains from options, futures and forward contracts) derived with respect to
its business of investing in such stock, securities or currencies. The Fund must
also diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash and cash items, U.S. government securities, securities of other
regulated investment companies, and other securities limited in respect of any
one issuer to a value not greater than 5% of the value of the Fund's total
assets and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities (other than those of the U.S. government or other regulated
investment companies) of any one issuer or of two or more issuers that the Fund
controls and that are engaged in the same, similar or related trades or
businesses.
To avoid a nondeductible 4% excise tax, the Fund will be required to
distribute, by December 31st of each year, at least an amount equal to the sum
of (i) 98% of its ordinary income for such year and (ii) 98% of its capital gain
net income (the latter of which generally is computed on the basis of the
one-year period ending on October 31st of such year), plus any amounts that were
not distributed in previous taxable years. For purposes of the excise tax, any
ordinary income or capital gain net income retained by, and subject to federal
income tax in the hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary dividends. Such
distributions, however, would be eligible (i) to be treated as "qualified
dividend income" in the case of shareholders taxed as individuals who satisfy
certain holding period and other requirements and (ii) for the dividends
received deduction in the case of corporate shareholders who satisfy certain
holding period and other requirements. In addition, the Fund could be required
to recognize unrealized gains, pay substantial taxes and make distributions
(which could be subject to interest charges) before requalifying for taxation as
a regulated investment company.
If the Fund does not meet the asset coverage requirements of the 1940 Act,
the Fund intends to repurchase or redeem (to the extent permitted under the 1940
Act) Preferred Shares in order to maintain or restore the asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem Preferred Shares and the amounts to be
repurchased or redeemed, if any, will be made in the sole discretion of the
Fund.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. To generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise taxes, the Fund may have to dispose
of securities that it would otherwise have continued to hold.
Some of the Fund's investment practices are subject to special provisions
of the Code 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 gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited), (iv) cause the Fund to recognize income
or gain without a corresponding receipt of cash, (v) adversely affect the time
as to
B-30
when a purchase or sale of stock or securities is deemed to occur and/or (vi)
adversely alter the characterization of certain complex financial transactions.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. The Fund will monitor its transactions and may
make certain tax elections in order to mitigate the effect of these provisions.
FEDERAL INCOME TAXATION OF HOLDERS OF PREFERRED SHARES
The Fund believes that the Preferred Shares will constitute stock of the
Fund and distributions of the Fund's investment company taxable income will
generally be taxable to shareholders as ordinary income to the extent of the
Fund's earnings and profits. It is possible, however, that the Internal Revenue
Service (the "IRS") might take a contrary position asserting, for example, that
the Preferred Shares constitute debt of the Fund. If this position were upheld,
distributions by the Fund to holders of Preferred Shares would constitute
interest, whether or not they exceeded the Fund's earnings and profits, and
would be taxed as ordinary income. The Fund believes, however, that such a
position, if asserted by the IRS, would be unlikely to prevail if the issuer
were properly litigated. On May 28, 2003, President Bush signed into the law the
Jobs and Growth Tax Relief Reconciliation Act of 2003, which contains provisions
that reduce the U.S. federal income tax rates on (1) long-term capital gains
received by individuals and (2) "qualified dividend income" received by
individuals from certain domestic and foreign corporations. The reduced rates
apply to long-term capital gains from sales or exchanges in taxable years ending
on or after May 6, 2003 and cease to apply for taxable years beginning after
December 31, 2008. Because the Fund intends to invest primarily in Senior Loans
and other senior debt securities, ordinary income dividends paid by the Fund
generally will not be eligible for the reduced rates applicable to "qualified
dividend income" and generally will not qualify for the dividends received
deduction available to corporations. Distributions from the Fund designated as
capital gain dividends will be eligible for the rate applicable to long-term
capital gains. Distributions of the Fund's net capital gain as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a shareholder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholder (assuming such shares are held as a capital asset).
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the nondeductible 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 distribution was actually made.
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize a gain or loss in an
amount equal to the difference between the amount received in exchange for the
shares and their adjusted tax basis in the shares sold. If the shares sold are
held as a capital asset, the gain or loss will be a capital gain or loss. Such
gain or loss generally will be treated as long-term gain or loss if the shares
were held for more than one year and otherwise generally will be treated as
short-term gain or loss. Any loss recognized upon a taxable disposition of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received with respect to such
shares. Any loss realized on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced within a 61-day period beginning 30 days
before and ending 30 days after the disposition of the shares. If disallowed,
the loss will be reflected by an upward adjustment to the basis of the shares
acquired.
For federal income tax purposes, the IRS currently requires that a
regulated investment company that has two or more classes of shares allocated to
each such class proportionate amounts of each type of its income
B-31
(such as ordinary income and net capital gain) for each tax year. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the regulated investment company
during the year to such class. Accordingly, the Fund intends to designate
distributions made to holders of common shares and holders of Preferred Shares
in accordance with each such class's proportionate share of the total dividends
paid to both classes.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital, or in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
Ordinary income dividends (but not capital gain dividends) paid to
shareholders who are non-resident aliens or foreign entities ("Non-U.S.
Shareholders") will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities,
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Non-U.S. Shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax ("backup
withholding") from dividends and gross proceeds paid to non-corporate
shareholders. This tax may be withheld from dividends if (i) the shareholder
fails to properly furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that the taxpayer identification number provided is correct, that the
shareholder is not subject to backup withholding and that the shareholder is a
U.S. person (as defined for U.S. federal income tax purposes). Redemption
proceeds may be subject to backup withholding under the circumstances described
in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to backup withholding. To
avoid backup withholding, Non-U.S. Shareholders must generally provide a
properly completed IRS Form W-8BEN (or other applicable form) certifying their
non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends, capital gain dividends or gross proceeds paid to such shareholder
and the amount, if any, of tax withheld pursuant to backup withholding rules
with respect to such amounts. In the case of a Non-U.S. Shareholder, the Fund
must report to the IRS and such Non-U.S. shareholder the amount of dividends,
capital gain dividends or gross proceeds paid that are subject to withholding
(including backup withholding, if any) and the amount of tax withheld with
respect to such amounts. This information may also be made available to the tax
authorities in the Non-U.S. Shareholder's country of residence.
B-32
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.
B-33
APPENDIX A -- RATINGS OF INVESTMENTS
DESCRIPTION OF MOODY'S DEBT RATINGS
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note -- Those bonds in the "Aa", "A," "Baa," "Ba" and "B" categories which
Moody's believes possess the strongest credit attributes within those categories
are designated by the symbols "Aa1," "A1," "Baa1," "Ba1" and "B1."
Short-term Notes -- The four ratings of Moody's for short-term notes are
"MIG 1/VMIG1," "MIG 2/VMIG2," "MIG 3/VMIG3" and "MIG 4/VMIG4." "MIG 1/VMIG1"
denotes "best quality . . . strong protection by established cash flows."
"MIG2/VMIG2" denotes "high quality" with ample margins of protection.
"MIG3/VMIG3" notes are of "favorable quality . . . but . . . lacking the
undeniable strength of the preceding grades." "MIG 4/VMIG4" notes are of
"adequate quality . . . [p]rotection commonly regarded as required of an
investment security is present . . . there is specific risk."
A-1
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The issue credit rating is not
a recommendation to purchase, sell or hold a financial obligation, inasmuch as
it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days -- including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put features, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;
2. Nature of and provisions of the obligation; and
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3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA -- An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA -- An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A -- An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
to the obligation.
BB, B, CCC, CC and C -- Obligations rated "BB", "B", "CCC", "CC" and "C" is
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- An obligation rated "BB" is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated "CCC" is currently vulnerable to non-payment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated "CC" is currently highly vulnerable to
non-payment.
C -- A subordinated debt or preferred stock obligation rated "C" is
currently highly vulnerable to non-payment. The "C" rating may be used to cover
a situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A "C" rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D -- An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
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Plus (+) or Minus (-) -- The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r -- This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit ratings. Examples include:
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
NR -- This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
DESCRIPTION OF STANDARD & POOR'S SHORT-TERM CREDIT RATINGS
A-1 -- A short-term obligation rated "A-1" is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than the
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 -- A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated "C" is currently vulnerable to
non-payment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated "D" is in payment default. The "D"
rating category is used when interest payments or principal payments are not
made on the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
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APPENDIX B -- FORM OF CERTIFICATE OF VOTE
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VAN KAMPEN SENIOR INCOME TRUST
FORM OF CERTIFICATE OF VOTE ESTABLISHING
A CLASS OF PREFERRED SHARES (THE "CERTIFICATE")
Van Kampen Senior Income Trust, a Massachusetts business trust (the
"Trust"), certifies that:
FIRST: Article VI of the Trust's Declaration of Trust (which, as hereafter
restated or amended from time to time, is together with this Certificate herein
called the "Declaration") empowers the Board of Trustees of the Trust (the
"Board") to authorize the issuance of one or more series of a class of preferred
shares, provided that to the extent required by the Investment Company Act of
1940, as amended (the "1940 Act"), no such series shall have priority over any
other series within its class upon the distribution of assets or in respect of
the payment of dividends.
SECOND: Pursuant to the authority so vested in the Board of Trustees of the
Trust, the Board has, by resolution, authorized the creation of 28,000 Auction
Rate Cumulative Preferred Shares, $0.01 par value, liquidation preference
$25,000 per share, classified as Series M, T, W, TH and F (collectively, the
"Series") Auction Rate Cumulative Preferred Shares (collectively, the "Preferred
Shares").
THIRD: The preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of redemption of the
shares of each series of Preferred Shares are as follows:
DESIGNATION
SERIES M: A series of 5,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series M Auction Rate Cumulative
Preferred Shares" ("Series M"). Each share of Series M may be issued on a date
to be determined by the Board or pursuant to their delegated authority; have an
initial Applicable Rate and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board or pursuant to their
delegated authority; and have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Trust, as are set
forth in Part I and Part II of this Certificate. The Series M shall constitute a
separate series of Preferred Shares of the Trust.
SERIES T: A series of 5,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series T Auction Rate Cumulative
Preferred Shares" ("Series T"). Each share of Series T may be issued on a date
to be determined by the Board or pursuant to their delegated authority; have an
initial Applicable Rate and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board or pursuant to their
delegated authority; and have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Trust, as are set
forth in Part I and Part II of this Certificate. The Series T shall constitute a
separate series of Preferred Shares of the Trust.
SERIES W: A series of 5,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series W Auction Rate Cumulative
Preferred Shares" ("Series W"). Each share of Series W may be issued on a date
to be determined by the Board or pursuant to their delegated authority; have an
initial Applicable Rate and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board or pursuant to their
delegated authority; and have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Trust, as are set
forth in Part I and Part II of this Certificate. The Series W shall constitute a
separate series of Preferred Shares of the Trust.
SERIES TH: A series of 5,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series TH Auction Rate Cumulative
Preferred Shares" ("Series TH"). Each share of Series TH may be issued on a date
to be determined by the Board or pursuant to their delegated authority; have an
initial
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Applicable Rate and an initial Dividend Payment Date as shall be determined in
advance of the issuance thereof by the Board or pursuant to their delegated
authority; and have such other preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, in addition to those required by applicable law or set forth in the
Declaration applicable to preferred shares of the Trust, as are set forth in
Part I and Part II of this Certificate. The Series TH shall constitute a
separate series of Preferred Shares of the Trust.
SERIES F: A series of 5,600 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series F Auction Rate Cumulative
Preferred Shares" ("Series F"). Each share of Series F may be issued on a date
to be determined by the Board or pursuant to their delegated authority; have an
initial Applicable Rate and an initial Dividend Payment Date as shall be
determined in advance of the issuance thereof by the Board or pursuant to their
delegated authority; and have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Trust, as are set
forth in Part I and Part II of this Certificate. The Series F shall constitute a
separate series of Preferred Shares of the Trust.
Subject to the provisions of Section 3(j) of Part I of this Certificate,
the Board may, in the future, authorize the issuance of additional series of the
Trust's preferred shares, including additional Series of Preferred Shares, as
long as any additional series of preferred shares has the same preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption and other terms of each of the respective
Series herein described, except that the Applicable Rate for its initial
Dividend Period, its initial Dividend Payment Date and any other changes in the
terms herein set forth shall be as set forth in an amendment to this
Certificate.
As used in Part I and Part II of this Certificate, capitalized terms shall
have the meanings provided in Section 19 of Part I of this Certificate.
PART I:
TERMS OF THE PREFERRED SHARES
1. NUMBER OF SHARES; RANKING.
(a) The initial number of authorized shares constituting Series M is 5,600
shares. The initial number of authorized shares constituting Series T is 5,600
shares. The initial number of authorized shares constituting Series W is 5,600
shares. The initial number of authorized shares constituting Series TH is 5,600
shares. The initial number of authorized shares constituting Series F is 5,600
shares. No fractional shares of any Series shall be issued.
(b) Shares of each Series which at any time have been redeemed or purchased
by the Trust shall, after such redemption or purchase, have the status of
authorized but unissued preferred shares.
(c) Shares of each Series shall rank on a parity with shares of any other
series of preferred shares (including any other Preferred Shares) as to the
payment of dividends to which such shares are entitled and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust.
(d) No Holder of shares of any Series shall have, solely by reason of being
such a Holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of any Series, any Common Shares of the Trust or any other
securities of the Trust which it may hereafter issue or sell.
2. DIVIDENDS.
(a) The Holders of shares of each Series shall be entitled to receive,
when, as and if declared by the Board, out of funds legally available therefor,
cumulative cash dividends on their shares at the Applicable Rate, determined as
set forth in paragraph (c) of this Section 2, and no more, payable on the
respective dates determined as set forth in paragraph (b) of this Section 2.
Dividends on the Outstanding shares of each Series issued on the Date of
Original Issue shall accumulate from the Date of Original Issue.
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(b) (i) Dividends shall be payable when, as and if declared by the Board
following the initial Dividend Payment Date, subject to subparagraph (b)(ii) of
this Section 2, on the shares of each Series, as follows:
(A) with respect to any Dividend Period of one year or less, on the
Business Day following the last day of such Dividend Period; provided
however, if the Dividend Period is more than 91 days, then on the 91st,
181st and 271st days within such period, if applicable, and on the Business
Day following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on a
quarterly basis on each January 1, April 1, July 1 and October 1 within
such Dividend Period and on the Business Day following the last day of such
Dividend Period.
(ii) If a day for payment of dividends resulting from the
application of subparagraph (b)(i) above is not a Business Day, then the
Dividend Payment Date shall be the first Business Day following such day
for payment of dividends.
(iii) The Trust shall pay to the Paying Agent not later than 12:00
p.m., New York City time, on the Business Day next preceding each
Dividend Payment Date for a Series, an aggregate amount of funds
available on the next Business Day in the City of New York, New York,
equal to the dividends to be paid to all Holders of shares of such
Series on such Dividend Payment Date. The Trust shall not be required to
establish any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of
dividends shall be held in trust for the payment of such dividends by
the Paying Agent for the benefit of the Holders specified in
subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends, including interest earned on such
moneys, will, to the extent permitted by law, be repaid to the Trust at
the end of 90 days from the date on which such moneys were to have been
so applied.
(v) Each dividend on each Series shall be paid on the Dividend
Payment Date therefor to the Holders of shares of that Series as their
names appear on the share ledger or share records of the Trust on the
Business Day next preceding such Dividend Payment Date; provided,
however, if dividends are in arrears, they may be declared and paid at
any time to Holders as their names appear on the share ledger or share
records of the Trust on such date not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board. No interest will be
payable in respect of any dividend payment or payments which may be in
arrears.
(c) (i) The dividend rate on Outstanding shares of each Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor shall be equal to the rate per annum set
forth under "Designation" above. For each subsequent Dividend Period, the
dividend rate shall be equal to the rate per annum that results from an Auction;
provided, however, that if an Auction for any subsequent Dividend Period of a
Series is not held for any reason or if Sufficient Clearing Orders have not been
made in an Auction (other than as a result of all shares of any Series being the
subject of Submitted Hold Orders), then the dividend rate on the shares of that
Series for any such Dividend Period shall be the Maximum Rate (except (i) during
a Default Period when the dividend rate shall be the Default Rate, as set forth
in Section 2(c)(ii) below) or (ii) after a Default Period and prior to the
beginning of the next Dividend Period when the dividend rate shall be the
Maximum Rate at the close of business on the last day of such Default Period).
The rate per annum at which dividends are payable on shares of each Series as
determined pursuant to this Section 2(c)(i) shall be the "Applicable Rate."
(ii) Subject to the cure provisions in Section 2(c)(iii) below, a
"Default Period" with respect to a particular Series will commence on any
date the Trust fails to deposit irrevocably in trust in same-day funds with
the Paying Agent by 12:00 noon, New York City time, (A) the full amount of
any declared dividend on that Series payable on the Dividend Payment Date
(a "Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the
"Redemption Date") (a "Redemption Default" and, together with a Dividend
Default, a "Default").
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Subject to the cure provisions of Section 2(c)(iii) below, a Default
Period shall end on the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and any unpaid Redemption Price shall have been
deposited irrevocably in trust in same-day funds with the Paying Agent. In
the case of a Dividend Default, no Auction shall be held during a Default
Period applicable to that Series, and the Applicable Rate for each Dividend
Period commencing during a Default Period will be equal to the Default
Rate, and each subsequent Dividend Period commencing after the beginning of
a Default Period shall be a Standard Dividend Period; provided, however,
that the commencement of a Default Period will not by itself cause the
commencement of a new Dividend Period.
(iii) No Default Period shall be deemed to commence if the amount of
any dividend or any Redemption Price due (if such default is not solely due
to the willful failure of the Trust) is deposited irrevocably in trust in
same-day funds with the Paying Agent by 12:00 noon, New York City time,
within three Business Days after the applicable Dividend Payment Date or
Redemption Date, together with an amount equal to the Default Rate applied
to the amount of such non-payment based on the actual number of days
comprising such period divided by 360. The Default Rate shall be equal to
the Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period (or in respect of dividends
on another date in connection with a redemption during such Dividend
Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a
fraction, the numerator of which will be the number of days in such
Dividend Period (or portion thereof) that such share was Outstanding and
for which the Applicable Rate or the Default Rate was applicable and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.
(d) Any dividend payment made on shares of any Series shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such Series.
(e) For so long as the Preferred Shares are Outstanding, except as
otherwise contemplated by Part I of this Certificate, the Trust will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares, ranking
junior to the Preferred Shares as to dividends or upon liquidation) with respect
to Common Shares or any other shares of the Trust ranking junior to the
Preferred Shares as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or
other shares ranking junior to the Preferred Shares (except by conversion into
or exchange for shares of the Trust ranking junior to the Preferred Shares as to
dividends and upon liquidation), unless (i) immediately after such transaction,
the Trust would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage, (ii) all cumulative and unpaid dividends due on
or prior to the date of the transaction have been declared and paid in full with
respect to the Trust's preferred shares, including the Preferred Shares, and
(iii) the Trust has redeemed the full number of preferred shares required to be
redeemed by any mandatory provision for redemption, including any Preferred
Shares required to be redeemed by any provision for mandatory redemption
contained in Section 3(a)(ii) of Part I of this Certificate.
(f) For so long as the Preferred Shares are Outstanding, except as set
forth in the next sentence, the Trust will not declare, pay or set apart for
payment on any series of shares of the Trust ranking, as to the payment of
dividends, on a parity with the Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared and paid on the
Preferred Shares through their most recent Dividend Payment Date. When dividends
are not paid in full upon the Preferred Shares through their most recent
Dividend Payment Date or upon any other series of shares ranking on a parity as
to the payment of dividends with Preferred Shares through their most recent
respective dividend payment dates, all dividends declared upon Preferred Shares
and any other such series of shares ranking on a parity as to the payment of
dividends with Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on Preferred Shares and such other series of
preferred shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other series of
preferred shares bear to each other.
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(g) The Trust will not declare, pay or set apart for payment any dividend
or other distribution in respect to any Series (i) if there is any event of
payment default which has occurred and is continuing under indebtedness senior
to such Series (such senior indebtedness including but not limited to
indebtedness under any commercial paper program) or (ii) unless immediately
after such transaction, the Trust would have Eligible Assets with an aggregate
Discounted Value at least equal to the asset coverage requirements under the
indebtedness senior to such Series.
3. REDEMPTION.
(a) (i) After the initial Dividend Period, subject to the provisions of
this Section 3 and to the extent permitted under the 1940 Act and Massachusetts
law, the Trust may, at its option, redeem in whole or in part, out of funds
legally available therefor, shares of any Series herein designated as (A) having
a Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period, by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000 plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ("Redemption Price"), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period, by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board
after consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions at the time of the designation of such Dividend
Period as set forth in Section 4 of Part I of this Certificate; provided,
however, that during a Dividend Period of more than one year no shares of any
Series will be subject to optional redemption except in accordance with any
Specific Redemption Provisions approved by the Board after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Trust shall not give a notice of or effect
any redemption pursuant to this Section 3(a)(i) unless, on the date on which the
Trust gives such notice and on the Redemption Date, (A) the Trust has available
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable Redemption Date and having a value not less than the
amount (including any applicable premium) due to Holders of shares of each
Series by reason of the redemption of each Series on the Redemption Date and (B)
the Trust would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount immediately subsequent to
such redemption, if such redemption were to occur on such date, it being
understood that the provisions of paragraph (d) of this Section 3 shall be
applicable in such circumstances in the event the Trust makes the deposit and
takes the other action required thereby.
(ii) If the Trust fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is
not cured within five Business Days following the relevant Valuation Date
in the case of a failure to meet the Preferred Shares Basic Maintenance
Amount Test or the last Business Day of the following month in the case of
a failure to meet the 1940 Act Preferred Shares Asset Coverage (each an
"Asset Coverage Cure Date"), the Preferred Shares will be subject to
mandatory redemption out of funds legally available therefor. The number of
Preferred Shares to be redeemed in such circumstances will be equal to the
lesser of (A) the minimum number of Preferred Shares the redemption of
which, if deemed to have occurred immediately prior to the opening of
business on the relevant Asset Coverage Cure Date, would result in the
Trust meeting the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage, as the case may be, in either
case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all Preferred Shares then Outstanding will be redeemed), and (B)
the maximum number of Preferred Shares that can be redeemed out of funds
expected to be available therefor on the Mandatory Redemption Date at the
Mandatory Redemption Price set forth in subparagraph (a)(iv) of this
Section 3.
(iii) [Reserved]
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(iv) In determining the Preferred Shares required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Trust shall allocate
the number of shares required to be redeemed to satisfy the Preferred
Shares Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset
Coverage, as the case may be, pro rata among the Holders of the Preferred
Shares in proportion to the number of shares they hold and other preferred
shares subject to mandatory redemption provisions similar to those
contained in this Section 3, subject to the further provisions of this
subparagraph (iv). The Trust shall effect any required mandatory redemption
pursuant to: (A) the Preferred Shares Basic Maintenance Amount Test, as
described in subparagraph (a)(ii) of this Section 3, no later than 30 days
after the Trust last met the Preferred Shares Basic Maintenance Amount Test
or (B) the 1940 Act Preferred Shares Asset Coverage, as described in
subparagraph (a)(ii) of this Section 3, no later than 30 days after the
Asset Coverage Cure Date (each a "Mandatory Redemption Date"), except that
if the Trust does not have funds legally available for the redemption of,
or is not otherwise legally permitted to redeem, the number of Preferred
Shares which would be required to be redeemed by the Trust under clause (A)
of subparagraph (a)(ii) of this Section 3 if sufficient funds were
available, together with other preferred shares which are subject to
mandatory redemption under provisions similar to those contained in this
Section 3, or if the Trust otherwise is unable to effect such redemption on
or prior to such Mandatory Redemption Date, the Trust shall redeem those
Preferred Shares and other preferred shares which it was unable to redeem
on the earliest practicable date on which the Trust will have such funds
available upon notice pursuant to Section 3(b) to record owners of the
Preferred Shares to be redeemed and the Paying Agent. The Trust will
deposit with the Paying Agent funds sufficient to redeem the specified
number of Preferred Shares with respect to a redemption required under
subparagraph (a)(ii) of this Section 3, by 1:00 p.m., New York City time,
of the Business Day immediately preceding the Mandatory Redemption Date. If
fewer than all of the Outstanding Preferred Shares are to be redeemed
pursuant to this Section 3(a)(iv), the number of shares to be redeemed
shall be redeemed pro rata from the Holders of such shares in proportion to
the number of such shares held by such Holders, by lot or by such other
method as the Trust shall deem fair and equitable, subject, however, to the
terms of any applicable Specific Redemption Provisions. "Mandatory
Redemption Price" means the Redemption Price plus (in the case of a
Dividend Period of one year or more only) a redemption premium, if any,
determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to the foregoing Section 3(a),
the Trust will file a notice of its intention to redeem with the Securities and
Exchange Commission (the "Commission") so as to provide at least the minimum
notice required under Rule 23c-2 under the 1940 Act or any successor provision.
In addition, the Trust shall deliver a notice of redemption to the Auction Agent
(the "Notice of Redemption") containing the information set forth below (i) in
the case of an optional redemption pursuant to Section 3(a)(i) above, one
Business Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of shares of any
Series called for redemption not later than the close of business on the
Business Day immediately following the day on which the Auction Agent determines
the shares to be redeemed (or, during a Default Period with respect to such
shares, not later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives Notice of Redemption from
the Trust). The Auction Agent shall confirm such telephonic notice in writing
not later than the close of business on the third Business Day preceding the
date fixed for redemption by providing the Notice of Redemption to each Holder
of shares called for redemption, the Paying Agent (if different from the Auction
Agent) and the Securities Depository. Notice of Redemption will be addressed to
the registered owners of shares of any Series at their addresses appearing on
the share records of the Trust. Such Notice of Redemption will set forth (i) the
date fixed for redemption, (ii) the number and identity of shares of each Series
to be redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by
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applicable law. If fewer than all shares held by any Holder are to be redeemed,
the Notice of Redemption mailed to such Holder shall also specify the number of
shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred shares, including the Preferred Shares, may be redeemed at the option
of the Trust unless all dividends in arrears on the Outstanding Preferred Shares
and any other preferred shares have been or are being contemporaneously paid or
set aside for payment; provided, however, that the foregoing shall not prevent
the purchase or acquisition of outstanding preferred shares pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to holders of all outstanding preferred shares.
(d) Upon the deposit of funds sufficient to redeem shares of any Series
with the Paying Agent and the giving of the Notice of Redemption to the Auction
Agent under paragraph (b) of this Section 3, dividends on such shares shall
cease to accumulate and such shares shall no longer be deemed to be Outstanding
for any purpose (including, without limitation, for purposes of calculating
whether the Trust has met the Preferred Shares Basic Maintenance Amount Test or
the 1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of
the shares so called for redemption shall cease and terminate, except the right
of such Holder to receive the Redemption Price specified herein, but without any
interest or other additional amount. Such Redemption Price shall be paid by the
Paying Agent to the nominee of the Securities Depository. The Trust shall be
entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate Redemption Price of the shares of any Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of any
Series called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of two years from such Redemption Date shall, to the extent
permitted by law, be paid to the Trust, after which time the Holders of shares
of each Series so called for redemption may look only to the Trust for payment
of the Redemption Price and all other amounts, if any, to which they may be
entitled; provided, however, that the Paying Agent shall notify all Holders
whose funds are unclaimed by placing a notice in the Wall Street Journal
concerning the availability of such funds for three consecutive weeks. The Trust
shall be entitled to receive, from time to time after the date fixed for
redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. A failure to redeem shares of any Series
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Trust shall have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Trust may not have redeemed shares of each
Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of any Series and shall include those shares of any
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the Redemption Price
of shares of any Series called for redemption shall be held in trust by the
Paying Agent for the benefit of Holders of shares so to be redeemed.
(g) So long as any shares of any Series are held of record by the nominee
of the Securities Depository, the Redemption Price for such shares will be paid
on the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.
(h) Except for the provisions described above, nothing contained in this
Certificate limits any right of the Trust to purchase or otherwise acquire any
shares of any Series outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on, or the mandatory or optional redemption price
with respect to, any shares of any Series for which Notice of Redemption has
been given and the Trust meets the 1940 Act Preferred Shares Asset Coverage and
the Preferred Shares Basic Maintenance Amount Test after giving effect to such
purchase or acquisition on the
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date thereof. Any shares of any Series which are purchased, redeemed or
otherwise acquired by the Trust shall have no voting rights. If fewer than all
the Outstanding shares of any Series are redeemed or otherwise acquired by the
Trust, the Trust shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board.
(i) In the case of any redemption pursuant to this Section 3, only whole
shares of each Series shall be redeemed, and in the event that any provision of
the Declaration would require redemption of a fractional share, the Auction
Agent shall be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(i) of Part I of this Certificate, the Board may authorize,
create or issue other series of preferred shares, including other series of
Preferred Shares and other series of preferred shares ranking on a parity with
the Preferred Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, to the extent permitted by the 1940 Act, as amended, if
upon issuance, the net proceeds from the sale of such preferred shares (or such
portion thereof needed to redeem or repurchase the Outstanding Preferred Shares)
are deposited with the Auction Agent in accordance with Section 3(d) of Part I
of this Certificate, Notice of Redemption as contemplated by Section 3(b) of
Part I of this Certificate has been delivered prior thereto or is sent promptly
thereafter, and such proceeds are used to redeem all Outstanding Preferred
Shares or, if upon the issuance of any such series, the Trust would meet the
1940 Act Preferred Shares Asset Coverage, the Preferred Shares Basic Maintenance
Amount Test and the requirements of Section 12 of Part I of this Certificate.
(k) Notwithstanding anything herein to the contrary, redemptions of
preferred shares pursuant to this Section 3 shall comply with the terms and
covenants of any commercial paper program and no such redemptions shall be
permitted to the extent they will cause an event of default under such
agreements.
4. DESIGNATION OF DIVIDEND PERIOD.
(a) The initial Dividend Period for each Series is as set forth under
"Designation" above. The Trust will designate the duration of subsequent
Dividend Periods of each Series; provided, however, that no such designation is
necessary for a Standard Dividend Period and, provided further, that any
designation of a Special Dividend Period shall be effective only if (i) notice
thereof shall have been given as provided herein, (ii) any failure to pay in a
timely manner to the Auction Agent the full amount of any dividend on, or the
Redemption Price of, each Series shall have been cured as provided above, (iii)
Sufficient Clearing Orders shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Dividend
Period, (iv) if the Trust shall have mailed a Notice of Redemption with respect
to any shares of any Series, the redemption price with respect to such shares
shall have been deposited with the Paying Agent, and (v) in the case of the
designation of a Special Dividend Period, the Trust has confirmed that as of the
Auction Date next preceding the first day of such Special Dividend Period, it
has Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount, and the Trust has consulted with the
Broker-Dealers and has provided notice of such designation and a Preferred
Shares Basic Maintenance Certificate to each Rating Agency.
(b) If the Trust proposes to designate any Special Dividend Period, not
fewer than 7 Business Days (or two Business Days in the event the duration of
the Dividend Period prior to such Special Dividend Period is fewer than 8 days)
nor more than 30 Business Days prior to the first day of such Special Dividend
Period, notice shall be (i) made by press release and (ii) communicated by the
Trust by telephonic or other means to the Auction Agent and confirmed in writing
promptly thereafter. Each such notice shall state (A) that the Trust proposes to
exercise its option to designate a succeeding Special Dividend Period,
specifying the first and last days thereof, and (B) that the Trust will, by 3:00
p.m., New York City time, on the second Business Day next preceding the first
day of such Special Dividend Period, notify the Auction Agent, who will promptly
notify the Broker-Dealers, of either (x) its determination, subject to certain
conditions, to proceed with such Special Dividend Period, subject to the terms
of any Specific Redemption Provisions, or (y) its determination not to proceed
with such Special Dividend Period, in which latter event the succeeding Dividend
Period shall be a Standard Dividend Period. No later than 3:00 p.m., New York
City time, on the second Business Day
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next preceding the first day of any proposed Special Dividend Period, the Trust
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Trust has determined to designate
the next succeeding Dividend Period as a Special Dividend Period,
specifying the first and last days thereof, and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Trust has determined not to exercise
its option to designate a Special Dividend Period.
If the Trust fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the confirmation provided in clause (v) of Paragraph (a) of this Section 4
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Trust shall be deemed to
have delivered a notice to the Auction Agent with respect to such Dividend
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Dividend Period.
5. RESTRICTIONS ON TRANSFER.
Shares of each Series may be transferred only (a) pursuant to an order
placed in an Auction, (b) to or through a Broker-Dealer or (c) to the Trust or
any Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to
an Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the
Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding shares of any Series through different Broker-Dealers,
advises the Auction Agent of such transfer. The certificates representing the
shares of each Series issued to the Securities Depository will bear legends with
respect to the restrictions described above and stop-transfer instructions will
be issued to the Transfer Agent and/or Registrar.
6. VOTING RIGHTS.
(a) Except as otherwise provided in the Declaration or as otherwise
required by applicable law, (i) each Holder of shares of any Series shall be
entitled to one vote for each share of any Series held on each matter submitted
to a vote of shareholders of the Trust, and (ii) the holders of preferred
shares, including shares of each Series, and Common Shares shall vote together
as a single class on all matters submitted to shareholders; provided, however,
that, at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of preferred shares, including shares of each Series,
represented in person or by proxy at said meeting, shall be entitled, as a
class, to the exclusion of the holders of all other securities and classes of
shares of beneficial interest of the Trust, to elect two trustees of the Trust,
with each preferred share entitling the holder thereof to one vote. Except as
set forth in paragraph (b) of this Section 6, the class of preferred shares,
including shares of each Series, shall not be entitled to participate in the
election of any other trustees of the Trust.
(b) During any period in which any one or more of the conditions described
below shall exist (such period being referred to herein as a "Voting Period"),
the number of trustees constituting the Board shall be automatically increased
by the smallest number that, when added to the two trustees elected exclusively
by the holders of preferred shares, including shares of each Series, would
constitute a majority of the Board as so increased by such smallest number; and
the holders of preferred shares, including shares of each Series, shall be
entitled, voting as a class on a one-vote-per-share basis (to the exclusion of
the holders of all other securities and classes of shares of beneficial interest
of the Trust), to elect such smallest number of additional trustees, together
with the two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(i) If, at the close of business on any Dividend Payment Date,
accumulated dividends (whether or not earned or declared) on preferred
shares, including shares of each Series, equal to at least two full years'
dividends shall be due and unpaid; or
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(ii) if at any time holders of any other preferred shares are entitled
under the 1940 Act to elect a majority of the trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the holders of preferred shares, including
shares of each Series, upon the further occurrence of any of the events
described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the holders of
preferred shares, including shares of each Series, to elect additional trustees
as described in paragraph (b) of this Section 6, the Trust shall notify the
Auction Agent, and the Auction Agent shall call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than 10 nor more than 90 days after the date of
mailing of such notice. If the Trust fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting, it may be
called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred shares, including shares of each Series, held during a Voting Period
at which trustees are to be elected, such holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of shares
of beneficial interest of the Trust), shall be entitled to elect the number of
trustees prescribed in paragraph (b) of this Section 6 on a one-vote-per-share
basis.
(d) The holders of preferred shares, including shares of each Series, may
also have such other voting rights as are contemplated by Article III of the
Trust's Declaration.
(e) For purposes of determining any rights of the holders of preferred
shares, including shares of each Series, to vote on any matter, whether such
right is created by the Certificate, by statute or otherwise, if redemption of
some or all of the preferred shares, including shares of each Series, is
required, no holder of preferred shares, including shares of each Series, shall
be entitled to vote and no preferred shares, including shares of each Series,
shall be deemed to be "outstanding" for the purpose of voting or determining the
number of shares required to constitute a quorum, if, prior to or concurrently
with the time of determination, sufficient Deposit Securities for the redemption
of such shares have been deposited, in the case of Preferred Shares, in trust
with the Paying Agent for that purpose and the requisite Notice of Redemption
with respect to such shares shall have been given as provided in Section 3(b) of
Part I of this Certificate and, in the case of other preferred shares, the Trust
has otherwise met the conditions for redemption applicable to such preferred
shares.
(f) The terms of office of all persons who are trustees of the Trust at the
time of a special meeting of Holders of the Preferred Shares and holders of
other preferred shares to elect trustees pursuant to paragraph (b) of this
Section 6 shall continue, notwithstanding the election at such meeting by the
holders of the number of trustees that they are entitled to elect and the
persons so elected by such holders, together with the two incumbent trustees
elected by such holders and the remaining incumbent trustees, shall constitute
the duly elected trustees of the Trust.
(g) Simultaneously with the termination of a Voting Period, the terms of
office of the additional trustees elected by the Holders of the Preferred Shares
and holders of other preferred shares pursuant to paragraph (b) of this Section
6 shall terminate, the remaining trustees shall constitute the trustees of the
Trust and the voting rights of such holders to elect additional trustees
pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(h) Unless otherwise required by law or in the Trust's charter documents,
the Holders of Preferred Shares shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein. In the event that the Trust fails to pay any dividends on the Preferred
Shares of the Trust or fails to redeem any Preferred Shares which it is required
to redeem, or any other event occurs which requires the mandatory redemption of
Preferred Shares, and the required Notice of Redemption has not been given,
other than the rights set forth in paragraph (a) of Section 3 of Part I of this
Certificate, the exclusive remedy of the
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Holders of Preferred Shares shall be the right to vote for trustees pursuant to
the provisions of paragraph (b) of this Section 6. In no event shall the Holders
of Preferred Shares have any right to sue for, or bring a proceeding with
respect to, such dividends or redemptions or damages for the failure to receive
the same.
(i) So long as any of preferred shares are outstanding, the Trust will not,
without the affirmative vote of the holders of a majority of the outstanding
preferred shares, (i) amend, alter or repeal any of the preferences, rights or
powers of such class so as to affect materially and adversely such preferences,
rights or powers; (ii) increase the authorized number of Preferred Shares; (iii)
create, authorize or issue shares of any class of shares ranking senior to or on
parity with the Preferred Shares or any other series of preferred shares with
respect to the payment of dividends or the distribution of assets on
liquidation; (iv) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Trust or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (v) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Trust's assets as a whole, except (A) liens the
validity of which are being contested in good faith by appropriate proceedings,
(B) liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (C) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness senior to the preferred shares, (D) liens, pledges, charges,
security interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under clause (vi) below and (E) liens
to secure payment for services rendered including, without limitation, services
rendered by the Trust's Paying Agent and the Auction Agent; or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Trust may
borrow as may be permitted by the Trust's investment restrictions; provided,
however, that transfers of assets by the Trust subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision
to the extent that after any such transaction the Trust has Eligible Assets with
an aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount as of the immediately preceding Valuation Date.
(j) The affirmative vote of the holders of a majority of the outstanding
preferred shares, including shares of each Series, voting as a separate class,
shall be required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares or any action requiring a vote of
security holders of the Trust under Section 13(a) of the 1940 Act. In the event
a vote of holders of preferred shares is required pursuant to the provisions of
Section 13(a) of the 1940 Act, the Trust shall, not later than ten Business Days
prior to the date on which such vote is to be taken, notify each Rating Agency
that such vote is to be taken and the nature of the action with respect to which
such vote is to be taken and shall, not later than ten Business Days after the
date on which such vote is taken, notify each Rating Agency of the results of
such vote.
(k) The affirmative vote of the holders of a majority of the outstanding
preferred shares of any series, voting separately from any other series, shall
be required with respect to any matter that materially and adversely affects the
rights, preferences or powers of that series in a manner different from that of
other series or classes of the Trust's shares of beneficial interest. For
purposes of the foregoing, no matter shall be deemed to adversely affect any
right, preference or power unless such matter (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right
in respect of redemption of such series; or (iii) creates or alters (other than
to abolish) any restriction on transfer applicable to such series. The vote of
holders of any series described in this Section 6(k) will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or
preferred shares, if any, necessary to authorize the action in question.
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(l) The Board, without the vote or consent of any holder of preferred
shares, including shares of each series, or any other shareholder of the Trust,
may from time to time amend, alter or repeal any or all of the definitions
contained herein, add covenants and other obligations of the Trust or confirm
the applicability of covenants and other obligations set forth herein, all in
connection with obtaining or maintaining the rating of any Rating Agency with
respect to each Series, and any such amendment, alteration or repeal will not be
deemed to affect the preferences, rights or powers of Preferred Shares or the
Holders thereof, provided that the Board receives written confirmation from each
relevant Rating Agency (with such confirmation in no event being required to be
obtained from a particular Rating Agency with respect to definitions or other
provisions relevant only to and adopted in connection with another Rating
Agency's rating of any Series) that any such amendment, alteration or repeal
would not adversely affect the rating then assigned by such Rating Agency.
In addition, subject to compliance with applicable law, the Board may amend
the definition of Maximum Rate to increase the percentage amount by which the
Reference Rate is multiplied to determine the Maximum Rate shown therein without
the vote or consent of the holders of preferred shares, including shares of each
Series, or any other shareholder of the Trust, and without receiving any
confirmation from any Rating Agency, after consultation with the Broker-Dealers,
provided that immediately following any such increase the Trust would meet the
Preferred Shares Basic Maintenance Amount Test.
(m) Unless otherwise required by law, Holders of shares of each Series
shall not have any relative rights or preferences or other special rights other
than those specifically set forth herein. The Holders of shares of each Series
shall have no rights to cumulative voting. In the event that the Trust fails to
pay any dividends on the shares of any Series, the exclusive remedy of the
Holders shall be the right to vote for trustees pursuant to the provisions of
this Section 6.
(n) The foregoing voting provisions will not apply with respect to any
series if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
7. LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Trust, whether voluntary or involuntary, the holders of all
outstanding preferred shares, including shares of each Series, shall be entitled
to receive out of the assets of the Trust (or the proceeds thereof) available
for distribution to shareholders, after claims of creditors but before any
distribution or payment shall be made in respect of the Common Shares or any
other shares of the Trust ranking junior to the preferred shares, as to
liquidation payments, a liquidation distribution in the amount of $25,000 per
share (the "Liquidation Preference"), plus an amount equal to all unpaid
dividends accrued to and including the date fixed for such distribution or
payment (whether or not declared by the Trust, but excluding interest thereon),
but such holders shall be entitled to no further participation in any
distribution or payment in connection with any such liquidation, dissolution or
winding up.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Trust, whether voluntary or involuntary, the assets of the Trust
available for distribution among the holders of all outstanding preferred
shares, including shares of each Series, shall be insufficient to permit the
payment in full to such holders of the amounts to which they are entitled, then
such available assets shall be distributed among the holders of preferred
shares, including shares of each Series, ratably in any such distribution of
assets according to the respective amounts which would be payable on all such
shares if all amounts thereon were paid in full. Unless and until payment in
full of the liquidation distributions to which they are entitled has been made
to the holders of preferred shares, including shares of each Series, no
dividends or distributions will be made to holders of Common Shares or any
shares of the Trust ranking junior to the preferred shares as to liquidation.
(c) Upon the dissolution, liquidation or winding up of the affairs of the
Trust, whether voluntary or involuntary, until payment in full is made to the
Holders of the Preferred Shares of the liquidation distribution to which they
are entitled, no dividend or other distribution shall be made to the holders of
shares of Common Shares or any other class of shares of beneficial interest of
the Trust ranking junior to the Preferred Shares
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upon dissolution, liquidation or winding up of the affairs of the Trust and no
purchase, redemption or other acquisition for any consideration by the Trust
shall be made in respect of the shares of Common Shares or any other class of
shares of beneficial interest of the Trust ranking junior to the Preferred
Shares upon dissolution, liquidation or winding up of the affairs of the Trust.
(d) Neither the consolidation nor merger of the Trust with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Trust of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Trust for purposes
of this Section 7.
(e) After the payment to Holders of Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Trust.
(f) In the event the assets of the Trust or proceeds thereof available for
distribution to the Holders of Preferred Shares, upon dissolution, liquidation
or winding up of the affairs of the Trust, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution shall
be made on account of any shares of any other series of preferred shares unless
proportionate distributive amounts shall be paid on account of the Preferred
Shares, ratably, in proportion to the full distributable amounts to which
holders of all preferred shares are entitled upon such dissolution, liquidation
or winding up.
(g) Subject to the rights of the holders of other preferred shares or after
payment shall have been made in full to the Holders of Preferred Shares as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Preferred Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust shall, subject to any respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets remaining to be
paid or distributed, and the Holders of the Preferred Shares shall not be
entitled to share therein.
8. AUCTION AGENT.
For so long as any Preferred Shares are Outstanding, the Auction Agent,
duly appointed by the Trust to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Trust and its
Affiliates (which, however, may engage or have engaged in business transactions
with the Trust or its Affiliates), and at no time shall the Trust or any of its
Affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any shares of any Series are Outstanding, the Trust shall
use its best efforts promptly thereafter to appoint another qualified commercial
bank, trust company or financial institution to act as the Auction Agent.
9. 1940 ACT PREFERRED SHARES ASSET COVERAGE.
The Trust shall maintain, as of the last Business Day of each month in
which any Preferred Shares are Outstanding, the 1940 Act Preferred Shares Asset
Coverage; provided, however, that Section 3(a)(ii) shall be the sole remedy in
the event the Trust fails to do so.
10. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
So long as any Preferred Shares are Outstanding and any Rating Agency so
requires, the Trust shall maintain, as of each Valuation Date, Moody's Eligible
Assets and Fitch Eligible Assets, as applicable, having an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount;
provided, however, that Section 3(a)(ii) shall be the sole remedy in the event
the Trust fails to do so.
B-14
11. [RESERVED]
12. CERTAIN OTHER RESTRICTIONS.
So long as any Preferred Shares are Outstanding and any Rating Agency so
requires, the Trust will not, unless it has received written confirmation from
such Rating Agency that any such action would not impair the rating then
assigned by such Rating Agency to the Preferred Shares, engage in any one or
more of the following transactions:
(a) purchase or sell futures contracts or options thereon with respect
to portfolio securities or write put or call options on portfolio
securities;
(b) except in connection with a refinancing of the Preferred Shares,
issue additional shares of any series of preferred shares, including any
Series, or reissue any preferred shares, including any Series previously
purchased or redeemed by the Trust;
(c) engage in any short sales of securities;
(d) lend portfolio securities;
(e) merge or consolidate into or with any other corporation;
(f) engage in any reverse repurchase agreement; or
(g) change the Pricing Service to a service other than an Approved
Pricing Service.
13. COMPLIANCE PROCEDURES FOR ASSET MAINTENANCE TESTS.
For so long as any Preferred Shares are Outstanding and any Rating Agency
so requires:
(a) As of each Valuation Date, the Trust shall determine (i) the
Market Value of each Eligible Asset owned by the Trust on that date, (ii)
the Discounted Value of each such Eligible Asset, (iii) whether the
Preferred Shares Basic Maintenance Amount Test is met as of that date, (iv)
the value (as used in the 1940 Act) of the total assets of the Trust, less
all liabilities, and (v) whether the 1940 Act Preferred Shares Asset
Coverage is met as of that date.
(b) Upon any failure to meet the Preferred Shares Basic Maintenance
Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
Date, the Trust may use reasonable commercial efforts (including, without
limitation, altering the composition of its portfolio, purchasing Preferred
Shares outside of an Auction or, in the event of a failure to file a
certificate on a timely basis, submitting the requisite certificate), to
meet (or certify in the case of a failure to file a certificate on a timely
basis, as the case may be) the Preferred Shares Basic Maintenance Amount
Test or 1940 Act Preferred Shares Asset Coverage on or prior to the Asset
Coverage Cure Date.
(c) [Reserved]
(d) The Trust shall deliver to each Rating Agency a certificate which
sets forth a determination of items (i)-(iii) of paragraph (a) of this
Section 13 (a "Preferred Shares Basic Maintenance Certificate") as of (A)
the Date of Original Issue, (B) the last Valuation Date of each month on or
before the third Business day after such day, (C) any date requested by any
Rating Agency, in each case on or before the third Business Day after such
day, (D) a Business Day on or before any Asset Coverage Cure Date relating
to the Trust's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, (E) any day in which the Fund shall fail to have
Moody's Eligible Assets or Fitch Eligible Assets with an aggregate
Discounted Value at least equal to 105% of the Preferred Shares Basic
Maintenance Amount, and (F) any day that Common or Preferred Shares are
repurchased. Such Preferred Shares Basic Maintenance Certificate shall be
delivered in the case of clause (i)(A) on the Date of Original Issue and in
the case of all other clauses, except as otherwise noted above, on or
before the seventh Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
B-15
(e) The Trust shall deliver to each Rating Agency a certificate which
sets forth a determination of items (iv) and (v) of paragraph (a) of this
Section 13 (a "1940 Act Preferred Shares Asset Coverage Certificate") (i)
as of the Date of Original Issue, and (ii) as of (A) the last Valuation
Date of each fiscal year thereafter, and (B) as of a Business Day on or
before any Asset Coverage Cure Date relating to the failure to meet the
1940 Act Preferred Shares Asset Coverage. Such 1940 Act Preferred Shares
Asset Coverage Certificate shall be delivered in the case of clause (i) on
the Date of Original Issue and in the case of clause (ii) on or before the
seventh Business Day after the relevant Valuation Date or the Asset
Coverage Cure Date. The certificates required by paragraphs (d) and (e) of
this Section 13 may be combined into a single certificate.
(f) [Reserved]
(g) Within ten Business Days of the Date of Original Issue, the Trust
shall deliver to each Rating Agency a letter prepared by the Trust's
independent auditors (an "Auditor's Certificate") regarding the accuracy of
the calculations made by the Trust in the Preferred Shares Basic
Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate required to be delivered by the Trust on the Date of Original
Issue. Within ten Business Days after delivery of the Preferred Shares
Basic Maintenance Certificate and the 1940 Act Preferred Shares Asset
Coverage Certificate relating to the last Valuation Date of each fiscal
year of the Trust, the Trust will deliver to each Rating Agency an
Auditor's Certificate regarding the accuracy of the calculations made by
the Trust in such Certificates. In addition, the Trust will deliver to the
persons specified in the preceding sentence an Auditor's Certificate
regarding the accuracy of the calculations made by the Trust on each
Preferred Shares Basic Maintenance Certificate and 1940 Act Preferred
Shares Asset Coverage Certificate delivered in relation to an Asset
Coverage Cure Date within ten days after the relevant Asset Coverage Cure
Date. If an Auditor's Certificate shows that an error was made in any such
report, the calculation or determination made by the Trust's independent
auditors will be conclusive and binding on the Trust.
(h) The Auditor's Certificates referred to in paragraph (g) above will
confirm, based upon the independent auditors review of portfolio data
provided by the Trust, (i) the mathematical accuracy of the calculations
reflected in the related Preferred Shares Basic Maintenance Amount
Certificates and 1940 Act Preferred Shares Asset Coverage Certificates,
(ii) that, based upon such calculations, the Trust had, at such Valuation
Date, met the Preferred Shares Basic Maintenance Amount Test, and (iii)
that the Trust met the Moody's General Portfolio Requirements and the Fitch
General Portfolio Requirements, as applicable.
(i) In the event that a Preferred Shares Basic Maintenance Certificate
or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods
specified in this Section 13, the Trust shall be deemed to have failed to
meet the Preferred Shares Basic Maintenance Amount Test or the 1940 Act
Preferred Shares Asset Coverage, as the case may be, on such Valuation Date
for purposes of Section 13(b) of Part I of this Certificate. In the event
that a Preferred Shares Basic Maintenance Certificate, a 1940 Act Preferred
Shares Asset Coverage Certificate or an applicable Auditor's Certificate
with respect to an Asset Coverage Cure Date is not delivered within the
time periods specified herein, the Trust shall be deemed to have failed to
meet the Preferred Shares Basic Maintenance Amount Test or the 1940
Preferred Shares Asset Coverage, as the case may be, as of the related
Valuation Date.
14. [RESERVED]
15. NOTICE.
All notices or communications hereunder, unless otherwise specified in this
Certificate, shall be sufficiently given if in writing and delivered in person,
by telecopier or mailed by first-class mail, postage prepaid. Notices delivered
pursuant to this Section 15 shall be deemed given on the earlier of the date
received or the date five days after which such notice is mailed.
B-16
16. WAIVER.
To the extent permitted by Massachusetts law, holders of at least
two-thirds of the Outstanding Preferred Shares, acting collectively, or each
Series, acting as a separate series, may waive any provision hereof intended for
their respective benefit in accordance with such procedures as may from time to
time be established by the Board.
17. TERMINATION.
In the event that no Preferred Shares are Outstanding, all rights and
preferences of such shares established and designated hereunder shall cease and
terminate, and all obligations of the Trust under this Certificate shall
terminate.
18. AMENDMENT.
Subject to the provisions of this Certificate, the Board may, by resolution
duly adopted without shareholder approval (except as otherwise provided by this
Certificate or required by applicable law), amend this Certificate to (1)
reflect any amendments hereto which the Board is entitled to adopt pursuant to
the terms of Section 6(l) of Part I of this Certificate without shareholder
approval or (2) add additional shares of each Series (and terms relating
thereto). All such additional shares shall be governed by the terms of this
Certificate. To the extent permitted by applicable law, the Board may interpret,
amend or adjust the provisions of this Certificate to resolve any inconsistency
or ambiguity or to remedy any patent defect.
19. DEFINITIONS.
As used in Part I and Part II of this Certificate, the following terms
shall have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are shares
of beneficial interest, including all Outstanding Preferred Shares (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares of
beneficial interest of a closed-end investment company as a condition of
declaring dividends on its common shares), determined on the basis of values
calculated as of a time within 48 hours (not including Sundays or holidays) next
preceding the time of such determination.
"1940 Act Preferred Shares Asset Coverage Certificate" means the
certificate required to be delivered by the Trust pursuant to Section 13(e) of
Part I of this Certificate.
"Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Trust; provided that Van
Kampen Asset Management shall not be deemed to be an Affiliate nor shall any
corporation or any person controlled by, in control of or under common control
with such corporation, one of the trustees, directors or executive officers of
which is also a trustee, director or executive officer of the Trust, be deemed
to be an Affiliate.
"Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Rate" means 80% of the LIBOR Rate.
"Applicable Rate" (the rate per annum at which cash dividends are payable
on each Series) means, with respect to each Series for each Dividend Period, (i)
if Sufficient Clearing Orders exist for the Auction in respect thereof, the
Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist for the
Auction in respect thereof, the Maximum Rate.
B-17
"Approved Price" means the "fair value" as determined by the Trust in
accordance with the valuation procedures adopted from time to time by the Board
of Trustees and for which the Trust receives a marked-to-market price (which,
for the purpose of clarity, shall not mean a Market Value Price) from an
independent source at least semi-annually.
"Approved Pricing Service" means Loan Pricing Corporation or any other
quotation service designated in writing by the Trust provided that no Rating
Agency has objected, in its reasonable discretion, in writing to the Trust
within ten business days of receipt of the Trust's written notice of the
designation of such quotation service.
"Asset Coverage Cure Date" has the meaning set forth in Section 3(a)(ii) of
this Certificate.
"Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
"Auction Agent" means The Bank of New York Company unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board enters into an agreement with the Trust to follow the
Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" means the first Business Day next preceding the first day of
a Dividend Period for each Series.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Part II hereof.
"Auditor's Certificate" has the meaning set forth in Section 13(g) of Part
I of this Certificate.
"Beneficial Owner," with respect to shares of each Series, means a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a holder of shares of such series.
"Bid" has the meaning set forth in Section 2(a)(ii) of Part II of this
Certificate.
"Bidder" has the meaning set forth in Section 2(a)(ii) of Part II of this
Certificate; provided, however, that neither the Trust nor any Affiliate shall
be permitted to be a Bidder in an Auction.
"Board" means the Board of Trustees of the Trust or any duly authorized
committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Trust and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York, New York are authorized or obligated by law to close.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, par value
$0.01 per share, of the Trust.
"Date of Original Issue" means the date on which a Series is originally
issued by the Trust.
"Default Period" has the meaning set forth in Sections 2(c) (ii) or (iii)
of Part I of this Certificate.
"Default Rate" means the Reference Rate multiplied by three (3).
B-18
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or
MIG-1 by Moody's or AAA or F-1 by Fitch.
"Discounted Value" means the product of the Market Value (plus accrued
interest) of an Eligible Asset multiplied by the applicable Advance Rate.
"Dividend Default" has the meaning set forth in Section 2(c)(ii) of Part I
of this Certificate.
"Dividend Payment Date" means (i) with respect to any Dividend Period of
one year or less, the Business Day next succeeding the last day thereof and, if
any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.
"Dividend Period" means, with respect to each Series, the period commencing
on the Date of Original Issue thereof and ending on the date specified for such
series on the Date of Original Issue thereof and thereafter, as to such Series,
the period commencing on the day following each Dividend Period for such Series
and ending on the day established for such Series by the Trust.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating
the Preferred Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares), whichever is applicable.
"Existing Holder" has the meaning set forth in Section 1 of Part II of this
Certificate.
"Fitch" means Fitch Ratings and its successors at law.
"Fitch Discount Factor" means, for purposes of determining the Discounted
Value of any Fitch Eligible Asset, the percentage determined as follows. The
Fitch Discount Factor for any Fitch Eligible Asset other than the securities set
forth below will be the percentage provided in writing by Fitch.
(i) Senior Loans: The Fitch Discount Factor applied to senior, secured
floating rate Loans made to corporate and other business entities ("Senior
Loans") shall be the percentage specified in the table below opposite such
Fitch Loan Category:
FITCH LOAN CATEGORY DISCOUNT FACTOR
------------------- ---------------
A........................................................... 115%
B........................................................... 130%
C........................................................... 152%
D........................................................... 370%
B-19
(ii) Corporate Debt Securities: The percentage determined by reference
to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below.
DISCOUNT FACTORS FOR CORPORATE DEBT SECURITIES INCLUDING NON-INVESTMENT
GRADE BONDS (NON-CONVERTIBLES)
TERMS TO MATURITY OF
NON-INVESTMENT GRADE BONDS AAA AA A BBB BB B NR(1)
-------------------------- --- --- --- --- --- --- -----
1 year or less.................................. 106% 108% 110% 112% 130% 152% 152%
2 years or less (but longer than 1 year)........ 106 108 110 112 130 152 152
3 years or less (but longer than 2 years)....... 106 108 110 112 130 152 152
4 years or less (but longer than 3 years)....... 111 113 115 117 134 152 152
5 years or less (but longer than 4 years)....... 111 113 115 117 134 152 152
7 years or less (but longer than 5 years)....... 114 116 118 120 136 152 152
10 years or less (but longer than 7 years)...... 116 118 120 122 137 152 152
15 years or less (but longer than 10 years)..... 120 122 124 124 139 152 152
30 years or less (but longer than 15 years)..... 124 127 129 129 145 152 152
Greater than 30 years........................... 124 127 129 129 145 152 152
---------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on a
security is a Moody's rating of Ba, a Fitch rating of BB will be used). If a
security is not rated by any Rating Agency, the Trust will use the
percentage set forth under "not rated" in this table. Securities rated below
B by Fitch shall be traded the same as securities not rated by Fitch.
The Fitch Discount Factors presented in the immediately preceding table
apply to corporate debt securities that are Performing and have a Market Value
determined by a Pricing Service or an Approved Price. The Fitch Discount Factor
noted in the table above for a debt security rated B by Fitch shall apply to any
non-Performing debt security with a price equal to or greater than $0.90. The
Fitch Discount Factor noted in the table above for a debt security rated CCC by
Fitch shall apply to any non-Performing debt security with a price less than
$0.90 but equal to or greater than $0.20. If a debt security does not have a
Market Value determined by a Pricing Service or an Approved Price, a rating two
rating categories below the actual rating on the debt security will be used
(e.g., where the actual rating is A-, the rating for Debt Securities rated BB-
will be used). The Fitch Discount Factor for a debt security issued by a limited
partnership that is not a Rule 144A Security shall be the Discount Factor
determined in accordance with the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately preceding table
will also apply to corporate obligations backed by a guaranty, a letter of
credit or insurance issued by a third party. If the third-party credit rating is
the basis for the rating on the obligation, then the rating on the third party
will be used to determine the Fitch Discount Factor in the table.
(iii) Common stock: The Fitch Discount Factors for large-cap stocks
(i.e., common stocks of companies with a market capitalization of greater
than $10 billion) shall be 200%; for mid-cap stocks (i.e., common stocks of
companies with a market capitalization of between $2 billion and $10
billion) shall be 233%; for small-cap stocks (i.e., common stocks of
companies with a market capitalization of between $300 million and $2
billion) shall be 286%; and for all other common stocks shall be 370%.
B-20
(iv) Preferred stock: The percentage determined by references to the
rating of a preferred stock in accordance with the table set forth below:
PREFERRED STOCK(1) DISCOUNT FACTOR
------------------ ---------------
AAA......................................................... 130%
AA.......................................................... 133%
A........................................................... 135%
BBB......................................................... 139%
BB.......................................................... 154%
Not rated or below BB....................................... 161%
Investment Grade DRD........................................ 164%
Not rated or below Investment Grade DRD..................... 200%
---------------
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by only
one other Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount Factor (e.g.,
where the only rating on a security is an S&P rating of AAA, a Fitch rating
of AAA will be used, and where the only rating on a security is a Moody's
rating of Ba, a Fitch rating of BB will be used). If a security is not rated
by any Rating Agency, the Trust will use the percentage set forth under "not
rated" in this table.
(v) Convertible securities: The Fitch Discount Factor applied to
convertible securities is (A) 200% for investment grade convertibles and
(B) 222% for below investment grade convertibles so long as such
convertible debt securities have neither (x) conversion premium greater
than 100% nor (y) have a yield to maturity or yield to worst of greater
than 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have
conversion premiums of greater than 100% is (A) 152% for investment grade
convertibles and (B) 179% for below investment grade convertibles so long as
such convertible debt securities do not have a yield to maturity or yield to
worst of greater than 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have
a yield to maturity or yield to worse of greater than 15.00% above the relevant
Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A and the Moody's rating is Baa, a Fitch rating of BBB will be
used). If a security is not rated by Fitch but is rated by only one other Rating
Agency, then the rating on the security from the other Rating Agency will be
used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where
the only rating on a security is a Moody's rating of Ba, a Fitch rating of BB
will be used). If a security is not rated by any Rating Agency, the Trust will
treat the security as if it were below investment grade.
B-21
(vi) U.S. Government Securities:
TIME REMAINING TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year or less.............................................. 101.5%
2 years or less (but longer than 1 year).................... 103%
3 years or less (but longer than 2 years)................... 105%
4 years or less (but longer than 3 years)................... 107%
5 years or less (but longer than 4 years)................... 109%
7 years or less (but longer than 5 years)................... 112%
10 years or less (but longer than 7 years).................. 114%
15 years or less (but longer than 10 years)................. 122%
20 years or less (but longer than 15 years)................. 130%
25 years or less (but longer than 20 years)................. 146%
Greater than 30 years....................................... 154%
(vii) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without limitation
Debt Securities, Short Term Money Market Instruments and municipal debt
obligations, will be (A) 100%, so long as such portfolio securities mature
or have a demand feature at par exercisable within the Fitch Exposure
Period; (B) 115%, so long as such portfolio securities mature or have a
demand feature at par not exercisable within the Fitch Exposure Period; and
(C) 125%, so long as such portfolio securities neither mature nor have a
demand feature at par exercisable within the Fitch Exposure Period. A Fitch
Discount Factor of 100% will be applied to cash.
(viii) Rule 144A Securities: The Fitch Discount Factor applied to Rule
144A Securities shall be the Discount Factor determined in accordance with
the table above under Corporate Debt Securities in subsection (i)
multiplied by 110% until such securities are registered under the
Securities Act.
(ix) MBS, asset-backed and other mortgage-backed securities:
MBS: U.S. Government Agency (FNMA, FHLMC or GNMA) conforming
mortgage-backed securities with an original stated maturity of more than 15
years shall have a discount factor of 114% and conforming mortgage-backed
securities with an original stated maturity of 15 years or less shall have a
discount factor of 111%.
B-22
Asset-backed and other mortgage-backed securities: The percentage
determined by reference to the asset type in accordance with the table set forth
below.
ASSET TYPE
(WITH TIME REMAINING TO
MATURITY, IF APPLICABLE) DISCOUNT FACTOR
------------------------ ---------------
U.S. Treasury/agency securities (10 years or less).......... 118%
U.S. Treasury/agency securities (greater than 10 years)..... 127%
U.S. agency sequentials (10 years or less).................. 120%
U.S. agency sequentials (greater than 10 years)............. 142%
U.S. agency principal only securities....................... 236%
U.S. agency interest only securities (with Market Value
greater than $0.40)....................................... 696%
U.S. agency interest only securities (with Market Value less
than or equal to $0.40)................................... 271%
AAA Lock-Out securities, interest only...................... 236%
U.S. agency planned amortization class bonds (10 years or
less)..................................................... 115%
U.S. agency planned amortization class bonds (greater than
10 years)................................................. 136%
AAA sequentials (10 years or less).......................... 118%
AAA sequentials (greater than 10 years)..................... 135%
AAA planned amortization class bonds (10 years or less)..... 115%
AAA planned amortization class bonds (greater than 10
years).................................................... 140%
Jumbo mortgage rated AAA(1)................................. 123%
Jumbo mortgage rated AA(1).................................. 130%
Jumbo mortgage rated A(1)................................... 136%
Jumbo mortgage rated BBB(1)................................. 159%
Commercial mortgage-backed securities rated AAA............. 131%
Commercial mortgage-backed securities rated AA.............. 139%
Commercial mortgage-backed securities rated A............... 148%
Commercial mortgage-backed securities rated BBB............. 177%
Commercial mortgage-backed securities rated BB.............. 283%
Commercial mortgage-backed securities rated B............... 379%
Commercial mortgage-backed securities rated CCC or not
rated..................................................... 950%
---------------
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity loans,
manufactured housing and prime mortgage-backed securities not issued by a
U.S. agency or instrumentality.
(x) Futures and call options: For purposes of the Preferred Shares
Basic Maintenance Amount, futures held by the Trust and call options sold
by the Trust shall not be included as Fitch Eligible Assets. However, such
assets shall be valued at Market Value by subtracting the good faith margin
and the maximum daily trading variance as of a Valuation Date. For call
options purchased by the Trust, the Market Value of the call option will be
included as Fitch Eligible Asset subject to a Fitch Discount Factor
mutually agreed to between the Trust and Fitch based on the characteristics
of the option contract such as its maturity and the underlying security of
the contract.
(xi) Securities lending: The Trust may engage in securities lending in
an amount not to exceed 15% of the Trust's total gross assets. For purposes
of calculating the Preferred Shares Basic Maintenance Amount, such
securities lent shall be included as Fitch Eligible Assets with the
appropriate Fitch Discount Factor applied to such lent security. The
obligation to return such collateral shall not be included as an
obligation/liability for purposes of calculating the Preferred Shares Basic
Maintenance Amount. However, the Fund may reinvest cash collateral for
securities lent in conformity with its investment objectives and policies
and the provisions of this Certificate of Vote. In such event, to the
B-23
extent that securities lending collateral received is invested by the Fund
in assets that otherwise would be Fitch Eligible Assets and the value of
such assets exceeds the amount of the Fund's obligation to return the
collateral on a Valuation Date, such excess amount shall be included in the
calculation of Fitch Eligible Assets by applying the applicable Fitch
Discount Factor to this amount and adding the product to total Fitch
Eligible Assets. Conversely, if the value of assets in which securities
lending collateral has been invested is less then the amount of the Fund's
obligation to return the collateral on a Valuation Date, such difference
shall be included as an obligation/liability of the Fund for purposes of
calculating the Preferred Shares Basic Maintenance Amount. Collateral
received by the Trust in a securities lending transaction and maintained by
the Trust in the form received shall not be included as a Fitch Eligible
Asset for purposes of calculating the Preferred Shares Basic Maintenance
Amount.
(xii) Swaps (including Total Return Swaps, Interest Rate Swaps and
Credit Default Swaps): Total Return and Interest Rate Swaps are subject to
the following provisions:
If the Trust has an outstanding gain from a swap transaction on a
Valuation Date, the gain will be included as a Fitch Eligible Asset subject
to the Fitch Discount Factor on the counterparty to the swap transaction.
At the time a swap is executed, the Trust will only enter into swap
transactions where the counterparty has at least a Fitch rating of A- or
Moody's rating of A3.
(A) Only the cumulative unsettled profit and loss from a Total
Return Swap transaction will be calculated when determining the
Preferred Shares Basic Maintenance Amount. If the Trust has an
outstanding liability from a swap transaction on a Valuation Date, the
Trust count such liability as an outstanding liability from the total
Fitch Eligible Assets in calculating the Preferred Shares Basic
Maintenance Amount.
(B) In addition, for swaps other than Total Return Swaps, the
Market Value of the position (positive or negative) will be included as
a Fitch Eligible Asset. The aggregate notional value of all swaps will
not exceed the Liquidation Preference of the Outstanding Preferred
Shares.
(C) (1) The underlying securities subject to a Credit Default Swap
sold by the Trust will be subject to the applicable Fitch Discount
Factor for each security subject to the swap;
(2) If the Trust purchases a Credit Default Swap and holds the
underlying security, the Market Value of the Credit Default Swap and
the underlying security will be included as a Fitch Eligible Asset
subject to the Fitch Discount Factor assessed based on the
counterparty risk; and
(3) The Trust will not include a Credit Default Swap as a Fitch
Eligible Asset purchased by the Trust without the Trust holding the
underlying security or when the Trust buys a Credit Default Swap for
a basket of securities without holding all the securities in the
basket.
"Fitch Eligible Asset" means:
(i) Senior Loans;
(ii) Cash (including interest and dividends due on assets rated (A)
BBB or higher by Fitch or the equivalent by another Rating Agency if the
payment date is within five (5) Business Days of the Valuation Date, (B) A
or higher by Fitch or the equivalent by another Rating Agency if the
payment date is within thirty days of the Valuation Date, and (C) A+ or
higher by Fitch or the equivalent by another Rating Agency if the payment
date is within the Fitch Exposure Period) and receivables for Fitch
Eligible Assets sold if the receivable is due within five (5) Business Days
of the Valuation Date, and if the trades which generated such receivables
are settled within five (5) Business Days;
(iii) Short Term Money Market Instruments so long as (A) such
securities are rated at least F1+ by Fitch or the equivalent by another
Rating Agency, (B) in the case of demand deposits, time deposits and
overnight funds, the supporting entity is rated at least A by Fitch or the
equivalent by another Rating Agency, or (C) in all other cases, the
supporting entity (1) is rated at least A by Fitch or the equivalent by
another Rating Agency and the security matures within one month, (2) is
rated at least A by Fitch or
B-24
the equivalent by another Rating Agency and the security matures within
three months or (3) is rated at least AA by Fitch or the equivalent by
another Rating Agency and the security matures within six months;
(iv) U.S. Government Securities;
(v) debt securities if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws
but are eligible for resale pursuant to Rule 144A under the Securities Act
as determined by the Trust's investment manager or portfolio manager acting
pursuant to procedures approved by the Board of Trustees of the Trust; and
such securities are issued by (1) a U.S. corporation, limited liability
company or limited partnership, (2) a corporation, limited liability
company or limited partnership domiciled in Argentina, Australia, Brazil,
Chile, France, Germany, Italy, Japan, Korea, Mexico, Spain or the United
Kingdom or other country if Fitch does not inform the Trust that including
debt securities from such foreign country will adversely impact Fitch's
rating of the APS (the "Approved Foreign Nations"), (3) the government of
any Approved Foreign Nation or any of its agencies, instrumentalities or
political subdivisions (the debt securities of Approved Foreign Nation
issuers being referred to collectively as "Foreign Bonds"), (4) a
corporation, limited liability company or limited partnership domiciled in
Canada or (5) the Canadian government or any of its agencies,
instrumentalities or political subdivisions (the debt securities of
Canadian issuers being referred to collectively as "Canadian Bonds").
Foreign Bonds held by the Trust will qualify as Fitch Eligible Assets only
up to a maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Similarly, Canadian Bonds held by the
Trust will qualify as Fitch Eligible Assets only up to a maximum of 20% of
the aggregate Market Value of all assets constituting Fitch Eligible
Assets. Notwithstanding the limitations in the two preceding sentences,
Foreign Bonds and Canadian Bonds held by the Trust will qualify as Fitch
Eligible Assets only up to a maximum of 30% of the aggregate Market Value
of all assets constituting Fitch Eligible Assets. All debt securities
satisfying the foregoing requirements and restrictions of this paragraph
(iv) are herein referred to as "Debt Securities;"
(vi) Common stocks (i) (A) which are traded on the New York Stock
Exchange, the American Stock Exchange or in the over-the-counter market,
(B) which, if cash dividend paying, pay cash dividends in U.S. dollars, and
(C) which may be sold without restriction by the Fund; provided, however,
that (1) common stock which, while a Fitch Eligible Asset owned by the
Fund, ceases paying any regular cash dividend will no longer be considered
a Fitch Eligible Asset until 60 calendar days after the date of the
announcement of such cessation, unless the issuer of the common stock has
senior debt securities rated at least A- by Fitch and (2) the aggregate
Market Value of the Fund's holdings of the common stock of any issuer in
excess of 5% per U.S. issuer of the number of outstanding shares times the
Market Value of such common stock shall not be a Fitch's Eligible Asset;
(ii) securities denominated in any currency other than the U.S. dollar and
securities of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
dollar-denominated American Depository Receipts ("ADRs") which are traded
in the United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the
District of Columbia; provided, however, that the aggregate Market Value of
the Fund's holdings of securities denominated in currencies other than the
U.S. dollar and ADRs in excess of 3% of the aggregate Market Value of the
Outstanding shares of common stock of such issuer or in excess of 10% of
the Market Value of the Fund's Fitch Eligible Assets with respect to
issuers formed under the laws of any single such non-U.S. jurisdiction
other than Argentina, Australia, Brazil, Chile, France, Germany, Italy,
Japan, Korea, Mexico, Spain or the United Kingdom (the "Approved Foreign
Nations") shall not be a Fitch Eligible Asset;
(vii) Preferred stocks if (i) dividends on such preferred stock are
cumulative, (ii) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars or euros and do not provide for
conversion or exchange into, or have warrants attached entitling the holder
to receive equity capital at any time over the respective lives of such
securities, (iii) the issuer of such a preferred stock has common stock
listed on either the New York Stock Exchange or the American Stock
Exchange, (iv) the issuer of such a preferred stock has a senior debt
rating or preferred stock rating from Fitch of BBB- or higher or
B-25
the equivalent rating by another Rating Agency. In addition, the preferred
stocks issue must be at least $50 million;
(viii) asset-backed and MBS;
(ix) Rule 144A Securities;
(x) Interest Rate Swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (1) the counterparty to the swap
transaction has a short-term rating of not less than F1 by Fitch or the
equivalent by another Rating Agency, or, if the swap counterparty does not
have a short-term rating, the counterparty's senior unsecured long-term
debt rating is AA or higher by Fitch or the equivalent by another Rating
Agency and (2) the original aggregate notional amount of the Interest Rate
Swap transaction or transactions is not greater than the liquidation
preference of the Preferred Shares originally issued;
(xi) swaps, including total return and Credit Default Swaps entered
into according to ISDA; and
(xii) Fitch Hedging Transactions.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of
the 1940 Act, not otherwise provided for in this definition may be included in
Fitch Eligible Assets, but, with respect to any financial contract, only upon
receipt by the Trust of a writing from Fitch specifying any conditions on
including such financial contract in Fitch Eligible Assets and assuring the
Trust that including such financial contract in the manner so specified would
not affect the credit rating assigned by Fitch to the Preferred Shares.
Where the Trust sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the APS Basic Maintenance Amount.
Where the Trust purchases an asset and agrees to sell it to a third party
in the future, cash receivable by the Trust thereby will constitute a Fitch
Eligible Asset if the long-term debt of such other party is rated at least A- by
Fitch or the equivalent by another Rating Agency and such agreement has a term
of 30 days or less; otherwise the Discounted Value of such purchased asset will
constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any liens, except for (A)
liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Trust will not affect the status of such asset
as a Fitch Eligible Asset, (B) liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) liens to secure payment for
services rendered or cash advanced to the Trust by its investment manager or
portfolio manager, the Trust's custodian, transfer agent or registrar or the
Auction Agent and (D) liens arising by virtue of any repurchase agreement.
Fitch Diversification Limitations:
Portfolio holdings as described below must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM
SECURITY RATED AT LEAST ISSUER(1) INDUSTRY(1),(2) ISSUE SIZE
----------------------- -------------- --------------- ------------------
($ IN MILLION)(3)
AAA.................................... 100% 100% $100
AA-.................................... 20 75 100
A-..................................... 10 50 100
BBB-................................... 6 25 100
BB-.................................... 4 16 50
B-..................................... 3 12 50
CCC.................................... 2 8 50
---------------
(1) Percentages represent a portion of the aggregate Market Value of corporate
debt securities.
(2) Industries are determined according to Fitch's Industry Classifications, as
defined herein.
B-26
(3) Preferred stock has a minimum issue size of $50 million.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A and the Moody's rating is Baa, a Fitch rating of BBB will be
used). If a security is not rated by Fitch but is rated by only one other Rating
Agency, then the rating on the security from the other Rating Agency will be
used to determine the Fitch Diversification Limitations (e.g., where the only
rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be
used, and where the only rating on a security is a Moody's rating of Ba, a Fitch
rating of BB will be used). If a security is not rated by any Rating Agency, the
Trust will use the percentage set forth under "not rated" in this table.
"Fitch Exposure Period" means the period commencing on (and including) a
given Valuation Date and ending 41 days thereafter.
"Fitch General Portfolio Requirements" means that the Trust's portfolio
must meet the following diversification requirements: (a) no more than 25% by
par value of the Trust's total assets can be invested in the securities of
borrowers and other issuers having their principal business activities in the
same Fitch Industry Classification; provided, that this limitation shall not
apply with respect to U.S. Government Securities and provided further that for
purposes of this subsection (a), the term "issuer" shall not include a lender
selling a participation to the Trust or any other person interpositioned between
such lender and the Trust with respect to a participation and (b) no more than
10% by par value of the Trust's total assets can be invested in securities of a
single issuer, and provided further that for purposes of this subsection (b),
the term "issuer" includes both the borrower under a loan agreement and the
lender selling a participation to the Trust together with any other persons
interpositioned between such lender and the Trust with respect to such
participation.
"Fitch Hedging Transactions" means purchases or sales of exchange-traded
financial futures contracts based on any index approved by Fitch, LIBOR or
Treasury Bonds, and purchases, writings or sales of exchange-traded put options
on such futures contracts, and purchases, writings or sales of exchange-traded
call options on such financial futures contracts, and put and call options on
such financial futures contracts ("Fitch Hedging Transactions"), subject to the
following limitations:
(i) The Trust may not engage in any Fitch Hedging Transaction based on
any index approved by Fitch (other than transactions that terminate a
futures contract or option held by the Trust by the Trust's taking the
opposite position thereto ("closing transactions")) that would cause the
Trust at the time of such transaction to own or have sold outstanding
financial futures contracts based on such index exceeding in number 10% of
the average number of daily traded financial futures contracts based on
such index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal.
(ii) The Trust will not engage in any Fitch Hedging Transaction based
on Treasury Bonds or LIBOR (other than closing transactions) that would
cause the Trust at the time of such transaction to own or have sold:
(A) Outstanding financial futures contracts based on Treasury Bonds
or LIBOR with such contracts having an aggregate Market Value exceeding
60% of the aggregate Market Value of Fitch Eligible Assets owned by the
Trust and at least rated AA by Fitch (or, if not rated by Fitch Ratings,
rated at least Aa by Moody's; or, if not rated by Moody's, rated AAA by
S&P); or
(B) Outstanding financial futures contracts based on Treasury Bonds
or LIBOR with such contracts having an aggregate Market Value exceeding
40% of the aggregate Market Value of all Fitch Eligible Assets owned by
the Trust (other than Fitch Eligible Assets already subject to a Fitch
Hedging Transaction) and rated at least A or BBB by Fitch (or, if not
rated by Fitch Ratings, rated at least Baa by Moody's; or, if not rated
by Moody's, rated at least A or AA by S&P) (for purposes of the
foregoing clauses (i) and (ii), the Trust shall be deemed to own futures
contracts that underlie any outstanding options written by the Trust);
B-27
(iii) The Trust may engage in closing transactions to close out any
outstanding financial futures contract based on any index approved by Fitch
if the amount of open interest in such index as reported by The Wall Street
Journal is less than an amount to be mutually determined by Fitch and the
Trust.
(iv) The Trust may not enter into an option or futures transaction
unless, after giving effect thereto, the Trust would continue to have Fitch
Eligible Assets with an aggregate Discounted Value equal to or greater than
the Preferred Shares Basic Maintenance Amount.
"Fitch Industry Classification" means, for the purposes of determining
Fitch Eligible Assets, each of the following industry classifications:
FITCH INDUSTRY CLASSIFICATIONS
(MAJOR GROUPS) SIC CODE
------------------------------ ------------------
Aerospace and Defense....................................... 37, 45
Automobiles................................................. 37, 55
Banking, Finance and Real Estate............................ 60, 65, 67
Broadcasting and Media...................................... 27, 48
Building and Materials...................................... 15-17, 32, 52
Cable....................................................... 48
Chemicals................................................... 28, 30
Computers and Electronics................................... 35, 36
Consumer Products........................................... 23, 51
Energy...................................................... 13, 29, 49
Environmental Services...................................... 87
Farming and Agriculture..................................... 1-3, 7-9
Food, Beverage and Tobacco.................................. 20, 21, 54
Gaming, Lodging and Restaurants............................. 70, 58
Health Care and Pharmaceuticals............................. 38, 28, 80
Industrial/Manufacturing.................................... 35
Insurance................................................... 63, 64
Leisure and Entertainment................................... 78, 79
Metals and Mining........................................... 10, 12, 14, 33, 34
Miscellaneous............................................... 50, 72-76, 99
Paper and Forest Products................................... 8, 24, 26
Retail...................................................... 53, 56, 59
Sovereign................................................... NA
Supermarkets and Drug Stores................................ 54
Telecommunications.......................................... 48
Textiles and Furniture...................................... 22, 25, 31, 57
Transportation.............................................. 40, 42-47
Utilities................................................... 49
Structured Finance Obligations.............................. NA
Packaging and Containers.................................... 26, 32, 34
Business Services........................................... 73, 87
The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.
B-28
"Fitch Loan Category" means the following four categories (and, for
purposes of this categorization, the Market Value of a Fitch Eligible Asset
trading at par is equal to $1.00):
(i) "Fitch Loan Category A" means Performing Loans which have a Market
Value or an Approved Price greater than or equal to $0.90.
(ii) "Fitch Loan Category B" means: (A) Performing Loans which have a
Market Value or an Approved Price of greater than or equal to $0.80 but
less than $0.90; and (B) non-Performing Loans which have a Market Value or
an Approved Price greater than or equal to $0.85.
(iii) "Fitch Loan Category C" means: (A) Performing Loans which have a
Market Value or an Approved Price of greater than or equal to $0.70 but
less than $0.80; (B) non-Performing Loans which have a Market Value or an
Approved Price of greater than or equal to $0.75 but less than $0.85; and
(C) Performing Loans without an Approved Price rated BB- or higher by
Fitch. If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating
of BBB+ will be used). If a security is not rated by Fitch but is rated by
only one other Rating Agency, then the rating on the security from the
other Rating Agency will be used to determine the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA-, a
Fitch rating of AAA- will be used, and where the only rating on a security
is a Moody's rating of Ba3, a Fitch rating of BB- will be used).
(iv) "Fitch Loan Category D" means Loans not described in any of the
foregoing categories.
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall within more
than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed
to fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.
"Hold Order" has the meaning set forth in Section 2(a)(ii) of Part II of
this Certificate.
"Holder" means, with respect to Preferred Shares, the registered holder of
shares of each Series as the same appears on the share ledger or share records
of the Trust.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"LIBOR" means the London Inter-bank Offered Rate.
"LIBOR Dealers" means Citigroup Global Markets Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other dealer or dealers as the Fund may
from time to time appoint, or, in lieu of any thereof, their respective
affiliates or successors.
"LIBOR Rate" on any Auction Date or other testing date, means (i) the rate
for deposits in U.S. dollars for the designated Dividend Period, which is either
available from Bloomberg (or any successor) or appears on display page 3750 of
Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as may
replace that page on that service, or such other service as may be selected by
the Fund and the LIBOR Dealer or its successors that are LIBOR Dealers) as of
11:00 a.m., London time, on the day that is the London Business Day preceding
such Auction Date or testing date (each a "LIBOR Determination Date"), or (ii)
if such rate is not available from Bloomberg or does not appear on Telerate Page
3750 or such other page as may replace such Telerate Page 3750, (A) the LIBOR
Dealer shall determine the arithmetic mean of the offered quotations of the
reference banks to leading banks in the London interbank market for deposits in
U.S. dollars for the designated Dividend Period in an amount determined by such
LIBOR Dealer by reference to requests for quotations as of approximately 11:00
a.m. (London time) on such date made by such LIBOR Dealer to the reference
banks, (B) if at least two of the reference banks provide such quotations, LIBOR
Rate shall equal such arithmetic mean of such quotations, (C) if only one or
none of the reference banks provide such quotations, LIBOR Rate shall be deemed
to be the arithmetic mean of the offered quotations that leading banks in The
City of New York selected by the LIBOR Dealer (after obtaining the Fund's
approval) are
B-29
quoting on the relevant LIBOR Determination Date for deposits in U.S. dollars
for the designated Dividend Period in an amount determined by the LIBOR Dealer
(after obtaining the Fund's approval) that is representative of a single
transaction in such market at such time by reference to the principal London
offices of leading banks in the London interbank market; provided, however, that
if one of the LIBOR Dealers does not quote a rate required to determine the
LIBOR Rate, the LIBOR Rate will be determined on the basis of the quotation or
quotations furnished by any substitute LIBOR Dealer or substitute LIBOR Dealers
selected by the Fund to provide such rate or rates not being supplied by the
LIBOR Dealer; provided further, that if the LIBOR Dealer and substitute LIBOR
Dealers are required but unable to determine a rate in accordance with at least
one of the procedures provided above, LIBOR Rate shall be LIBOR Rate as
determined on the previous Auction Date. If the number of Dividend Period days
shall be (i) 7 or more but fewer than 22 days, such rate shall be the seven-day
LIBOR rate; (ii) 22 or more but fewer than 49 days, such rate shall be the
one-month LIBOR rate; (iii) 49 or more but fewer than 77 days, such rate shall
be the two-month LIBOR rate; (iv) 77 or more but fewer than 112 days, such rate
shall be the three-month LIBOR rate; (v) 112 or more but fewer than 140 days,
such rate shall be the four-month LIBOR rate; (vi) 140 or more but fewer that
168 days, such rate shall be the five-month LIBOR rate; (vii) 168 or more but
fewer 189 days, such rate shall be the six-month LIBOR rate; (viii) 189 or more
but fewer than 217 days, such rate shall be the seven-month LIBOR rate; (ix) 217
or more but fewer than 252 days, such rate shall be the eight-month LIBOR rate;
(x) 252 or more but fewer than 287 days, such rate shall be the nine-month LIBOR
rate; (xi) 287 or more but fewer than 315 days, such rate shall be the ten-month
LIBOR rate; (xii) 315 or more but fewer than 343 days, such rate shall be the
eleven-month LIBOR rate; and (xiii) 343 or more but fewer than 365 days, such
rate shall be the twelve-month LIBOR rate.
"Loan" means any assignment of or participation in any bank loan
denominated in U.S. dollars including term loans, the funded and unfunded
portions of revolving credit lines (provided that the Trust shall place in
reserve an amount equal to any unfunded portion of any revolving credit line)
and debtor-in possession financings; provided that such loan (a) is not extended
for the purpose of purchasing or carrying any margin stock and (b) is similar to
those typically made, syndicated, purchased or participated by a commercial bank
in the ordinary course of business.
"Mandatory Redemption Date" has the meaning set forth in Section 3(a)(iv)
of Part I of this Certificate.
"Mandatory Redemption Price" has the meaning set forth in Section 3(a)(iv)
of Part I of this Certificate.
"Market Value" means the Market Value Price or, if a Market Value Price is
not readily available, the Approved Price of each Eligible Asset held by the
Trust.
"Market Value Price" means the price of an Eligible Asset which is the
price obtained from an Approved Pricing Service or, if such price is not
available, the lower of the bid prices quoted by two Dealers.
"Maximum Rate" means, on any date on which the Applicable Rate is
determined, the higher of the applicable percentage of the Reference Rate or the
applicable spread plus the Reference Rate on the date of such Auction determined
as set forth below based on the lower of the credit ratings assigned to the
Preferred Shares by Moody's and Fitch subject to upward but not downward
adjustment in the discretion of the Board of Trustees after consultation with
the Broker-Dealers; provided that immediately following any such increase the
Trust would be in compliance with the Preferred Shares Basic Maintenance Amount.
In no event will the Maximum Rate be greater than 18%.
MOODY'S APPLICABLE PERCENTAGE APPLICABLE SPREAD
CREDIT RATING FITCH CREDIT RATING OF REFERENCE RATE OVER REFERENCE RATE
------------- ------------------- --------------------- -------------------
Aaa..................................... AAA 150% 150 bps
Aa3 to Aa1.............................. AA- to AA+ 250% 250 bps
A3 to A1................................ A- to A+ 350% 350 bps
Baa1 and lower.......................... BBB+ and lower 550% 550 bps
B-30
"MBS" means mortgage backed securities that are issued, backed or otherwise
guaranteed by the U.S. Government or its agencies or instrumentalities or that
are issued by private issuers.
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" means for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows. The
Moody's Discount Factor for any Moody's Eligible Asset other than the securities
set forth below will be the percentage provided in writing by Moody's.
(i) CORPORATE DEBT SECURITIES: The percentage determined by reference
to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below
(non-convertibles).
MOODY'S RATING CATEGORY
TERM TO MATURITY OF ----------------------------------------------
CORPORATE DEBT SECURITY (2) AAA AA A BAA BA B UNRATED(1)
--------------------------- --- --- --- --- --- --- ----------
1 year or less................................ 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year)...... 115 118 122 125 146 160 250
3 years or less (but longer than 2 years)..... 120 123 127 131 153 168 250
4 years or less (but longer than 3 years)..... 126 129 133 138 161 176 250
5 years or less (but longer than 4 years)..... 132 135 139 144 168 185 250
7 years or less (but longer than 5 years)..... 139 143 147 152 179 197 250
10 years or less (but longer than 7 years).... 145 150 155 160 189 208 250
15 years or less (but longer than 10 years)... 150 155 160 165 196 216 250
20 years or less (but longer than 15 years)... 150 155 160 165 196 228 250
30 years or less (but longer than 20 years)... 150 155 160 165 196 229 250
Greater than 30 years......................... 165 173 181 189 205 240 250
---------------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate debt security
is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set
forth under "Unrated" in this table. Ratings assigned by S&P or Fitch are
generally accepted by Moody's at face value. However, adjustments to face
value may be made to particular categories of credits for which the S&P
and/or Fitch rating does not seem to approximate a Moody's rating
equivalent. Split rated securities assigned by S&P and Fitch will be
accepted at the lower of the two ratings.
(2) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
For corporate debt securities that do not pay interest in U.S. dollars, the
fund sponsor will contact Moody's to obtain the applicable currency conversion
rates.
PREFERRED STOCK: The Moody's Discount Factor for taxable preferred stock
shall be:
Aaa......................................................... 150%
Aa.......................................................... 155%
A........................................................... 160%
Baa......................................................... 165%
Ba.......................................................... 196%
B........................................................... 216%