As filed with the Securities and Exchange Commission on August 23, 2004
1933 Act File No. 333-115414
1940 Act File No. 811-21539
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO. _
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
(Exact Name of Registrant as Specified in Declaration of Trust)
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (630) 241-4141
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W. Scott Jardine
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
(Name and Address of Agent for Service)
Copies of Communications to:
Eric F. Fess, Esq. Leonard B. Mackey, Jr., Esq.
Chapman and Cutler LLP Clifford Chance US LLP
111 West Monroe Street 31 West 52nd Street
Chicago, Illinois 60603 New York, New York 10019
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this registration statement.
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If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box [ ]
It is proposed that this filing will become effective when declared effective
pursuant to section 8(c) [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
-------------------------- -------------- --------------------------- -------------------------------- ----------------------
Title of Securities Amount Being Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Being Registered Registered Price Per Unit Offering Price(1) Registration Fee(2)
-------------------------- -------------- --------------------------- -------------------------------- ----------------------
Auction Market 4,000 $25,000 $100,000,000 $12,670.00
Preferred Shares (AMPS)
Series A and B
-------------------------- -------------- --------------------------- -------------------------------- ----------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Of this amount, $126.70 has already been paid.
The Registrant hereby amends this Registration Statement on the date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on the
dates as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
Subject to Completion
Preliminary Prospectus dated August 23, 2004
PROSPECTUS
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$100,000,000
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE
INCOME FUND II
Auction Market Preferred Shares ("AMPS")
2,000 Shares, Series A
2,000 Shares, Series B
Liquidation Preference $25,000 per Share
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First Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund")
is offering 2,000 Series A Auction Market Preferred Shares ("Series A AMPS") and
2,000 Series B Auction Market Preferred Shares ("Series B AMPS"). The shares are
referred to in this prospectus as "AMPS." The Fund is a recently organized,
diversified, closed-end management investment company. The Fund's primary
investment objective is to seek a high level of current income. As a secondary
objective, the Fund will attempt to preserve capital. The Fund will pursue these
objectives by investing in senior secured floating rate corporate loans.
Investors in AMPS will be entitled to receive cash dividends at an annual
rate that may vary for each dividend period. Generally, following the Initial
Rate Period, each Rate Period will be seven days for the Series A AMPS and 28
days for the Series B AMPS. For the Series A AMPS, the dividend rate for the
initial period from and including the issue date through , 2004, will be % per
year, and for the Series B AMPS, the dividend rate for the initial period from
and including the issue date through , 2004, will be % per year. For each
subsequent Rate Period, the dividend rate will be determined by an auction
(each, an "Auction") conducted in accordance with the procedures described in
this prospectus, and in additional detail in Appendix A to the Statement of
Additional Information.
The AMPS will not be listed on any exchange. Generally, investors may only
buy and sell the AMPS through an order placed at an auction with or through a
Broker-Dealer (as defined in this prospectus) that has entered into an agreement
with the auction agent or in a secondary market that Broker-Dealers may
maintain. These Broker-Dealers are not required to maintain a market in the
AMPS, and a secondary market, if one develops, may not provide investors with
liquidity.
This offering is conditioned upon the AMPS receiving a rating of "Aaa" from
Moody's Investors Service, Inc. ("Moody's") and "AAA" from Standard & Poor's
Ratings Group, a division of The McGraw Hill Companies, Inc. ("S&P"). The AMPS
will be senior in liquidation and distribution rights to the Fund's outstanding
common shares, $.01 par value (the "Common Shares"). The Common Shares are
listed on the New York Stock Exchange ("NYSE") under the symbol "FCT."
(continued on following page)
INVESTING IN AMPS INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISKS" SECTION
BEGINNING ON PAGE 25 OF THIS PROSPECTUS.
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Per Share Total
--------- -----
Public offering price (1) $25,000 $100,000,000
Sales load $250 $1,000,000
Proceeds to the Fund (before expenses) $24,750 $99,000,000
(1) Plus accumulated dividends, if any, from the date the AMPS are first
issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
AMPS will be ready for delivery in book-entry form only through the facilities
of The Depository Trust Company on or about , 2004.
---------------
MERRILL LYNCH & CO. OPPENHEIMER & CO.
---------------
The date of this prospectus is , 2004.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
(continued from previous page)
INVESTMENTS IN THE FUND ARE NOT DEPOSITS WITH OR OTHER LIABILITIES OF
MACQUARIE BANK LIMITED ACN 008 583 542, OR OF ANY ENTITY IN THE MACQUARIE BANK
GROUP, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING POSSIBLE DELAYS IN
REPAYMENT AND LOSS OF INCOME AND CAPITAL INVESTED. NONE OF MACQUARIE BANK
LIMITED, FOUR CORNERS CAPITAL MANAGEMENT, LLC, AND ANY MEMBER COMPANY OF THE
MACQUARIE BANK GROUP GUARANTEES ANY PARTICULAR RATE OF RETURN OR THE PERFORMANCE
OF THE FUND, NOR DO THEY GUARANTEE THE REPAYMENT OF CAPITAL FROM THE FUND.
In addition, the Fund's Common Shares do not represent a deposit or
obligation of, and are not guaranteed or endorsed by, any bank or other insured
depository institution, and are not federally insured by the Federal Deposit
Insurance Corporation (the "FDIC"), the Federal Reserve Board or any other
government agency.
Investment Objectives and Policies. The Fund's primary investment objective
is to seek a high level of current income. As a secondary objective, the Fund
will attempt to preserve capital. The Fund will pursue these objectives by
investing in a portfolio of senior secured floating rate corporate loans
("Senior Loans"). There can be no assurance that the Fund will achieve its
investment objectives. Investing in Senior Loans involves credit risk and,
during periods of generally declining credit quality, it may be particularly
difficult for the Fund to achieve its secondary investment objective. The Fund
may not be appropriate for all investors. See "The Fund's Investments."
Investment Adviser. First Trust Advisors L.P. ("First Trust Advisors" or
the "Adviser") will be the Fund's investment adviser, responsible for selecting
and supervising the Sub-Adviser, ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing clerical,
bookkeeping and other administrative services.
First Trust Advisors serves as investment adviser or portfolio supervisor
to investment portfolios with approximately $12.7 billion in assets, which it
managed or supervised as of July 31, 2004. See "Management of the
Fund--Investment Adviser" and the Statement of Additional Information under
"Adviser."
Sub-Adviser. Four Corners Capital Management, LLC ("Four Corners" or the
"Sub-Adviser") will manage the Fund's portfolio subject to the Adviser's
supervision. See "Management of the Fund--Sub-Adviser" and the Statement of
Additional Information under "Sub-Adviser."
You should read carefully this prospectus, which contains important
information about the Fund, before deciding whether to invest in the AMPS, and
retain it for future reference. The Statement of Additional Information dated ,
2004 (the "SAI"), containing additional information about the Fund, has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this prospectus. You may request a free copy of
the SAI, the table of contents of which is on page 54 of this prospectus, by
calling (800) 988-5891 or by writing to the Fund, or obtain a copy (and other
information regarding the Fund) from the Securities and Exchange Commission's
web site (http://www.sec.gov). You also may e-mail requests for these documents
to publicinfo@sec.gov or request these documents in writing from the Securities
and Exchange Commission's Public Reference Section, Washington D.C. 20549-0102.
Page 2
TABLE OF CONTENTS
Page
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Prospectus Summary......................................................... 5
Financial Highlights....................................................... 19
The Fund................................................................... 20
Use of Proceeds............................................................ 20
Capitalization............................................................. 21
Portfolio Composition...................................................... 21
The Fund's Investments..................................................... 22
Risks...................................................................... 25
Management of the Fund..................................................... 32
Description of AMPS........................................................ 33
The Auction................................................................ 43
Description of Borrowings.................................................. 46
Description of Common Shares............................................... 46
Certain Provisions in the Declaration of Trust............................. 47
Closed-End Fund Structure.................................................. 48
Conversion to Open-End Fund................................................ 48
Federal Income Tax Matters................................................. 48
Net Asset Value............................................................ 50
Underwriting............................................................... 52
Auction Agent, Transfer Agent, Registrar and Dividend Disbursing Agent..... 52
Custodian and Administrator................................................ 52
Legal Matters.............................................................. 53
Available Information...................................................... 53
Table of Contents of the Statement of Additional Information............... 54
Glossary of Terms.......................................................... A-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
Page 3
This page is intentionally left blank.
Page 4
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this prospectus, the SAI and the Fund's Statement
Establishing and Fixing the Rights and Preferences of Auction Market Preferred
Shares (the "Statement") attached as Appendix A to the SAI. You also should
review carefully the information set forth under "Risks." Capitalized terms used
but not defined herein shall have the meanings given to the terms in the
Glossary of Terms attached as Appendix A to this prospectus.
The Fund......................... First Trust/Four Corners Senior Floating
Rate Income Fund II is a recently organized,
diversified, closed-end management
investment company. The Fund's principal
offices are located at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532, and
its phone number is (630) 241-4141. The
Fund's Common Shares are listed on the NYSE
under the symbol "FCT." As of July 31, 2004,
the Fund had 25,230,236 Common Shares
outstanding and net assets applicable to
Common Shares of $483,282,710.
The Offering..................... The Fund is offering an aggregate of 2,000
shares of Series A AMPS and 2,000 shares of
Series B AMPS, each at a purchase price of
$25,000 per share plus accumulated
dividends, if any, from the Date of Original
Issue. The AMPS are being offered through a
group of underwriters led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). See "Underwriting."
This offering is conditioned upon the AMPS
receiving a rating of "Aaa" from Moody's and
"AAA" from S&P. The Fund will invest the net
proceeds of the offering in accordance with
the Fund's investment objectives and
policies described under "The Fund's
Investments--Investment Objectives and
Policies." The Fund anticipates that it may
take up to three months following completion
of this offering until the Fund's assets are
fully invested in accordance with the Fund's
investment objectives and policies. During
this period, the Fund may invest all or a
portion of the proceeds of this offering in
U.S. government securities, or high grade
short-term or long-term debt obligations.
The AMPS will entitle their holders to
receive cash dividends at an annual rate
that may vary for each Rate Period.
Generally, except as described under
"Description of AMPS--Dividends and Rate
Periods," following the Initial Rate Period,
the Rate Period for the Series A AMPS will
be seven days and the Rate Period for the
Series B AMPS will be 28 days. The Auction
Agent will determine the Applicable Rate for
a particular Rate Period by auction
conducted on the Business Day immediately
prior to the start of that Rate Period.
Generally, the Applicable Rate will be the
lowest rate per annum that would result in
the purchase of all available AMPS in the
auction.
The AMPS will not be listed on an exchange.
Instead, investors may buy or sell AMPS at
an auction by submitting Orders to
broker-dealers that have entered into an
agreement with the Auction Agent
("Broker-Dealers") or to certain other
broker- dealers. Deutsche Bank Trust Company
Americas, the Auction Agent, will review
Orders for AMPS from Broker-Dealers on
behalf of Beneficial Owners that wish to
sell, or hold at the auction rate, or hold
only at a specified Applicable Rate, and on
behalf of any customers of a Broker-Dealer
that are not Beneficial Owners of a series
of AMPS but that wish to purchase shares of
the series, or that are Beneficial Owners of
shares of the series that wish to purchase
additional shares of the series (in each
case, a "Potential Beneficial Owner"), that
wish to buy. The Auction Agent then will
determine the lowest Applicable Rate that
will result in all of the outstanding AMPS
continuing to be held.
For the Series A AMPS, the dividend rate for
the Initial Rate Period from and including
the Date of Original Issue through , 2004,
will be % per year. The first Auction Date
for the Series A AMPS will be , 2004, and
the Initial Dividend Payment Date will be
, 2004. For the Series B AMPS, the
dividend rate for the Initial Rate Period
from and including the Date of Original
Issue through , 2004, will be % per year.
The first Auction Date for the Series B AMPS
will be , 2004, and the Initial Dividend
Payment Date will be , 2004. Subsequent
Page 5
Auctions generally will be held on every for
the Series A AMPS and on every fourth for
the Series B AMPS (unless the then current
Rate Period is a Special Rate Period, the
day that normally would be the Auction Date
is not a Business Day or unforeseen events
preclude the holding of an auction).
Each subsequent Rate Period normally will
begin on the Business Day following an
Auction Date.
Investment Objectives
and Policies..................... The Fund's primary investment objective is
to seek a high level of current income. As a
secondary objective, the Fund will attempt
to preserve capital. The Fund will pursue
these objectives through investment in a
portfolio of Senior Loans. There can be no
assurance that the Fund will achieve its
investment objectives. Investment in Senior
Loans involves credit risk and, during
periods of generally declining credit
quality, it may be particularly difficult
for the Fund to achieve its secondary
investment objective. The Fund may not be
appropriate for all investors. See "The
Fund's Investments."
Under normal conditions, the Fund will
invest at least 80% of its Managed Assets
(as defined below) in a diversified
portfolio of Senior Loans. The Fund cannot
change this investment policy unless the
Fund's shareholders receive at least 60 days
prior notice of any such change. The portion
of the Fund's assets invested in Senior
Loans will vary from time to time consistent
with the Fund's investment objectives,
changes in market prices for Senior Loans,
changes in interest rates and other economic
and market factors. It is anticipated that
at least 80% of the Fund's Managed Assets
will be invested in lower grade debt
instruments, although from time to time all
of the Fund's Managed Assets may be invested
in such lower grade debt instruments. The
Fund does not intend to purchase
publicly-traded high yield bonds or equity
securities but may receive such securities
as a result of a restructuring of the debt
of the issuer or the reorganization of a
Senior Loan or as part of a package of
securities acquired together with the Senior
Loans of an issuer.
Lower grade debt instruments are rated "Ba1"
or lower by Moody's, "BB+" or lower by S&P,
or comparably rated by another nationally
recognized statistical rating organization
("NRSRO") or, if unrated, are of comparable
credit quality. Lower grade debt instruments
are commonly referred to as "high yield" or
"junk bonds" and are considered speculative
with respect to the issuer's capacity to pay
interest and repay principal. They involve
greater risk of loss, are subject to greater
price volatility and are less liquid,
especially during periods of economic
uncertainty or change, than higher- rated
debt instruments. Lower grade debt
instruments may also be more susceptible to
real or perceived adverse economic and
competitive industry conditions than higher-
rated debt instruments. Unlike higher-rated
debt instruments, which tend to react mainly
to fluctuations in the general level of
interest rates, the market values of lower
grade debt instruments tend to reflect to a
greater extent individual developments of
the issuer, although movements in the
general direction of interest rates can be
expected to impact the market value of lower
grade debt instruments. In addition, lower
grade debt instruments tend to be more
sensitive to economic conditions.
"Managed Assets" means the average daily
gross asset value of the Fund (including
assets attributable to the Fund's Preferred
Shares, if any, and the principal amount of
borrowings) minus the sum of the Fund's
accrued and unpaid dividends on any
outstanding Preferred Shares and accrued
liabilities (other than the principal amount
of any borrowings incurred or of commercial
paper or notes issued by the Fund). For
purposes of determining Managed Assets, the
liquidation preference of the Preferred
Shares is not treated as a liability.
Percentage limitations described in this
prospectus are as of the time of investment
by the Fund and may be exceeded on a
going-forward basis as a result of market
value fluctuations of the Fund's portfolio
and other events.
Senior Loans. Under normal circumstances,
the Fund will invest at least 80% of its
Managed Assets in Senior Loans. Senior Loans
generally hold one of the most senior
positions in the capital structure of a
business entity (the "Borrower"), are
Page 6
typically secured with specific collateral
and have a claim on the assets and/or stock
of the Borrower that is senior to that held
by subordinated debtholders and stockholders
of the Borrower. The proceeds of Senior
Loans primarily are used to finance
leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases,
and, to a lesser extent, to finance internal
growth and for other corporate purposes.
Senior Loans typically have rates of
interest which are redetermined either
daily, monthly, quarterly or semi-annually
by reference to a base lending rate, plus a
premium. This base lending rate is primarily
the London Inter-Bank Offered Rate
("LIBOR"), and secondarily the prime rate
offered by one or more major United States
banks (the "Prime Rate") and the certificate
of deposit rate or other base lending rate
used by commercial lenders. The Senior Loans
held by the Fund typically will have a
dollar-weighted average period until the
next interest rate adjustment of
approximately 90 days or less. The Senior
Loans in which the Fund will invest are
primarily lower grade.
Under normal circumstances, the Fund may
also invest up to 10% of its Managed Assets
through purchasing revolving credit
facilities, investment grade debtor-in-
possession financing, unsecured loans, other
floating rate debt securities, such as
notes, bonds, and asset-backed securities
(such as special purpose trusts investing in
bank loans), investment grade loans and
fixed income debt obligations and money
market instruments, such as commercial
paper. See "The Fund's Investments."
The Fund may also invest up to 10% of its
Managed Assets in Senior Loans and, on
limited occasions, equity and debt
securities acquired in connection therewith,
of (i) firms that, at the time of
acquisition, have defaulted on their debt
obligations and/ or filed for protection
under Chapter 11 of the U.S. Bankruptcy Code
or have entered into a voluntary
reorganization in conjunction with their
creditors and stakeholders in order to avoid
a bankruptcy filing, or (ii) firms prior to
an event of default whose acute operating
and/or financial problems have resulted in
the markets valuing their respective
securities and debt at sufficiently
discounted prices so as to be yielding,
should they not default, a significant
premium over comparable duration U.S.
Treasury bonds. Investing in the securities
and debt of distressed issuers ("Special
Situation Investments") involves a far
greater level of risk than investing in
issuers whose debt obligations are being met
and whose debt trades at or close to its
"par" value. While offering a greater
potential opportunity for capital
appreciation, Special Situation Investments
are highly speculative with respect to the
issuer's ability to continue to make
interest payments and/or to pay its
principal obligations in full. Special
Situation Investments can be very difficult
to properly value, making them susceptible
to a high degree of price volatility and
rendering them less liquid than performing
debt obligations. Those Special Situation
Investments involved in a bankruptcy
proceeding can be subject to a high degree
of uncertainty with regard to both the
timing and the amount of the ultimate
settlement. Special Situation Investments
may also include non-investment grade
debtor-in-possession financing,
sub-performing real estate loans and
mortgages, privately placed senior,
mezzanine, subordinated and junior debt,
letters of credit, trade claims, convertible
bonds, and preferred and common stocks.
Foreign Investments. The Fund may invest up
to 15% of its Managed Assets in U.S.
dollar-denominated foreign investments,
predominantly in developed countries and
territories of those countries, but in no
case will the Fund invest in debt securities
of issuers located in emerging markets. The
value of foreign investments is affected by
changes in foreign tax laws (including
withholding tax), government policies (in
this country or abroad) and relations
between nations, and trading, settlement,
custodial, and other operational risks. In
addition, the costs of investing abroad are
generally higher than in the United States,
and foreign securities markets may be less
liquid, more volatile, and less subject to
governmental supervision than markets in the
United States. Foreign investments could
also be affected by other factors not
present in the United States, including
expropriation, armed conflict, confiscatory
taxation, lack of uniform accounting and
auditing standards, less publicly available
financial and other information, and
potential difficulties in enforcing
contractual obligations.
Page 7
Other Securities. Under normal market
conditions, the Fund will invest at least
80% of its Managed Assets in Senior Loans to
meet its investment objectives. The Fund
does not intend to purchase publicly-traded
high yield bonds or equity securities but
may receive such securities as a result of a
restructuring of the debt of the issuer or
the reorganization of a Senior Loan or as
part of a package of securities acquired
together with the Senior Loans of an issuer.
The Fund may invest the remainder of its
assets in other investments and securities
of various types. For temporary defensive
purposes, the Fund may depart from its
principal investment strategies and invest
part or all of its assets in securities with
remaining maturities of less than one year,
cash equivalents, or may hold cash. During
such periods, the Fund may not be able to
achieve its investment objectives.
Investment Adviser............... First Trust Advisors L.P. is the Fund's
investment adviser, responsible for
selecting and supervising the Sub-Adviser,
ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business
affairs and providing clerical, bookkeeping
and other administrative services. The
Adviser, in consultation with the
Sub-Adviser, is also responsible for
determining the Fund's overall investment
strategy and overseeing its implementation.
First Trust Advisors, a registered
investment adviser, is an Illinois limited
partnership formed in 1991. It serves as
investment adviser or portfolio supervisor
to investment portfolios with approximately
$12.7 billion in assets, which it managed or
supervised as of July 31, 2004. See the SAI
under "Adviser."
Sub-Adviser...................... Four Corners Capital Management, LLC manages
the Fund's portfolio subject to the
Adviser's supervision. Four Corners
specializes in managing portfolios of Senior
Loans and structured finance assets. Four
Corners is a Delaware limited liability
company founded in September 2001 by
Macquarie Holdings (USA), Inc., a subsidiary
of Macquarie Bank Limited, and an
experienced group of senior loan investment
professionals. Four Corners managed and
advised investment portfolios with
approximately $2 billion of investment
capacity as of July 31, 2004. See the SAI
under "Sub-Adviser."
Auction Procedures............... In an auction, you may choose to buy, sell
or hold the AMPS. The following is a brief
summary of the Auction Procedures, which we
describe in more detail elsewhere in this
prospectus and in the SAI. These Auction
Procedures are complicated, and there are
exceptions to these procedures. Many of the
terms in this section have a special
meaning. Any terms used but not defined in
this section have the meanings assigned to
them in Appendix A to this prospectus.
Unless otherwise permitted by the Fund,
Beneficial Owners and Potential Beneficial
Owners of AMPS may participate in auctions
only through their Broker-Dealers.
Broker-Dealers will submit the Orders of
their respective customers who are
Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating
themselves as "Existing Holders" in respect
of shares subject to Orders submitted or
deemed submitted to them by Beneficial
Owners and as "Potential Holders" in respect
of shares subject to Orders submitted to
them by Potential Beneficial Owners.
On or prior to each Auction Date for the
AMPS (usually the Business Day immediately
preceding the first day of each Rate
Period), each Beneficial Owner may submit
Orders to its Broker-Dealer as follows:
o Hold Order--indicating its desire to hold
shares of such series without regard to
the Applicable Rate for the next Rate
Period.
o Bid--indicating its desire to purchase or
hold the indicated number of shares of
such series at $25,000 per share if the
Applicable Rate for shares of such series
for the next Rate Period is not less than
the rate or spread specified in the bid
and which shall be deemed an irrevocable
offer to sell shares of such series at
$25,000 per share if the Applicable Rate
for shares of such series for the next
Rate Period is less than the rate of
spread specified in the Bid.
Page 8
o Sell Order--indicating its desire to sell
shares of such series at $25,000 per
share without regard to the Applicable
Rate for the next Rate Period.
A Beneficial Owner may submit different
types of Orders to its Broker-Dealer with
respect to the different shares of a series
of AMPS it holds. If a Beneficial Owner
offers through its Broker-Dealer to purchase
additional AMPS in an auction, the
Beneficial Owner, for purposes of that offer
to purchase additional shares, will be
treated as a Potential Beneficial Owner.
Bids by Beneficial Owners through their
Broker-Dealers specifying rates per annum
higher than the Maximum Rate will be treated
as Sell Orders. A Hold Order (in the case of
an auction relating to a Rate Period of
seven days or less for the Series A AMPS or
28 days or less for the Series B AMPS) or a
Sell Order (in the case of an auction
relating to a Special Rate Period of longer
than 91 days) shall be deemed to have been
submitted on behalf of a Beneficial Owner if
an Order with respect to the AMPS it holds
is not submitted on behalf of the Beneficial
Owner for any reason, including the failure
of a Broker-Dealer to submit the Beneficial
Owner's Order to the Auction Agent.
Potential Beneficial Owners of AMPS may
submit Bids through their Broker-Dealers in
which they offer to purchase AMPS if the
Applicable Rate for the next Rate Period for
these shares is not less than the rate per
annum specified in the Bid. A Bid by a
Potential Beneficial Owner with a rate per
annum higher than the Maximum Rate will not
be considered.
Neither the Fund nor the Auction Agent will
be responsible for a Broker-Dealer's failure
to act in accordance with the instructions
of Beneficial Owners or Potential Beneficial
Owners or failure to comply with any of the
foregoing.
A Broker-Dealer also may hold AMPS for its
own account as a Beneficial Owner. Thus, a
Broker-Dealer may submit Orders to the
Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and participate
in an auction as an Existing Holder or
Potential Holder on both its own behalf and
on behalf of its customers. Any Order placed
with the Auction Agent by a Broker-Dealer as
or on behalf of a Beneficial Owner or a
Potential Beneficial Owner will be treated
in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any
failure by a Broker-Dealer to submit to the
Auction Agent an Order in respect of any
AMPS 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 AMPS held by it, as described
above. Inasmuch as a Broker-Dealer
participates in an auction as an Existing
Holder or a Potential Holder only to
represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether
a customer or itself, all discussion herein
relating to the consequences of an auction
for Existing Holders and Potential Holders
also applies to the underlying beneficial
ownership interests represented thereby.
If Sufficient Clearing Bids exist in an
auction for the AMPS (that is, in general,
the number of AMPS subject to Bids by
Potential Holders with rates equal to or
lower than the Maximum Rate is at least
equal to the number of AMPS subject to Sell
Orders by Existing Holders), the Applicable
Rate will be the lowest rate per annum
specified in the Submitted Bids which,
taking into account the rate per annum and
all lower rates per annum bid by Existing
Holders and Potential Holders, would result
in Existing Holders and Potential Holders
owning all of the AMPS available for
purchase in the auction.
If Sufficient Clearing Bids do not exist,
the Rate Period next following the auction
automatically will be seven days in length
for the Series A AMPS (a "Seven-Day Rate
Period") or 28 days in length for the Series
B AMPS (a "28-Day Rate Period"), and the
Applicable Rate will be the Maximum Rate. In
such event, Existing Holders that have
submitted Sell Orders will not be able to
sell in the auction all, and may not be able
to sell any, AMPS subject to the Sell
Orders. As a result, in certain
circumstances, Existing Holders, and the
Beneficial Owners they represent, may not
have liquidity. If all Existing Holders
submit (or are deemed to have submitted)
Hold Orders in an auction, the Rate Period
Page 9
next following the auction automatically
shall be the same length as the immediately
preceding Rate Period, and the Applicable
Rate will be 90% of the Reference Rate.
The Auction Procedures include a pro rata
allocation of shares for purchase and sale,
which may result in an Existing Holder
selling or holding, or a Potential Holder
purchasing, a number of AMPS that is
different than the number of AMPS specified
in its Order. To the extent the allocation
procedures have this result, a Broker-Dealer
will be required to make appropriate pro
rata allocations among its customers.
A Sell Order by an Existing Holder will
constitute an irrevocable offer to sell the
AMPS. A Bid placed by an Existing Holder
also will constitute an irrevocable offer to
sell the AMPS if the rate per annum
specified in the Bid is higher than the
Applicable Rate determined in the auction,
in each case at a price per share equal to
$25,000. A Bid placed by a Potential Holder
will constitute an irrevocable offer to
purchase the AMPS at a price per share equal
to $25,000 if the rate per annum specified
in this Bid is less than or equal to the
Applicable Rate determined in the auction.
Settlement of purchases and sales will be
made on the next Business Day (also a
Dividend Payment Date) after the Auction
Date through the Securities Depository.
Purchasers will make payment through their
Agent Members in same-day funds to the
Securities Depository against delivery by
book-entry to their Agent Members. The
Securities Depository will make payment to
the sellers' Agent Members in accordance
with the Securities Depository's normal
procedures, which provide for payment in
same-day funds. See "The Auction."
Dividends and
Rate Periods..................... The table below shows the dividend rates,
the Dividend Payment Dates and the number of
days for the Initial Rate Periods of AMPS
offered in this prospectus. For subsequent
Rate Periods, AMPS will pay dividends based
on a rate set at auctions normally held
every seven days in the case of the Series A
AMPS, and 28 days in the case of the Series
B AMPS. In most instances, dividends are
payable on the first Business Day following
the end of the Rate Period. The rate set at
auction will not exceed the Maximum Rate.
The Dividend Payment Date for Special Rate
Periods will be set out in the notice
designating a Special Rate Period. Dividends
on AMPS will be cumulative from the date the
AMPS are first issued and will be paid out
of legally available funds.
Initial Dividend Dividend Payment Date Number of Days of
Series Rate for Initial Rate Period Initial Rate Period
A
B
The Fund may, subject to certain conditions,
designate Special Rate Periods of more than
seven days in the case of the Series A AMPS,
and more than 28 days in the case of Series
B AMPS. The Fund may not designate a Special
Rate Period unless sufficient clearing bids
were made in the most recent auction. In
addition, full cumulative dividends, any
amounts due with respect to mandatory
redemptions and any additional dividends
payable prior to such date must be paid in
full or deposited with the Auction Agent.
The Fund also must have received
confirmation from S&P and Moody's or any
substitute rating agency that the proposed
Special Rate Period will not adversely
affect such agency's then-current rating on
the AMPS and the lead Broker-Dealer
designated by the Fund, initially Merrill
Lynch, must not have objected to the
declaration of a Special Rate Period. See
"Description of AMPS--Dividends and Rate
Periods" and "--Designation of Special Rate
Periods" and "The Auction."
Restrictions on Dividend
Redemption and
Other Payments................... If the Fund issues any commercial paper,
notes or other borrowings (collectively
referred to throughout this prospectus as
"Borrowings") that constitute senior
securities representing indebtedness as
defined, and pursuant to, the Investment
Company Act of 1940, as amended (the "1940
Act"), the Fund would not be permitted to
Page 10
declare any dividend on AMPS unless, after
giving effect to the dividend, asset
coverage with respect to the Borrowings that
constitute senior securities representing
indebtedness, if any, is at least 200%. In
addition, the Fund would not be permitted to
declare any distribution on or purchase or
redeem AMPS unless, after giving effect to
the distribution, purchase or redemption,
asset coverage with respect to the
Borrowings that constitute senior securities
representing indebtedness, if any, is at
least 300%. Dividends or other distributions
on or redemptions or purchases of AMPS also
would be prohibited at any time that an
event of default under any Borrowings has
occurred and is continuing.
See "Description of AMPS--Restrictions on
Dividend, Redemption and Other Payments."
Asset Maintenance................ The Fund must maintain Eligible Assets
having an aggregate Discounted Value at
least equal to the Preferred Shares Basic
Maintenance Amount as of each Valuation
Date. The Fund also must maintain asset
coverage for the AMPS on a non-discounted
basis of at least 200% as of the last
Business Day of each month. See "Description
of AMPS--Asset Maintenance."
The discount factors and guidelines for
calculating the Discounted Value of the
Fund's portfolio for purposes of determining
whether the Preferred Shares Basic
Maintenance Amount has been satisfied have
been established by S&P and Moody's in
connection with the Fund's receipt from S&P
and Moody's of the "AAA" and "Aaa,"
respectively, credit rating with respect to
the AMPS on their Date of Original Issue.
The Fund estimates that on the Date of
Original Issue, the 1940 Act Preferred
Shares Asset Coverage, based on the
composition of its portfolio as of August
11, 2004, would be 340%, after giving effect
to the issuance of the AMPS offered hereby
($100,000,000), amounts borrowed by the Fund
under the Credit Facility described herein
($100,000,000 as of August 11, 2004, or 51%
of the $195,000,000 available) and the
deduction of sales loads and estimated
offering expenses for the AMPS ($1,009,209)
(or 263% if the Fund had borrowed 100% of
the $195,000,000 available under the Credit
Facility).
In addition, there may be additional asset
coverage requirements or other limitations
imposed in connection with any Borrowings,
such as limitations on the payment of
dividends to AMPS shareholders in certain
circumstances.
Redemption....................... Although the Fund will not ordinarily redeem
AMPS, it may be required to redeem AMPS if,
for example, the Fund does not meet an asset
coverage ratio required by law, correct a
failure to meet a rating agency guideline in
a timely manner or maintain other covenants
with respect to the AMPS. The Fund also may
redeem AMPS, at its option, in certain
circumstances. See "Description of
AMPS--Redemption."
Liquidation Preference........... The liquidation preference of the AMPS will
be $25,000 per share plus accumulated but
unpaid dividends, if any, thereon. See
"Description of AMPS--Liquidation Rights."
Voting Rights.................... Except as otherwise indicated, holders of
preferred shares of beneficial interest of
the Fund, $.01 par value (the "Preferred
Shares"), including the AMPS, have one vote
per share and vote together with holders of
Common Shares as a single class.
The 1940 Act requires that the holders of
AMPS and any other Preferred Shares voting
as a separate class have the right to elect
at least two trustees at all times and, upon
the Fund's failure to pay dividends on the
Preferred Shares in an amount equal to two
full years of dividends, have the right to
elect, as a class, the smallest number of
additional Trustees as shall be necessary to
assure that a majority of the Trustees has
been elected by the holders of Preferred
Shares. The terms of the additional Trustees
shall end when the Fund pays or provides for
all accumulated and unpaid dividends. See
"Description of AMPS--Voting Rights."
Page 11
Book-Entry Only.................. Except as described herein, investors in
AMPS will not receive certificates
representing ownership of their shares.
Ownership of AMPS will be maintained in
book-entry form by the Securities Depository
or its nominee for the account of the
investor's Agent Member. The investor's
Agent Member, in turn, will maintain records
of the investor's beneficial ownership of
AMPS. Accordingly, references in this
prospectus to an investor's investment in or
purchase, sale or ownership of AMPS are to
purchases, sales or ownership of those
shares by Beneficial Owners.
Dividends on the AMPS will be paid through
the Securities Depository on each Dividend
Payment Date. The Securities Depository's
normal procedures provide for it to
distribute the dividends in same-day funds
to Agent Members, who are in turn expected
to distribute the dividends to the person
for whom they are acting as agent in
accordance with the instructions of that
person. See "Description of AMPS-- Dividends
and Rate Periods."
Leverage......................... The Fund anticipates its total leverage will
be in an aggregate amount of 38% after the
issuance of the AMPS and assuming the Fund
borrows the full amount available to it
($195,000,000) under the Credit Facility. In
addition to the issuance of AMPS, the Fund
may make further use of financial leverage
through borrowings, including the issuance
of commercial paper or notes. Any Borrowings
will have seniority over the AMPS. Payments
to holders of AMPS in liquidation or
otherwise will be subject to the prior
payment of all outstanding indebtedness,
including Borrowings. By using Preferred
Shares or Borrowings, the Fund will be
engaging in an investment practice known as
leverage. Using leverage creates an
opportunity for the Fund to seek increased
net income or capital appreciation. Under
the requirements of the 1940 Act, the Fund,
immediately after issuing any Borrowings
that are senior securities representing
indebtedness (as defined in the 1940 Act),
must have an asset coverage of at least
300%.
Risks............................ The following discussion summarizes the
principal risks that you should consider
before deciding whether to invest in AMPS
and the Fund. For additional information
about the risks associated with investing in
AMPS and the Fund, see "Risks."
Risks of Investing in AMPS. The primary
risks of investing in AMPS include the
following:
o if an auction fails you may not be able
to sell some or all of your shares;
o because of the nature of the market for
AMPS, you may receive less than the price
you paid for your shares if you sell them
outside of an auction, especially when
market interest rates are rising;
o a rating agency could downgrade the
rating assigned to the AMPS, which could
affect their liquidity;
o the Fund may be forced to redeem your
AMPS to meet regulatory or rating agency
requirements or may voluntarily redeem
your AMPS in certain circumstances;
o in extraordinary circumstances, the Fund
may not earn sufficient income from its
investments to pay dividends on the AMPS;
o the AMPS will be junior to any
Borrowings;
o any Borrowings may constitute a
substantial lien and burden on the AMPS
by reason of their prior claim against
the income of the Fund and against the
net assets of the Fund in liquidation;
o if the Fund leverages through Borrowings,
the Fund may not be permitted to declare
dividends or other distributions with
respect to the AMPS or purchase AMPS
unless the Fund meets asset coverage
requirements and the payments of
principal and of interest on any of these
Borrowings are not in default;
o the value of the Fund's investment
portfolio may decline, reducing the asset
coverage for the AMPS;
Page 12
o if an issuer of a common stock in which
the Fund invests experiences financial
difficulties or if an issuer's preferred
stock or debt security is downgraded or
defaults or if an issuer in which the
Fund invests is affected by other adverse
market factors, there may be a negative
impact on the income and/or asset value
of the Fund's investment portfolio; and
o restrictions imposed by the 1940 Act and
by rating agencies on the declaration and
payment of dividends to the holders of
the Fund's Common Shares and AMPS might
impair the Fund's ability to maintain its
qualification as a regulated investment
company for federal income tax purposes.
Risks of Investing in the Fund. The primary
risks of investing in the Fund include the
following:
Limited Operating History. The Fund is a
recently organized, diversified, closed-end
management investment company that began
operations on May 28, 2004.
Performance Risk. The Fund's ability to pay
dividends depends upon the performance of
the Fund's Managed Assets. That performance,
in turn, is subject to a number of risks,
including credit risk on the underlying
assets.
Credit Risk. The Fund's net asset value and
ability to pay dividends depends upon the
performance of the Fund's Managed Assets.
That performance, in turn, is subject to a
number of risks, primarily the credit risk
of the Fund's underlying assets. Credit risk
is the risk of nonpayment of scheduled
interest and/or principal payments. Credit
risk also is the risk that one or more
investments in the Fund's portfolio will
decline in price, or fail to pay interest or
principal when due, because the issuer of
the underlying security experiences a
decline in its financial status. The value
of Senior Loans is affected by the
creditworthiness of the Borrowers (i.e.,
issuers) and by general economic and
specific industry conditions. Because the
Fund will own securities with low credit
quality, it will be subject to a high level
of credit risk.
The Fund generally invests in Senior Loans
that are secured with specific collateral.
However, the value of the collateral may not
equal the Fund's investment when the Senior
Loan is acquired or subsequently may decline
below the principal amount of the Senior
Loan. Also, to the extent that collateral
consists of stock of the Borrower or its
subsidiaries or affiliates, the Fund bears
the risk that the stock may decline in
value, be relatively illiquid, and/or may
lose all or substantially all of its value,
causing the Senior Loan to be
undercollateralized. Therefore, the
liquidation of the collateral underlying a
Senior Loan may not satisfy the issuer's
obligation to the Fund in the event of
non-payment of scheduled interest or
principal, and the collateral may not be
readily liquidated.
In the event of a Borrower's bankruptcy, the
Fund could experience delays and limitations
on its ability to realize the benefits of
the collateral securing the Senior Loan.
Among the credit risks involved in a
bankruptcy are assertions that the pledge of
collateral to secure a Senior Loan
constitutes a fraudulent conveyance or
preferential transfer that would have the
effect of nullifying or subordinating the
Fund's rights to the collateral.
Senior Loans. In the event a Borrower fails
to pay scheduled interest or principal
payments on a Senior Loan held by the Fund,
the Fund will experience a reduction in its
income and a decline in the market value of
the Senior Loan, which will likely reduce
dividends and lead to a decline in the net
asset value of the Fund's Common Shares. If
the Fund acquires a Senior Loan from another
lender, for example, by acquiring a
participation, the Fund may also be subject
to credit risks with respect to that lender.
See "The Fund's Investments--Additional
Information Concerning Senior Loans."
Page 13
Senior Loans generally involve less risk
than unsecured or subordinated debt and
equity instruments of the same issuer
because the payment of principal and
interest on Senior Loans is a contractual
obligation of the issuer that, in most
instances, takes precedence over the payment
of dividends, or the return of capital, to
the issuer's shareholders and payments to
bond holders.
Lower Grade Debt Instruments. The Senior
Loans in which the Fund invests are
generally lower grade. These lower grade
debt instruments may become the subject of
bankruptcy proceedings or otherwise
subsequently default as to the repayment of
principal and/or payment of interest or be
downgraded to ratings in the lower rating
categories ("Ca" or lower by Moody's, "CC"
or lower by S&P or comparably rated by
another NRSRO). The value of these
securities is affected by the
creditworthiness of the issuers of the
securities and by general economic and
specific industry conditions. Issuers of
lower grade debt instruments are not
perceived to be as strong financially as
those with higher credit ratings, so the
securities are usually considered
speculative investments. These issuers are
generally more vulnerable to financial
setbacks and recession than more
creditworthy issuers which may impair their
ability to make interest and principal
payments. Lower grade debt instruments tend
to be less liquid than higher grade debt
instruments. See "Risks--General Risks of
Investing in the Fund--Credit Risk."
Reliance on Credit Analysis by Sub-Adviser;
Management Risk. Investment decisions will
be based largely on the credit analysis
performed by the Sub-Adviser, and not on
rating agency evaluation. This analysis may
be difficult to perform. Information about a
Senior Loan and its issuer generally is not
in the public domain. Moreover, Senior Loans
may not be rated by any NRSRO. Many issuers
have not issued securities to the public and
are not subject to reporting requirements
under federal securities laws. Generally,
however, issuers are required to provide
financial information to lenders and
information may be available from other
Senior Loan participants, agents or others
that invest in, trade in, originate or
administer Senior Loans. The Sub-Adviser's
judgment about the attractiveness, relative
value or potential appreciation of a
particular sector, security or investment
strategy may prove to be incorrect.
Illiquid Securities. Although the resale, or
secondary market for Senior Loans is
growing, it is currently limited. There is
no organized exchange or board of trade on
which Senior Loans are traded. Instead, the
secondary market for Senior Loans is an
unregulated inter-dealer or inter-bank
resale market.
Senior Loans usually trade in large
denominations (typically $1 million and
higher) and trades can be infrequent. The
market has limited transparency so that
information about actual trades may be
difficult to obtain. Accordingly, some or
many of the Senior Loans in which the Fund
invests will be relatively illiquid.
In addition, Senior Loans in which the Fund
invests may require the consent of the
Borrower and/or agent prior to sale or
assignment. These consent requirements can
delay or impede the Fund's ability to sell
Senior Loans and can affect adversely the
price that can be obtained. The Fund may
have difficulty disposing of Senior Loans if
it needs cash to repay debt, to pay
dividends, to pay expenses or to take
advantage of new investment opportunities.
In addition, if the Fund purchases a
relatively large assignment of a Senior Loan
to generate extra income sometimes paid to
large lenders, the limitations of the
secondary market may inhibit the Fund from
selling a portion of the Senior Loan and
reducing its exposure to the Borrower when
the Sub-Adviser deems it advisable to do so.
Limited Secondary Market for Senior Loans;
Valuation. Although the resale or secondary
market for Senior Loans is growing,
currently it is limited. There is no
organized exchange or board of trade on
which Senior Loans are traded. Instead, the
secondary market for Senior Loans is an
unregulated inter-dealer or inter-bank
resale market.
Page 14
However, because the secondary market for
Senior Loans is limited, it may be difficult
to value some loans. Market quotations may
not be readily available for some Senior
Loans and valuation may require more
research than for liquid securities. In
addition, elements of judgment may play a
greater role in valuing Senior Loans than
securities for which there is a secondary
market, because there is less reliable
objective data available.
Interest Rate Risk. During normal market
conditions, changes in market interest rates
will affect the Fund. The principal effect
will be that the yield on the Fund's Common
Shares will tend to rise or fall as market
interest rates rise and fall. This is
because Senior Loans, the majority of the
assets in which the Fund invests, pay
interest at floating rates varying in
response to changes in market rates.
However, because the rates of interest paid
on the Senior Loans in which the Fund
invests will have a weighted average reset
period that is typically less than 90 days,
changes in prevailing interest rates can be
expected to cause some fluctuation in the
Fund's net asset value ("NAV"). Similarly, a
sudden and significant increase in market
interest rates may cause a decline in the
Fund's NAV.
Leverage Risk. The Fund will be leveraged in
the amount of 38% of its Managed Assets
after the issuance of the AMPS and assuming
the Fund borrows the full amount available
to it under the Credit Facility. The Fund
may use leverage for investment purposes, to
finance the repurchase of its Common Shares,
and to meet cash requirements. The Fund's
use of leverage may result in risks and can
magnify the effect of any losses. There is
no assurance that a leveraging strategy will
be successful.
Foreign Securities. The Fund may invest up
to 15% of its Managed Assets in U.S.
dollar-denominated foreign securities, but
in no case will the Fund invest in debt
securities of issuers located in emerging
markets. Investments in non-U.S. issuers may
involve unique risks which differ from
investments in securities of U.S. issuers.
These risks are more pronounced to the
extent that the Fund invests a significant
portion of its non-U.S. investments in one
region. These risks may include:
o less information about non-U.S. issuers
or markets may be available due to less
rigorous disclosure or accounting
standards or regulatory practices;
o many non-U.S. markets are smaller, less
liquid and more volatile. In a changing
market, the Sub-Adviser may not be able
to sell the Fund's portfolio securities
at times, in amounts and at prices it
considers desirable;
o an adverse effect of currency exchange
rates or controls on the value of the
Fund's investments;
o the economies of non-U.S. countries may
grow at slower rates than expected or may
experience a downturn or recession;
o economic, political, and social
developments may adversely affect the
securities markets; and
o withholding and other non-U.S. taxes may
decrease the Fund's return.
Unsecured Loans and Subordinated Loans. The
Fund may invest up to 10% of its Managed
Assets, measured at the time of investment,
in unsecured Senior Loans, subordinated
loans or a subordinated portion of a Senior
Loan. Unsecured Senior Loans and
subordinated loans share the same credit
risks as those discussed above under "Credit
Risk" except that unsecured Senior Loans are
not secured by any collateral of the
Borrower and subordinated loans are not the
most senior debt in a Borrower's capital
structure. Unsecured Senior Loans do not
enjoy the security associated with
collateralization and may pose a greater
risk of non-payment of interest or loss of
principal than do secured Senior Loans. The
primary additional risk in a subordinated
loan is the potential loss in the event of
default by the issuer of the loan.
Page 15
Subordinated loans and subordinated portions
of Senior Loans in an insolvency bear an
increased share, relative to senior secured
lenders, of the ultimate risk that the
Borrower's assets are insufficient to meet
its obligations to its creditors.
Restrictive Covenants and 1940 Act
Restrictions. The Fund has entered into a
364-day revolving credit facility among the
Fund, various lenders and Citicorp North
America, Inc., as agent, which allows the
Fund to borrow up to $195,000,000 (the
"Credit Facility"). The credit agreement
(the "Credit Agreement") governing this
facility includes usual and customary
covenants for this type of transaction,
including, but not limited to, limits on the
Fund's ability to: (1) issue Preferred
Shares; (2) incur liens or pledge portfolio
securities or investments; (3) change its
investment objectives or fundamental
investment policies and restrictions without
the approval of lenders; (4) adopt or carry
out any plan of liquidation, reorganization,
incorporation, recapitalization, merger or
consolidation or sell, transfer or otherwise
dispose of all or a substantial portion of
the Fund's assets; (5) remove the adviser or
the sub-adviser of the Fund; (6) amend the
Fund documents in a manner which could
adversely affect the rights, interests or
obligations of any of the lenders; (7)
engage in any business other than the
business currently engaged in; (8) create,
assume or suffer to exist certain debt
except for certain specific types of debt;
and (9) become a member of any Employee
Retirement Income Security Act ("ERISA")
group or incur any liability or obligation
that could result in the imposition of a
lien under the Code or ERISA. The Fund may
also enter into other leverage borrowing
programs in the future. The credit
agreements governing such future programs
(the "Potential Credit Agreements") will
also likely include the covenants listed
above. In addition, Potential Credit
Agreements may not permit the Fund's asset
coverage ratio to fall below 300% at any
time.
Under the requirements of the 1940 Act, the
Fund must have asset coverage of at least
300% immediately after any borrowing,
including borrowing under any leverage
borrowing program the Fund implements. 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
represented by senior securities issued by
the Fund. The Credit Agreement limits, and
any Potential Credit Agreement would likely
limit, the Fund's ability to pay dividends
or make other distributions on the Fund's
Preferred Shares including the AMPS, unless
the Fund complies with the 300% asset
coverage test in the Credit Agreement and
likely to be a provision in any Potential
Credit Agreement. In addition, the Credit
Agreement does not permit, and any Potential
Credit Agreement would likely not permit,
the Fund to declare dividends or other
distributions or purchase or redeem Common
Shares or Preferred Shares, including the
AMPS, at any time that any event of default
under the Credit Agreement or any Potential
Credit Agreement has occurred and is
continuing.
Lending Portfolio Securities. To generate
additional income, the Fund may lend
portfolio securities in an amount up to
331/3% of Managed Assets to broker-dealers,
major banks, or other recognized domestic
institutional borrowers of securities. As
with other extensions of credit, there are
risks of delay in the recovery or even loss
of rights in the collateral should the
borrower default or fail financially. The
Fund intends to engage in lending portfolio
securities only when such lending is fully
secured by investment grade collateral held
by an independent agent.
Demand for Senior Loans. Although the volume
of Senior Loans has increased in recent
years, demand for Senior Loans also has
grown. An increase in demand may affect
adversely the rate of interest payable on
Senior Loans acquired by the Fund, the price
of Senior Loans acquired in the secondary
markets and the rights provided to the Fund
under the terms of a Senior Loan.
Page 16
Short-Term Debt Securities. The Fund may
invest in short-term debt securities. Short-
term debt securities are subject to the risk
of the issuer's inability to meet principal
and interest payments on the obligation and
also may be subject to price volatility due
to such factors as interest rate
sensitivity, market perception of the
creditworthiness of the issuer and general
market liquidity.
Because short-term debt securities pay
interest at a fixed rate, when interest
rates decline, the value of the Fund's
short-term debt securities can be expected
to rise, and when interest rates rise, the
value of those securities can be expected to
decline.
Investments in Equity Securities Incidental
to Investment in Senior Loans. The Fund also
may acquire equity securities as incident to
the purchase or ownership of a Senior Loan
or in connection with a reorganization of a
Borrower. Investments in equity securities
incidental to investment in Senior Loans
entail certain risks in addition to those
associated with investments in Senior Loans.
The value of the equity securities may be
affected more rapidly, and to a greater
extent, by company-specific developments and
general market conditions. These risks may
increase fluctuations in the Fund's NAV. The
Fund frequently may possess material
non-public information about a Borrower as a
result of its ownership of a Senior Loan to
the Borrower. Because of prohibitions on
trading in securities while in possession of
material non- public information, the Fund
might be unable to enter into a transaction
in a security of the Borrower when it would
otherwise be advantageous to do so.
Strategic Transactions. The Fund may use
various other investment management
techniques that also involve certain risks
and special considerations, including
engaging in hedging and risk management
transactions, including credit default
swaps, credit-linked notes, interest rate
options, futures, swaps, caps, floors, and
collars and other derivative transactions.
These strategic transactions will be entered
into to seek to manage the risks of the
Fund's portfolio securities, but may have
the effect of limiting the gains from
favorable market movements. Certain of these
strategic transactions may provide
investment leverage to the Fund's portfolio
and result in many of the same risks of
leverage to Common Shareholders as discussed
above under "--Leverage Risk." See
"Additional Information About the Fund's
Investments" in the SAI for more information
about these techniques.
Reinvestment Risk. Reinvestment risk is the
risk that income from the Fund will decline
if and when the Fund invests the proceeds
from matured, traded, or called securities
at market rates that are below the
portfolio's current earnings rate. A decline
in income could affect the market price or
the overall returns on the Fund's Common
Shares.
Inflation Risk. Inflation risk is the risk
that the value of assets or income from the
Fund's investment will be worth less in the
future as inflation decreases the value of
money. As inflation increases, the real, or
inflation adjusted, value of the Fund's
Common Shares and distributions can decline
and the interest payments on Fund
borrowings, if any, may increase or the
value of dividend payments on the Fund's
Preferred Shares, if any, may decline.
Regulatory Changes. To the extent that
legislation or state or federal bank or
other regulators impose additional
requirements or restrictions on the ability
of certain financial institutions to make
loans, particularly in connection with
highly leveraged transactions, the
availability of Senior Loans and other
related potential investments for the Fund
may be reduced. Further, such legislation or
regulation could depress the market value of
Senior Loans and other debt securities held
by the Fund.
Market Event Risk. The terrorist attacks in
the U.S. on September 11, 2001 had a
disruptive effect on the securities markets.
U.S. military and related action in Iraq is
ongoing and events in the Middle East could
have significant adverse effects on the U.S.
economy and the stock market. The Fund
cannot predict the effects of similar events
in the future on the U.S. economy. The Iraq
war and related reconstruction, terrorism
and related geopolitical risks have led, and
may in the future lead to, increased
short-term market volatility and may have
adverse long-term effects on the U.S. and
world economies and markets generally.
Page 17
Federal Income
Tax Matters...................... The Fund believes that the AMPS will be
treated as equity for federal income tax
purposes. Distributions with respect to the
AMPS generally will be subject to federal
income taxation. A portion of the Fund's
portfolio income may qualify for the
dividends received deduction available to
corporate investors or for treatment as
"qualified dividend income" that generally
is subject to reduced rates of federal
income taxation for noncorporate investors.
The Internal Revenue Service ("IRS")
currently requires that a regulated
investment company, which has two or more
classes of stock, allocate to each class
proportionate amounts of each type of its
income (such as ordinary income and capital
gain) based upon the percentage of total
dividends distributed to each class for the
tax year. Accordingly, the Fund intends each
year to allocate ordinary income dividends
and capital gain dividends between its
Common Shares and AMPS in proportion to the
total dividends paid to each class during or
with respect to that year.
Trading Market................... The AMPS will not be listed on an exchange.
Instead, you may buy or sell your AMPS at an
auction that normally is held every for the
Series A AMPS and every fourth for the
Series B AMPS by submitting Orders to a
Broker- Dealer that has entered into an
agreement with the Auction Agent and the
Fund, or to a broker-dealer that has entered
into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers may maintain a secondary
trading market in AMPS outside of auctions,
but may discontinue this activity at any
time. There is no assurance that a secondary
market will be created or, if created, that
it will provide shareholders with liquidity
or that the trading price in any secondary
market would be $25,000. You may transfer
shares outside of auctions only to or
through a Broker-Dealer, or a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer.
Auction Agent, Transfer Agent,
Registrar and Dividend
Disbursing Agent................. Deutsche Bank Trust Company Americas will
serve as auction agent, transfer agent,
registrar and dividend disbursing agent with
respect to the AMPS.
Custodian and
Administrator.................... PFPC Trust Company serves as the custodian
of the assets of the Fund. PFPC Inc.
provides certain administrative and
accounting services to the Fund.
Page 18
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the operating performance of
the Fund from the commencement of the Fund's investment operations on May 18,
2004 until July 31, 2004. Since the Fund is recently organized and commenced
operations on May 18, 2004, the table covers eleven weeks of operations, during
which a substantial portion of the Fund's portfolio was held in temporary
investments pending investment in long-term securities that meet the Fund's
investment objectives and policies. Accordingly, the information presented may
not provide a meaningful picture of the Fund's operating performance.
For the Period For the Period
May 18, 2004 to June 1, 2004 to
May 31, 2004 July 31, 2004
(Audited) (Unaudited)
--------------- ---------------
Per Share Operating Performance:
Common share net asset value, beginning of period ........................................ $19.10 $19.04
Net investment (loss) income........................................................... $(.00) $.07
Net realized/unrealized (loss) gain from investments................................... $(.02) $.04
Total from investment operations.................................................. $(.02) $.11
Common share offering costs charged to paid in capital................................. $(.04) -
Common share net asset value, end of period............................................... $19.04 $19.15
Per share market value, end of period..................................................... $20.01 $19.67
Total return on common share net asset value(s) (1)....................................... (.31)% .58%
Total return based on market value(s) (1)................................................. .05% (1.70)%
Ratios/Supplemental Data:
Net assets applicable to common shares, end of period (in thousands)...................... $437,945 $483,283
Ratio of expenses to average net assets applicable to common shares....................... 1.44%(2) .90%(2)
Ratio of net investment (loss) income to average net assets applicable to common shares... (.76)%(2) 2.22%(2)
Portfolio turnover rate................................................................... .00% 8.39%
See accompanying notes to financial statements in the SAI.
------------
(1) Total return on Common Share net asset value is the combination of
reinvested dividend income, reinvested capital gains distributions at
prices obtained by the Dividend Reinvestment Plan, if any, and changes
in Common Share net asset value per share. Total investment return on
market value is the combination of reinvested dividend income,
reinvested capital gains distributions at prices obtained by the
Dividend Reinvestment Plan, if any, and changes in stock price per
share. Total returns are not annualized.
(2) Annualized on a 365-day calendar year.
Page 19
THE FUND
The Fund is a recently organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized on
March 25, 2004 as a Massachusetts business trust pursuant to a Declaration of
Trust (the "Declaration of Trust") governed by the laws of The Commonwealth of
Massachusetts. On May 18, 2004, the Fund issued an aggregate of 5,236 Common
Shares to First Trust Portfolios, L.P. in connection with the commencement of
operations of the Fund. On May 28, 2004, the Fund issued an aggregate of
23,000,000 Common Shares pursuant to which the Fund received approximately
$438,380,000, after the payment of estimated organizational and offering costs.
On June 23, 2004, and on July 13, 2004, the Fund issued an additional 1,000,000
Common Shares and 1,225,000 Common Shares, respectively, in connection with the
partial exercise by the underwriters of their overallotment option. The Common
Shares are listed on the NYSE under the symbol "FCT." The Fund's principal
office is located at 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532 and
its telephone number is (630) 241-4141.
The following provides information about the Fund's outstanding shares as
of July 31, 2004:
Amount Held
by the Fund Amount
Title of Class Amount Authorized or for its Account Outstanding
-------------- ----------------- ------------------ -----------
Common Shares.......... Unlimited None 25,230,236
Preferred Shares ...... Unlimited None None
AMPS Series A....... None None None
AMPS Series B....... None None None
USE OF PROCEEDS
The net proceeds of the offering will be $ , after payment of the sales
load and offering costs, estimated at approximately $ . The Fund will invest
the net proceeds of the offering in accordance with the Fund's investment
objectives and policies as described under "The Fund's Investments," as soon as
practicable. The Fund currently anticipates that it will be able to invest
substantially all of the net proceeds in Senior Loans that meet those investment
objectives and policies within approximately three to six months after the
completion of the offering. The investment process may take more than three
months because the Senior Loan market may not have enough attractively priced
and desirable assets available in that time frame to allow the Fund to invest
all available assets. Pending investment in Senior Loans that meet the Fund's
investment objectives and policies, the net proceeds of the offering will be
invested in high quality, short-term fixed income securities and money market
securities.
Page 20
CAPITALIZATION
The following table sets forth the capitalization (unaudited) of the Fund
as of July 31, 2004, and as adjusted, to give effect to the issuance of the AMPS
offered in this prospectus.
As of July 31, 2004
-------------------
Actual As Adjusted
(Unaudited) (Unaudited)
----------- -----------
Preferred Shares, $25,000 stated value per share,
at liquidation value; unlimited shares authorized
(no shares issued and 4,000 shares issued, as
adjusted, respectively) (1)..................................................... $ - $100,000,000
------------ ------------
Common Shareholders' Equity:
Common shares, $.01 par value per share; unlimited
shares authorized (25,230,236 shares outstanding) (1).............................. $ 252,302 $ 252,302
Paid-in surplus (2)................................................................... 480,581,394 579,572,185
Undistributed net investment income................................................... 1,708,475 1,708,475
Accumulated net realized gain (loss) from investments................................. 354,187 354,187
Net unrealized appreciation (depreciation) of investments............................. $ 386,352 $ 386,352
------------
(1) None of these outstanding shares are held by or for the account of the Fund.
(2) As adjusted paid-in surplus reflects a reduction for the sales load and
estimated offering expenses for the AMPS issuance ($1,009,209).
PORTFOLIO COMPOSITION
As of July 31, 2004, approximately 90.4% of the market value of the Fund's
portfolio was invested in leveraged bank loans, and approximately 9.6% of the
market value of the Fund's portfolio was invested in repurchase obligations. The
following table sets forth certain information with respect to the composition
of the Fund's investment portfolio as of July 31, 2004, based on the highest
rating assigned each investment.
Value
Credit Rating+ (in 000's) Percent
-------------- ---------- -------
Loan Assets
"Baa"/ "BB"........................... $ 14,612 2.2%
"Ba"/ "BB"............................ 270,655 41.6%
"B"/ "B".............................. 277,376 42.6%
"Caa"/ "CCC".......................... -- .0%
"Ca"/ "CC"............................ -- .0%
"D"................................... 7,268 1.1%
Unrated++............................. 18,288 2.8%
-------- ------
Total Loan Assets..................... 588,199 90.4%
Repurchase Agreements.................... 62,680 9.6%
-------- ------
Total.................................... $650,879 100.0%
======== ======
----------
+ Ratings assigned by Moody's and S&P. These ratings are an assessment of
the capacity and willingness of an issuer to pay the principal and
interest on the securities being rated. The ratings are not a
recommendation to purchase, hold or sell the securities being rated
inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The meanings assigned by Moody's
and S&P to their ratings are attached as Appendix B to the SAI.
++ Refers to securities that have not been rated by Moody's or S&P. See
"The Fund's Investments--Investment Objectives and Policies."
Page 21
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund will attempt to preserve capital. The
Fund will pursue these objectives through investment in a portfolio of Senior
Loans. Under normal conditions, the Fund will invest at least 80% of its Managed
Assets in a diversified portfolio of Senior Loans. There can be no assurance
that the Fund will achieve its investment objectives.
Corporate debt obligations, such as the Senior Loans, are subject to the
risk of non-payment of scheduled interest or principal. Such non-payment would
result in a reduction of income to the Fund, a reduction in the value of the
investment and a potential decrease in the Fund's NAV. There can be no assurance
that the liquidation of collateral securing a Senior Loan or bond, if any, 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 a bankruptcy of a Borrower, the Fund could
experience delays or limitations with respect to its ability to realize the
benefits of the collateral, if any, securing a corporate debt obligation. To the
extent that a corporate debt obligation 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 a bankruptcy of such Borrower. Some corporate debt
obligations, including Senior Loans, are subject to the risk that a court,
pursuant to fraudulent conveyance or other similar laws, could subordinate such
corporate debt obligations to presently existing or future indebtedness of the
Borrower or take other action detrimental to the holders, including, in certain
circumstances, invalidating such corporate debt obligations or causing interest
previously paid to be refunded to the Borrower. If interest were required to be
refunded, it could negatively affect the Fund's performance.
The Fund may invest in corporate debt obligations which are not rated by an
NRSRO, are not registered with the Securities and Exchange Commission or any
state securities commission and are not listed on any national securities
exchange. In evaluating the creditworthiness of corporate debt obligors, the
Sub-Adviser will consider, and may rely in part on, analyses performed by
others. Substantially all of the corporate debt obligations in which the Fund
will invest (at least 80%) will be lower grade debt instruments. Lower grade
debt instruments are rated "Ba1" or lower by Moody's, "BB+" or lower by S&P or
comparably rated by another NRSRO. In the event corporate debt obligations are
not rated, they are likely to be the equivalent of lower grade quality. Debt
instruments which are unsecured and lower grade are viewed by the NRSROs as
having speculative characteristics and are commonly referred to as "high yield"
or "junk bonds." A description of the ratings of corporate bonds by Moody's and
S&P is included as Appendix B to the SAI. The Sub-Adviser does not view ratings
as the determinative factor in its investment decisions and relies more upon its
credit analysis abilities than upon ratings.
No active trading market may exist for some corporate debt obligations in
which the Fund will invest and some of those debt obligations may be subject to
restrictions on resale. A secondary market may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods, which may
impair the Fund's ability to realize full value and thus cause a material
decline in the Fund's NAV.
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 that investing a significant portion of the Fund's Managed Assets in
Senior Loans will reduce fluctuations in NAV as a result of changes in market
interest rates. However, because the rates of interest paid on the Senior Loans
in which the Fund invests will have a weighted average reset period that is
typically less than 90 days, changes in prevailing interest rates can be
expected to cause some fluctuation in the Fund's NAV. Similarly, a sudden and
significant increase in market interest rates may cause a decline in the Fund's
NAV. Other economic factors (such as a large downward movement in stock prices,
a disparity in supply and demand of certain securities or market conditions that
can reduce liquidity) can also adversely impact the markets for debt
obligations. Ratings downgrades of holdings or their issuers will generally
reduce the value of such holdings.
The Fund may use interest rate swaps for risk management purposes and not
as a speculative investment and would typically use interest rate swaps to
shorten the average interest rate reset time of the Fund's holdings. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
fixed-rate payments for floating rate payments. The use of interest rate swaps
is a highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Sub-Adviser is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
be unfavorably affected.
The Fund may also acquire equity securities as an incident to the purchase
or ownership of a Senior Loan or in connection with a reorganization of a
Borrower. Investments in equity securities incidental to investment in Senior
Loans entail certain risks in addition to those associated with investments in
Senior Loans.
Page 22
Senior Loan Characteristics
Senior Loans are loans that typically are made to business Borrowers to
finance leveraged buyouts, recapitalizations, mergers, stock repurchases and to
finance internal growth. Senior Loans generally hold one of the most senior
positions in the capital structure of a Borrower and are usually secured by
liens on the assets of the Borrowers, including tangible assets such as cash,
accounts receivable, inventory, real estate, property, plant and equipment,
common and/or preferred stock of subsidiaries and other companies, and
intangible assets including trademarks, copyrights, patent rights, and franchise
value. The Fund may also receive guarantees as a form of collateral.
By virtue of their senior position and collateral, Senior Loans typically
provide lenders with the first right to cash flows or proceeds from the sale of
a Borrower's collateral if the Borrower becomes insolvent (subject to the
limitations of bankruptcy law, which may provide higher priority to certain
claims such as, for example, employee salaries, employee pensions, and taxes).
This means Senior Loans are generally repaid before unsecured bank loans,
corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders.
Senior Loans typically pay interest at least quarterly at rates which equal
a fixed percentage spread over a base rate such as LIBOR. For example, if LIBOR
were 4.00% and the Borrower were paying a fixed spread of 3.00%, the total
interest rate paid by the Borrower would be 7.00%. Base rates and, therefore,
the total rates paid on Senior Loans float, i.e., they change as market rates of
interest change. The fixed spread over the base rate on a Senior Loan typically
does not change.
Although a base rate such as LIBOR can change every day, loan agreements
for Senior Loans typically allow the Borrower the ability to choose how often
the base rate for the loan will change. Such periods can range from one day to
one year, with most Borrowers choosing monthly or quarterly reset periods.
During periods of rising interest rates, Borrowers will tend to choose longer
reset periods, and during periods of declining interest rates, Borrowers will
tend to choose shorter reset periods.
Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions represented by an agent who is
usually one of the originating lenders. In larger transactions, it is common to
have several agents. Generally, however, only one such agent has primary
responsibility for on-going administration of a Senior Loan. Agents are
typically paid fees by the Borrower for their services. The agent is primarily
responsible for negotiating the loan agreement which establishes the terms and
conditions of the Senior Loan and the rights of the Borrower and the lenders.
The agent is also responsible for monitoring collateral and for exercising
remedies available to the lenders such as foreclosure upon collateral.
Loan agreements may 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 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 or entity's bankruptcy estate. If,
however, any such amount were included in such person's or entity's bankruptcy
estate, the Fund would incur certain costs and delays in realizing payment or
could suffer a loss of principal or interest. In this event, the Fund could
experience a decrease in NAV.
The Fund acquires Senior Loans from lenders such as banks, insurance
companies, finance companies, other investment companies and private investment
funds. The Fund may also acquire Senior Loans from U.S. branches of foreign
banks that are regulated by the Federal Reserve System or appropriate state
regulatory authorities.
Senior Loans that the Fund may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the Borrower and the likelihood of payback are believed by the
Sub-Adviser to be the same as those applied to conventional Senior Loans. A
Lease Participation is also required to have a floating interest rate that is
indexed to a benchmark indicator of prevailing interest rates, such as LIBOR or
the Prime Rate.
See "Net Asset Value" for information about the valuation of Senior Loans.
Additional Information Concerning Senior Loans
The Fund's investments in Senior Loans may take one of several forms,
including acting as one of the group of lenders originating a Senior Loan,
purchasing an assignment of a portion of a Senior Loan from a third party or
acquiring a participation in a Senior Loan. When the Fund is a member of the
originating syndicate for a Senior Loan, it may share in a fee paid to the
syndicate. When the Fund acquires a participation in, or an assignment of, a
Senior Loan, it may pay a fee to, or forego a portion of interest payments from,
the lender selling the participation or assignment. The Fund will act as lender,
or purchase an assignment or participation, with respect to a Senior Loan only
if the agent is determined by the Sub-Adviser to be creditworthy.
Page 23
Except for rating agency guidelines imposed on the Fund's portfolio while
it has outstanding Preferred Shares, there is no minimum rating or other
independent evaluation of a Borrower limiting the Fund's investments and most
Senior Loans that the Fund may acquire, if rated, will be rated lower grade,
meaning below investment grade quality. See "Risks--General Risks of Investing
in the Fund--Credit Risk."
Original Lender. When the Fund is one of the original lenders, it will have
a direct contractual relationship with the Borrower and can enforce compliance
by the Borrower with terms of the loan agreement. It also may have negotiated
rights with respect to any funds acquired by other lenders through set-off.
Original lenders also negotiate voting and consent rights under the loan
agreement. Actions subject to lender vote or consent generally require 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 of, 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.
Assignments. When the Fund is a purchaser of an assignment, it 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 are, however,
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
assignment may be more limited than those held by the assigning lender.
Participations. The Fund may also invest in participations in Senior Loans.
The rights of the Fund when it acquires a participation are likely to be more
limited than the rights of an original lender or an investor who acquired an
assignment. Participation by the Fund in a lender's portion of a Senior Loan
typically means that the Fund has a contractual relationship only with the
lender, not with the Borrower. This means that the Fund has 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 the lender of
payments from the Borrower.
With a participation, the Fund will have no rights to enforce compliance by
the Borrower with the terms of the loan agreement or any rights with respect to
any funds acquired by other lenders through set-off against the Borrower. In
addition, the Fund may not directly benefit from the collateral supporting the
Senior Loan because it may be treated as a general creditor of the lender
instead of the Borrower. As a result, the Fund may be subject to delays,
expenses and risks that are greater than those that exist when the Fund is the
original lender or holds an assignment. This means the Fund must assume the
credit risk of both the Borrower and the lender selling the participation. The
Fund will consider a purchase of participations only in those situations where
the Fund considers the participating lender to be creditworthy.
In the event of a bankruptcy or insolvency of a Borrower, the obligation of
the Borrower to repay the Senior Loan may be subject to certain defenses that
can be asserted by such Borrower against the Fund as a result of improper
conduct of the lender selling the participation. A participation in a Senior
Loan will be deemed to be a Senior Loan for the purposes of the Fund's
investment objectives and policies.
Senior Loan Market. The market for Senior Loans in which the Fund will
invest surpassed the $1 trillion mark in 2002. New issue volume has exceeded
$200 billion for each of the last six years. According to Standard & Poor's
Leveraged Commentary and Data, over the last nine years, the investor base in
Senior Loans has changed dramatically, with foreign and domestic banks moving
from an approximate combined 75% market share in 1994 to an approximate combined
25% market share at year end 2003, while institutional investors, including
mutual funds, hedge funds, collateralized debt obligations, insurance companies,
and pension, endowment, and foundation investors collectively moved from an
approximate 25% market share to an approximate 75% market share over the same
period. According to Loan Pricing Corporation and Securities Data Corp., the
entrance of new investors has helped create an active trading market in Senior
Loans with approximately $145 billion in Senior Loan trades having been executed
in 2003. The growth in the market could continue to result in improved liquidity
for Senior Loans over time.
Market Indices. The Fund may invest in Senior Loan market indices that
synthetically reflect a composite of performance of the Senior Loan market based
on the aggregate performance of a diversified pool of underlying actively traded
"par" Senior Loans. The Fund may take long positions in these indices primarily
as a means of investing its portfolio following the closing of the offering of
the Fund's Common Shares and the receipt of the proceeds from the leveraging of
the Fund through the issuance of Preferred Shares or other debt. From time to
time, the Fund may invest in or short these indices as a means of managing
portfolio exposure or increasing portfolio yield. In the event the Fund invests
in these indices, the Fund expects to reduce its exposure to these indices by
acquiring individual Senior Loans in the primary and secondary markets following
the receipt of the aforementioned proceeds from the offerings of the Common and
Preferred Shares (and/or other debt offering.) Senior Loan market indices are
available in unfunded and funded format, the former making use of credit default
swaps and the latter making use of credit-linked notes. Descriptions of credit
default swaps and credit-linked notes may be found in the SAI. Any investment by
Page 24
the Fund in a Senior Loan market index will not be included in the limits set
forth in the SAI for credit default swaps and credit-linked notes. In the event
that the Fund were to invest in an unfunded Senior Loan market index, the Fund
will segregate assets in the form of cash and cash equivalents in an amount
equal to the aggregate market value of the unfunded index investment.
Other Investment Companies. The Fund may invest its Managed Assets in
securities of other open- or closed-end investment companies that invest
primarily in securities of the types in which the Fund may invest directly. In
addition, the Fund may invest a portion of its Managed Assets in pooled
investment vehicles (other than investment companies) that invest primarily in
securities of the types in which the Fund may invest directly. The Fund
generally expects that it may invest in other investment companies and/ or
pooled investment vehicles including market indices either during periods when
it has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or Preferred
Shares and/or borrowings, or during periods when there is a shortage of
attractive securities of the types in which the Fund may invest in directly
available in the market. As an investor in an investment company, the Fund will
bear its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. The Sub-Adviser will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available securities of the types in which the Fund may invest directly. In
addition, the securities of other investment companies also may be leveraged and
therefore will be subject to the same leverage risks described herein. As
described in the section entitled "Risks--General Risks of Investing in the
Fund--Leverage Risk," the net asset value and market value of leveraged shares
will be more volatile and the yield to shareholders will tend to fluctuate more
than the yield generated by unleveraged shares. The Fund will treat its
investments in such investment companies as investments in Senior Loans for all
purposes, such as for purposes of determining compliance with the requirement
set forth above that at least 80% of the Fund's Managed Assets be invested under
normal market circumstances in Senior Loans.
Leverage
The Fund anticipates its total leverage will be in an aggregate amount of
38% after the issuance of the AMPS and assuming the Fund borrows the full amount
available to it under the Credit Facility described below. In addition to the
issuance of AMPS, the Fund may make further use of financial leverage through
borrowings, including the issuance of commercial paper or notes. The Fund has
entered into the Credit Facility which provides up to $195,000,000 to be used
to, among other things, purchase loans and other instruments in which the Fund
may invest, thereby increasing the leverage of the Fund. The Fund currently
intends to borrow up to the full amount available under the Credit Facility. See
"Description of AMPS" and "Description of Borrowings." The Fund employs leverage
to acquire additional income producing investments when the Advisers believe
that the use of proceeds will enhance the Fund's net income. The amount of
outstanding financial leverage may vary with prevailing market or economic
conditions. Leverage entails special risks. See "Risks--General Risks of
Investing in the Fund--Leverage Risk." The management fee paid to the Advisers
will be calculated on the basis of the Fund's Managed Assets (which includes
proceeds of financial leverage), so the fees will be higher when leverage is
used. Under the requirements of the 1940 Act, the Fund, immediately after
issuing any Borrowings that are senior securities representing indebtedness (as
defined in the 1940 Act), must have an asset coverage of at least 300%. With
respect to any such Borrowings, asset coverage means the ratio that the value of
the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount of any such
Borrowings that are senior securities representing indebtedness, issued by the
Fund. Certain types of Borrowings also may result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. In addition, the Fund may be subject to certain
restrictions imposed by guidelines of one or more rating agencies which may
issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
RISKS
An investment in the AMPS involves risks. You may lose money by investing
in the Fund. Such an investment should not constitute a complete investment
program. Before investing in the AMPS, you should consider carefully the
following risks.
Risks of Investing in AMPS
Auction Risk. If there are more AMPS offered for sale than there are buyers
for those shares, you may not be able to sell your AMPS at an auction. If
Sufficient Clearing Bids do not exist in an auction, the Applicable Rate will be
the Maximum Rate, and in this event, owners of the AMPS who wish to sell will
not be able to sell all, or any, of the shares in the auction. As a result, your
investment in the AMPS may be illiquid. Also, if you place Hold Orders (orders
to retain AMPS) at an auction only at a specified rate, and that Bid rate
exceeds the rate set at the auction, you will not retain your AMPS. Finally, if
you buy shares or elect to retain 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 than market rate of return on your
Page 25
shares. The dividend paid may be changed, subject to certain conditions and
without notice to the holders of AMPS, which could affect the liquidity of your
investment. See "Description of AMPS" and "The Auction--Auction Procedures."
Interest Rate Risk. The AMPS pay dividends based on short-term interest
rates. If short-term interest rates rise, dividend rates on the AMPS may rise so
that the dividends paid to holders of AMPS exceeds the income from the Fund's
portfolio securities. The Fund will hold principally Senior Loans that are based
on longer term interest rates. The Fund intends to manage the potential interest
rate mismatch between the interest rates on its Senior Loans and the dividend
rate. There is no guarantee that the Fund will be successful in reducing or
eliminating this interest rate risk. In addition, rising market interest rates
could negatively impact the value of the Fund's investment portfolio, reducing
the amount of assets serving as asset coverage for the AMPS and jeopardizing the
Fund's ability to pay dividends on the AMPS.
Ratings and Asset Coverage Risk. While S&P and Moody's assign ratings of
"AAA" and "Aaa," respectively, to AMPS, the ratings do not eliminate or
necessarily mitigate the risks of investing in AMPS. A rating agency could
downgrade AMPS, which may make your shares less liquid at an auction or in the
secondary market, though probably with higher resulting dividend rates. If a
rating agency downgrades AMPS, the Fund intends to alter its portfolio or redeem
AMPS. The Fund may voluntarily redeem AMPS to meet regulatory or Rating Agency
requirements. See "Description of AMPS--Asset Maintenance" for a description of
the asset maintenance tests the Fund must meet. The Fund may not redeem AMPS if
such redemption would cause the Fund to fail to meet regulatory or Rating Agency
asset coverage requirements, and the Fund may not declare, pay or set apart for
payment any dividend or other distribution if immediately thereafter the Fund
would fail to meet regulatory asset coverage requirements. A material decline in
the Fund's NAV may impair the Fund's ability to maintain its required levels of
asset coverage on the AMPS or to pay dividends on AMPS.
Inflation Risk. Inflation is the reduction in the purchasing power of money
resulting from an increase in the price of goods and services. Inflation risk is
the risk that the inflation adjusted (or "real") value of your AMPS investment
or the income from that investment will be worth less in the future. As
inflation occurs, the real value of the AMPS and distributions declines. In an
inflationary period, however, it is expected that, through the auction process,
AMPS dividend rates would increase, tending to offset this risk.
Payment Restrictions. The Fund is prohibited from declaring, paying or
making any dividends or distributions on AMPS and the Common Shares unless it
satisfies certain conditions. See "Description of AMPS--Restrictions on
Dividend, Redemption and Other Payments." These prohibitions on the payment of
dividends or distributions might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
The Fund intends, however, to redeem AMPS if necessary to comply with the asset
coverage requirements. There can be no assurance, however, that such redemptions
can be effected in time to permit the Fund to distribute its income as required
to maintain its qualification as a regulated investment company under the Code.
See "Federal Income Tax Matters."
Secondary Market Risk. The Broker-Dealers may maintain a secondary market
in the shares outside of auctions, but they have no obligation to do so. There
can be no assurance that a secondary market for the shares will develop or, if
one does develop, that it will provide holders with a liquid trading market. If
you try to sell your AMPS 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 Rate Period (a Rate Period other than 28 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
AMPS are not required to maintain this market, and the Fund is not required to
redeem shares if an auction or an attempted secondary market sale fails because
of a lack of buyers. The AMPS are not listed on an exchange. If you sell your
AMPS 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. In addition, a Broker-Dealer may, in its own discretion, decide to
sell AMPS in the secondary market to investors at any time and at any price,
including at prices equivalent to, below or above the par value of the AMPS.
Securities and Exchange Commission Inquiries. Merrill Lynch has advised the
Fund that it and certain Broker-Dealers and other participants in the auction
rate securities markets, including both taxable and tax exempt markets, have
received letters from the Securities and Exchange Commission requesting that
each of them voluntarily conduct an investigation regarding their respective
practices and procedures in those markets. Merrill Lynch is cooperating fully
with the Securities and Exchange Commission in this process. No assurance can be
given as to whether the results of this process will affect the market for the
AMPS or the Auctions.
General Risks of Investing in the Fund
Limited Operating History. The Fund is a recently organized, diversified,
closed-end management investment company that began operations on May 28, 2004.
Page 26
Performance Risk. The Fund's ability to pay dividends depends upon the
performance of the Fund's Managed Assets. That performance, in turn, is subject
to a number of risks, including credit risk on the underlying assets.
Credit Risk. Credit risk is the risk of nonpayment of scheduled interest
and/or principal payments. Credit risk also is the risk that one or more
investments in the Fund's portfolio will decline in price, or fail to pay
interest or principal when due, because the issuer of the security experiences a
decline in its financial status. The value of Senior Loans is affected by the
creditworthiness of Borrowers/issuers and by general economic and specific
industry conditions. The Fund will own securities with low credit quality and
consequently, will be subject to a high level of credit risk.
The Fund generally invests in Senior Loans that are secured with specific
collateral. However, the value of the collateral may not equal the Fund's
investment when the Senior Loan is acquired or subsequently may decline below
the principal amount of the Senior Loan. Also, to the extent that collateral
consists of stock of the Borrower or its subsidiaries or affiliates, the Fund
bears the risk that the stock may decline in value, be relatively illiquid,
and/or may lose all or substantially all of its value, causing the Senior Loan
to be undercollateralized. Therefore, the liquidation of the collateral
underlying a Senior Loan may not satisfy the issuer's obligation to the Fund in
the event of non-payment of scheduled interest or principal, and the collateral
may not be readily liquidated.
In the event of a Borrower's bankruptcy, the Fund could experience delays
and limitations on its ability to realize the benefits of the collateral
securing the Senior Loan. Among the credit risks involved in a bankruptcy are
assertions that the pledge of collateral to secure a Senior Loan constitutes a
fraudulent conveyance or preferential transfer that would have the effect of
nullifying or subordinating the Fund's rights to the collateral.
Senior Loans. If a Borrower fails to pay scheduled interest or principal
payments on a Senior Loan held by the Fund, the Fund will experience a reduction
in its income and a decline in the market value of the Senior Loan, which will
likely reduce dividends and lead to a decline in the NAV of the Fund's Common
Shares. If the Fund acquires a Senior Loan from another lender, for example, by
acquiring a participation, the Fund also may be subject to credit risks with
respect to that lender. See "The Fund's Investments--Senior Loans--Additional
Information Concerning Senior Loans."
Senior Loans generally involve less risk than unsecured or subordinated
debt and equity instruments of the same issuer because the payment of principal
of and interest on Senior Loans is a contractual obligation of the issuer that,
in most instances, takes precedence over the payment of dividends, or the return
of capital, to the issuer's shareholders and payments to bond holders. The Fund
generally invests in Senior Loans that are secured with specific collateral.
However, the value of the collateral may not equal the Fund's investment when
the Senior Loan is acquired or may subsequently decline below the principal
amount of the Senior Loan. Also, to the extent that collateral consists of stock
of the Borrower or its subsidiaries or affiliates, the Fund bears the risk that
the stock may decline in value, be relatively illiquid, and/or may lose all or
substantially all of its value, causing the Senior Loan to be
undercollateralized. Therefore, the liquidation of the collateral underlying a
Senior Loan may not satisfy the issuer's obligation to the Fund in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
In the event of the bankruptcy of a Borrower, the Fund could experience
delays and limitations on its ability to realize the benefits of the collateral
securing the Senior Loan. Among the credit risks involved in a bankruptcy are
assertions that the pledge of collateral to secure a Senior Loan constitutes a
fraudulent conveyance or preferential transfer that would have the effect of
nullifying or subordinating the Fund's rights to the collateral.
The Senior Loans in which the Fund invests are generally lower grade (i.e.,
rated "Ba1" or lower by Moody's, "BB+" or lower by S&P or comparably rated by
another NRSRO) or unrated but determined to be of comparable credit quality as
lower grade debt instruments. Investment decisions will be based largely on the
credit analysis performed by the Sub-Adviser, and not on rating agency
evaluations. This analysis may be difficult to perform. Information about a
Senior Loan and its issuer generally is not in the public domain. Moreover,
Senior Loans may not be rated by any NRSRO. Many issuers have not issued
securities to the public and are not subject to reporting requirements under
federal securities laws. Generally, however, issuers are required to provide
financial information to lenders and information may be available from other
Senior Loan participants or agents that originate or administer Senior Loans.
Lower Grade Debt Instruments. Investing in lower grade debt instruments
involves additional risks than investment-grade debt instruments. Lower grade
debt instruments are securities rated "Ba1" or lower by Moody's or "BB+" or
lower by S&P, comparably rated by another NRSRO or, if unrated, of comparable
credit quality. These lower grade debt instruments may become the subject of
bankruptcy proceedings or otherwise subsequently default as to the repayment of
principal and/or payment of interest or be downgraded to ratings in the lower
rating categories ("Ca" or lower by Moody's, "CC" or lower by S&P or comparably
rated by another NRSRO). Issuers of lower grade debt instruments are not
Page 27
perceived to be as strong financially as those with higher credit ratings, so
the securities are usually considered speculative investments. These issuers are
generally more vulnerable to financial setbacks and recession than more
creditworthy issuers which may impair their ability to make interest and
principal payments.
Lower grade debt instruments tend to be less liquid than higher grade debt
instruments. Lower grade debt instruments carry particular market risks and may
experience greater volatility in market value than investment grade debt
instruments. Changes in interest rates, the market's perception of the issuers
and the creditworthiness of the issuers may significantly affect the value of
these securities. Some of these securities may have a structure that makes their
reaction to interest rate and other factors difficult to predict, causing their
value to be highly volatile. The secondary market for lower grade debt
instruments may be less liquid than the markets for higher quality debt
instruments, and this may have an adverse effect on the market value of certain
securities.
Lower grade debt instruments face market, issuer and other risks, and their
values may go up and down, sometimes rapidly and unpredictably. Market risk is
the risk that securities may decline in value due to factors affecting
securities markets generally or particular industries. Issuer risk is the risk
that the value of a security may decline for reasons relating to the issuer,
such as changes in the financial condition of the issuer.
The Fund could lose money if the issuer of a debt instrument is unable to
meet its financial obligations or goes bankrupt. The Fund may be subject to more
credit risk than other income funds because it invests in lower grade debt
instruments, which are considered predominantly speculative with respect to the
issuer's continuing ability to meet interest and principal payments. This is
especially true during periods of economic uncertainty or economic downturns.
The value of a lower grade debt instrument may fall when interest rates
rise. Debt instruments with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
instruments with shorter durations.
Lower grade debt instruments may be less liquid than higher quality
instruments. The Fund could lose money if it cannot sell a security at the time
and price that would be most beneficial to the Fund. A security in the lowest
rating categories, that is unrated, or whose credit rating has been lowered may
be particularly difficult to sell. Valuing less liquid securities involves
greater exercise of judgment and may be more subjective than valuing securities
using market quotes.
The value of a Senior Loan is partially a function of whether it is paying
what the market perceives to be a market rate of interest for the particular
Senior Loan, given its individual credit and other characteristics. If market
interest rates change, a Senior Loan's value could be affected to the extent the
interest rate paid on that loan does not reset at the same time. As discussed
above, the rates of interest paid on the Senior Loans in which the Fund invests
will have a weighted average reset period that is typically less than 90 days.
Therefore, the impact of the lag between a change in market interest rates and
the change in the overall rate on the portfolio is expected to be limited.
To the extent that changes in total rates of interest are reflected not in
a change to a base rate such as LIBOR but in a change in the spread over the
base rate which is payable on Senior Loans of the type and quality in which the
Fund invests, the Fund's NAV also could be adversely affected. Again, this is
because the value of a Senior Loan in the Fund is partially a function of
whether it is paying what the market perceives to be an appropriate total rate
of interest for the particular Senior Loan, given its individual credit and
other characteristics. However, unlike changes in market rates of interest for
which there is only a temporary lag before the portfolio reflects those changes,
changes in a Senior Loan's value based on changes in the market spread on Senior
Loans held by the Fund may be of longer duration.
Reliance on Credit Analysis by Sub-Adviser; Management Risk. Investment
decisions will be based largely on the credit analysis performed by the
Sub-Adviser, and not on rating agency evaluation. This analysis may be difficult
to perform. Information about a Senior Loan and its issuer generally is not in
the public domain. Moreover, Senior Loans may not be rated by any NRSRO. Many
issuers have not issued securities to the public and are not subject to
reporting requirements under federal securities laws. Generally, however,
issuers are required to provide financial information to lenders and information
may be available from other Senior Loan participants, agents or others that
invest in, trade in, originate or administer Senior Loans. The Sub-Adviser's
judgment about the attractiveness, relative value or potential appreciation of a
particular sector, security or investment strategy may prove to be incorrect.
Illiquid Securities. The Fund may invest without limit in illiquid
securities. Illiquid securities may be difficult to dispose of at a fair price
at the times when the Fund believes it is desirable to do so. The market price
of illiquid securities generally is more volatile than that of more liquid
securities, which may adversely affect the price that the Fund pays for or
recovers upon the sale of illiquid securities. Illiquid securities also are more
difficult to value and the Adviser's judgment may play a greater role in the
valuation process. Investment of the Fund's assets in illiquid securities may
restrict the Fund's ability to take advantage of market opportunities. The risks
associated with illiquid securities may be particularly acute in situations in
which the Fund's operations require cash and could result in the Fund borrowing
to meet its short-term needs or incurring losses on the sale of illiquid
securities.
Page 28
Limited Secondary Market for Senior Loans; Valuation. Although the resale,
or secondary market for Senior Loans is growing, currently it is limited. There
is no organized exchange or board of trade on which Senior Loans are traded.
Instead, the secondary market for Senior Loans is an unregulated inter-dealer or
inter-bank resale market.
Senior Loans usually trade in large denominations (typically $1 million and
higher) and trades can be infrequent. The market has limited transparency so
that information about actual trades may be difficult to obtain. Accordingly,
some or many of the Senior Loans in which the Fund invests will be relatively
illiquid.
In addition, Senior Loans in which the Fund invests may require the consent
of the Borrower and/or agent prior to sale or assignment. These consent
requirements can delay or impede the Fund's ability to sell Senior Loans and can
adversely affect the price that can be obtained. The Fund may have difficulty
disposing of Senior Loans if it needs cash to repay debt, to pay dividends, to
pay expenses or to take advantage of new investment opportunities. In addition,
if the Fund purchases a relatively large assignment of a Senior Loan to generate
extra income sometimes paid to large lenders, the limitations of the secondary
market may inhibit the Fund from selling a portion of the Senior Loan and
reducing its exposure to the Borrower when the Sub-Adviser deems it advisable to
do so.
The Fund will value its Senior Loans daily. However, because the secondary
market for Senior Loans is limited, it may be difficult to value loans. Market
quotations may not be readily available for some Senior Loans and valuation may
require more research than for liquid securities. In addition, elements of
judgment may play a greater role in valuation of Senior Loans than for
securities with a secondary market, because there is less reliable objective
data available.
Interest Rate Risk. During normal market conditions, changes in market
interest rates will affect the Fund. The principal effect will be that the yield
on the Fund's Common Shares will tend to rise or fall as market interest rates
rise and fall. This is because Senior Loans, the majority of the assets in which
the Fund invests, pay interest at floating rates varying in response to changes
in market rates. However, because the rates of interest paid on the Senior Loans
in which the Fund invests will have a weighted average reset period that is
typically less than 90 days, changes in prevailing interest rates can be
expected to cause some fluctuation in the Fund's NAV. Similarly, a sudden and
significant increase in market interest rates may cause a decline in the Fund's
NAV.
Leverage Risk. Upon the issuance of the AMPS and assuming the Fund borrows
the full amount available to it under the Credit Facility, the Fund will be
leveraged in the amount of 38% of its Managed Assets and currently intends,
under normal circumstances, to maintain that amount. The use of leverage results
in additional risks and can magnify the effect of any losses. There is no
assurance that a leveraging strategy will be successful.
The funds borrowed pursuant to a leverage borrowing program (such as a
credit line or commercial paper program), or obtained through the issuance of
Preferred Shares, constitute a substantial lien and burden by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. The rights of lenders to receive payments of interest on
and repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares and the
holders of Preferred Shares, with respect to the payment of dividends or upon
liquidation. The Fund may not be permitted to declare dividends or other
distributions, including dividends and distributions with respect to Common
Shares or Preferred Shares, including the AMPS, or purchase Common Shares or
Preferred Shares unless at the time thereof, the Fund meets certain asset
coverage requirements and no event of default exists under any leverage
borrowing program.
In addition, the Fund may not be permitted to pay dividends on Common
Shares unless all dividends on the Preferred Shares, including the AMPS, and/or
accrued interest on borrowings have been paid, or set aside for payment. In an
event of default under a leverage borrowing program, the lenders have the right
to cause a liquidation of collateral (i.e., sell Senior Loans and other assets
of the Fund) and, if any default is not cured, the lenders may be able to
control the liquidation as well. Certain types of leverage may result in the
Fund being subject to covenants relating to asset coverage and Fund 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 the Preferred Shares, including the AMPS, or other leverage securities
issued by the Fund. These guidelines may impose asset coverage or Fund
composition requirements that are more stringent than those imposed by the 1940
Act. The Sub-Adviser does not believe that these covenants or guidelines will
impede it from managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the
shareholders of the Fund. Changes in the future direction of interest rates are
very difficult to predict accurately. If the Fund were to reduce leverage based
on a prediction about future changes to interest rates, and that prediction
turned out to be incorrect, the reduction in leverage would likely operate to
reduce the income and/or total returns to shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that this
Page 29
risk outweighs the likelihood of achieving the desired reduction to volatility
in income and Common Share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
In addition, because the fee paid to the Adviser and Sub-Adviser will be
calculated on the basis of the Fund's Managed Assets, which include the proceeds
of leverage, the dollar amount of the Adviser's and Sub-Adviser's fees from the
Fund will be higher (and the Adviser and Sub-Adviser will be benefited to that
extent) when leverage is utilized.
Foreign Securities. The Fund may invest up to 15% of its Managed Assets in
U.S. dollar-denominated foreign securities, but in no case will the Fund invest
in debt securities of issuers located in emerging markets. Investments in
non-U.S. issuers may involve unique risks which differ from investments in
securities of U.S. issuers. These risks are more pronounced to the extent that
the Fund invests a significant portion of its non-U.S. investments in one
region. These risks may include:
o less information about non-U.S. issuers or markets may be available
due to less rigorous disclosure or accounting standards or
regulatory practices;
o many non-U.S. markets are smaller, less liquid and more volatile. In
a changing market, the Sub-Adviser may not be able to sell the
Fund's portfolio securities at times, in amounts and at prices it
considers desirable;
o an adverse effect of currency exchange rates or controls on the
value of the Fund's investments;
o the economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession;
o economic, political, and social developments may adversely affect
the securities markets; and
o withholding and other non-U.S. taxes may decrease the Fund's return.
Unsecured Loans and Subordinated Loans. The Fund may invest up to 10% of
its Managed Assets, measured at the time of investment, in unsecured Senior
Loans, subordinated loans or a subordinated portion of a Senior Loan. Unsecured
Senior Loans and subordinated loans share the same credit risks as those
discussed above under "Credit Risk" except that unsecured Senior Loans are not
secured by any collateral of the Borrower and subordinated loans are not the
most senior debt in a Borrower's capital structure. Unsecured Senior Loans do
not enjoy the security associated with collateralization and may pose a greater
risk of non-payment of interest or loss of principal than do secured Senior
Loans. The primary additional risk in a subordinated loan is the potential loss
in the event of default by the issuer of the loan. Subordinated loans and
subordinated portions of Senior Loans in an insolvency bear an increased share,
relative to senior secured lenders, of the ultimate risk that the Borrower's
assets are insufficient to meet its obligations to its creditors.
Restrictive Covenants and 1940 Act Restrictions. The Credit Agreement
governing the Credit Facility entered into by the Fund includes usual and
customary covenants for this type of transaction, including, but not limited to,
limits on the Fund's ability to: (1) issue Preferred Shares; (2) incur liens or
pledge portfolio securities or investments; (3) change its investment objectives
or fundamental investment policies and restrictions without the approval of
lenders; (4) adopt or carry out any plan of liquidation, reorganization,
incorporation, recapitalization, merger or consolidation or sell, transfer or
otherwise dispose of all or a substantial portion of the Fund's assets; (5)
remove the adviser or the sub-adviser of the Fund; (6) amend the Fund documents
in a manner which could adversely affect the rights, interests or obligations of
any of the lenders; (7) engage in any business other than the business currently
engaged in; (8) create, assume or suffer to exist certain debt except for
certain specific types of debt; and (9) become a member of any ERISA group or
incur any liability or obligation that could result in the imposition of a lien
under the Code or ERISA. Any Potential Credit Agreements will also likely
include the covenants listed above. In addition, Potential Credit Agreements may
not permit the Fund's asset coverage ratio to fall below 300% at any time.
Under the requirements of the 1940 Act, the Fund must have asset coverage
of at least 300% immediately after any borrowing, including borrowing under any
leverage borrowing program the Fund implements. 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 represented by senior securities issued by the
Fund. The Credit Agreement limits, and any Potential Credit Agreement would
likely limit, the Fund's ability to pay dividends or make other distributions on
the Fund's Preferred Shares including the AMPS, unless the Fund complies with
the 300% asset coverage test in the Credit Agreement and likely to be a
provision in any Potential Credit Agreement. In addition, the Credit Agreement
does not permit, and any Potential Credit Agreement would likely not permit, the
Fund to declare dividends or other distributions or purchase or redeem Common
Shares or Preferred Shares, including the AMPS, at any time that any event of
default under the Credit Agreement or any Potential Credit Agreement has
occurred and is continuing.
Page 30
Lending Portfolio Securities. To generate additional income, the Fund may
lend portfolio securities in an amount up to 33-1/3% of Managed Assets to
broker-dealers, major banks, or other recognized domestic institutional
borrowers of securities. As with other extensions of credit, there are risks of
delay in the recovery or even loss of rights in the collateral should the
borrower default or fail financially. The Fund intends to engage in lending
portfolio securities only when such lending is fully secured by investment grade
collateral held by an independent agent.
Demand for Senior Loans. Although the volume of Senior Loans has increased
in recent years, demand for Senior Loans also has grown. An increase in demand
may affect adversely the rate of interest payable on Senior Loans acquired by
the Fund, the price of Senior Loans acquired in the secondary markets and the
rights provided to the Fund under the terms of a Senior Loan.
Short-Term Debt Securities. The Fund may invest in short-term debt
securities. Short-term debt securities are subject to the risk of the issuer's
inability to meet principal and interest payments on the obligation and also may
be subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity.
Because short-term debt securities pay interest at a fixed rate, when
interest rates decline, the value of the Fund's short-term debt securities can
be expected to rise, and when interest rates rise, the value of those securities
can be expected to decline.
Investments in Equity Securities Incidental to Investment in Senior Loans.
The Fund also may acquire equity securities as incident to the purchase or
ownership of a Senior Loan or in connection with a reorganization of a Borrower.
Investments in equity securities incidental to investment in Senior Loans entail
certain risks in addition to those associated with investments in Senior Loans.
The value of the equity securities may be affected more rapidly, and to a
greater extent, by company-specific developments and general market conditions.
These risks may increase fluctuations in the Fund's NAV. The Fund frequently may
possess material non-public information about a Borrower as a result of its
ownership of a Senior Loan to the Borrower. Because of prohibitions on trading
in securities while in possession of material non-public information, the Fund
might be unable to enter into a transaction in a security of the Borrower when
it would otherwise be advantageous to do so.
Strategic Transactions. The Fund may use various other investment
management techniques that also involve certain risks and special
considerations, including engaging in hedging and risk management transactions,
including credit default swaps, credit-linked notes, interest rate options,
futures, swaps, caps, floors, and collars and other derivative transactions.
These strategic transactions will be entered into to seek to manage the risks of
the Fund's portfolio securities, but may have the effect of limiting the gains
from favorable market movements. Certain of these strategic transactions may
provide investment leverage to the Fund's portfolio and result in many of the
same risks of leverage to Common Shareholders as discussed above under
"--Leverage Risk." See "Additional Information About the Fund's Investments" in
the SAI for more information about these techniques.
Reinvestment Risk. Reinvestment risk is the risk that income from the Fund
will decline if and when the Fund invests the proceeds from matured, traded, or
called securities at market rates that are below the portfolio's current
earnings rate. A decline in income could affect the market price or the overall
returns on the Fund's Common Shares.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from the Fund's investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real, or inflation
adjusted, value of the Fund's Common Shares and distributions can decline and
the interest payments on Fund borrowings, if any, may increase or the value of
dividend payments on the Fund's Preferred Shares, if any, may decline.
Regulatory Changes. To the extent that legislation or state or federal bank
or other regulators impose additional requirements or restrictions on the
ability of certain financial institutions to make loans, particularly in
connection with highly leveraged transactions, the availability of Senior Loans
and other related investments sought after by the Fund may be reduced. Further,
such legislation or regulation could depress the market value of Senior Loans
and other debt securities held by the Fund.
Market Event Risk. The terrorist attacks in the U.S. on September 11, 2001
had a disruptive effect on the securities markets. U.S. military and related
action in Iraq is ongoing and events in the Middle East could have significant
adverse effects on the U.S. economy and the stock market. The Fund cannot
predict the effects of similar events in the future on the U.S. economy. The
Iraq war and related reconstruction, terrorism and related geopolitical risks
have led, and may in the future lead to, increased short-term market volatility
and may have adverse long-term effects on the U.S. and world economies and
markets generally.
Page 31
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Adviser and the
Sub-Adviser. There are five trustees of the Fund, one of whom is an "interested
person" (as defined in the 1940 Act) and four of whom are not "interested
persons." The names and business addresses of the trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth under "Management of the Fund" in the SAI.
Investment Adviser
First Trust Advisors, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532 is the investment adviser to the Fund and is responsible for selecting and
supervising the Sub-Adviser. First Trust Advisors serves as investment adviser
or portfolio supervisor to investment portfolios with approximately $12.7
billion in assets, which it managed or supervised as of July 31, 2004.
First Trust Advisors also is responsible for the ongoing monitoring of the
Fund's investment portfolio, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
First Trust Advisors, a registered investment adviser, is an Illinois
limited partnership formed in 1991 and an investment adviser registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
First Trust Advisors is a limited partnership with one limited partner, Grace
Partners of DuPage L.P. ("Grace Partners"), and one general partner, The Charger
Corporation. Grace Partners is a limited partnership with one general partner,
The Charger Corporation, and a number of limited partners. Grace Partners' and
The Charger Corporation's primary business is investment advisory and
broker/dealer services through their interests. The Charger Corporation is an
Illinois corporation controlled by the Robert Donald Van Kampen family. First
Trust Advisors is controlled by Grace Partners and The Charger Corporation.
For additional information concerning First Trust Advisors, including a
description of the services provided, see the SAI.
Sub-Adviser
Four Corners Capital Management, LLC, 515 South Flower Street, Suite 4310,
Los Angeles, California 90071 serves as the investment sub-adviser to the Fund.
In this capacity, the Sub-Adviser is responsible for the selection and ongoing
monitoring of the assets in the Fund's investment portfolio. The Sub-Adviser
specializes in managing portfolios of Senior Loans and structured finance
assets. The Sub-Adviser managed and advised investment portfolios with
approximately $2 billion of investment capacity as of July 31, 2004. The
Sub-Adviser's expertise is particularly suited to the Fund's focus on Senior
Loans. The Sub-Adviser is a Delaware limited liability company founded in
September 2001 by Macquarie Holdings (USA), Inc., a subsidiary of Macquarie Bank
Limited, and an experienced group of senior loan investment professionals.
The Sub-Adviser is owned 66.67% by Macquarie Bank Limited through a
subsidiary and 33.33% by the senior management of Four Corners. Day-to-day
operations and execution of specific investment strategies relating to the Fund
are the responsibility of the Sub-Adviser. Michael P. McAdams is the President
and Chief Investment Officer of the Sub-Adviser and will be co-Portfolio Manager
of the Fund. Robert I. Bernstein is the Managing Director and Chief Credit
Officer of the Sub-Adviser and will be co-Portfolio Manager of the Fund.
Mr. McAdams has been involved with the management of portfolios of senior
loans since 1982. In 1988 he established, and from 1988 until 1995, he was the
portfolio manager for, Pilgrim Prime Rate Trust, the first U.S. investment
company that invested primarily in senior loans. Immediately prior to
establishing Four Corners, Mr. McAdams was Chief Executive Officer of ING
Capital Advisors, LLC, an institutional asset manager then having approximately
$7 billion in senior loan and high yield bond portfolios under management. In
1995, Mr. McAdams was a founding board member of the Loan Syndications and
Trading Association ("LSTA"), the senior loan industry's trade group. Mr.
McAdams has served as Chairman (2001) and Vice Chairman (2002) of the LSTA and
was the first person from the investment side of the industry to serve in any of
those capacities. Today, he remains a Director and is a member of the LSTA's
Mark-to-Market Policy Committee.
Mr. Bernstein's involvement with senior loans began in 1986, and he has
been actively involved in the senior loan market for over 12 years. Prior to
joining Four Corners in November 2001, Mr. Bernstein was most recently a General
Partner of The Yucaipa Companies, a Los Angeles-based private equity investment
firm. While at Yucaipa, Mr. Bernstein completed more than $4 billion of senior
loan and high yield bond financings and private equity investments, and he
served on the boards of three companies. He was previously with Bankers Trust's
Leverage Finance Group, where he arranged senior loan and high yield bond
financing for financial sponsors and corporate issuers. Mr. Bernstein also
served as an infantry officer in the U.S. Marine Corps.
Page 32
Investment Management Agreement
The Fund has agreed to pay a fee for the services and facilities provided
by the Adviser of .75% of Managed Assets pursuant to an investment management
agreement between the Adviser and the Fund.
For purposes of calculating the management fee, the Fund's "Managed Assets"
means the average daily gross asset value of the Fund (which includes assets
attributable to the Fund's Preferred Shares, if any, and the principal amount of
borrowings), minus the sum of the Fund's accrued and unpaid dividends on any
outstanding Preferred Shares and accrued liabilities (other than the principal
amount of any borrowings incurred, commercial paper or notes issued by the Fund
and the liquidation preference of any outstanding Preferred Shares).
In addition to the management fee, the Fund pays all other costs and
expenses of its operations including the compensation of its trustees (other
than those affiliated with the Adviser), custodian, transfer and dividend
disbursing agent expenses, legal fees, leverage expenses, rating agency fees,
listing fees and expenses, expenses of independent auditors, expenses of
preparing, printing, and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies and taxes, if any.
The Sub-Adviser receives a portfolio management fee of .38% of Managed
Assets, which is paid out of the Adviser's management fee.
Because the fee paid to the Adviser and Sub-Adviser will be calculated on
the basis of the Fund's Managed Assets, which include the proceeds of leverage,
the dollar amount of the Adviser's and Sub-Adviser's fees from the Fund will be
higher (and the Adviser and Sub-Adviser will be benefited to that extent) when
leverage is utilized.
DESCRIPTION OF AMPS
The following is a brief description of the terms of AMPS. This description
does not purport to be complete and is subject to and qualified in its entirety
by reference to the more detailed description of AMPS in the Statement, attached
as Appendix A to the SAI. Capitalized terms not otherwise defined in this
section shall have the meanings given to the terms in the Glossary of Terms
attached as Appendix A to this prospectus.
General
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares of beneficial interest, par value $.01 per share, in
one or more classes or series, with rights as determined by the Board of
Trustees without the approval of Common Shareholders. The Statement currently
authorizes the issuance of Preferred Shares as follows: Preferred Shares
(referred to as "Auction Market Preferred Shares" or "AMPS"). The AMPS have a
liquidation preference of $25,000 per share, plus all accumulated but unpaid
dividends (whether or not earned or declared) to the date of final distribution.
The AMPS when issued and sold in this Offering will (1) be fully paid and,
subject to matters discussed in "Certain Provisions in the Declaration of
Trust," non-assessable, (2) not be convertible into Common Shares or other
capital stock of the Fund, (3) have no pre-emptive rights and (4) not be subject
to any sinking fund. The AMPS will be subject to optional and mandatory
redemption as described below under "--Redemption."
Holders of AMPS will not receive certificates representing their ownership
interest in the shares. Initially, The Depository Trust Company ("DTC") will act
as Securities Depository for the Agent Members with respect to the AMPS.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, Deutsche Bank Trust Company Americas will act as the
transfer agent, registrar, and paying agent for the AMPS. Furthermore, the
Auction Agent will send notices to holders of AMPS of any meeting at which
holders of AMPS have the right to vote. See "--Voting Rights" below. However,
the Auction Agent generally will serve merely as the agent of the Fund, acting
in accordance with the Fund's instructions.
Except in an auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any share of AMPS, so long
as the Fund is current in the payment of dividends on the AMPS and on any other
capital shares of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation.
Dividends and Rate Periods
General. Holders of AMPS will be entitled to receive cash dividends when,
as and if declared by the Board of Trustees, out of funds legally available
therefor, on the Initial Dividend Payment Date with respect to the Initial Rate
Period and, thereafter, on each Dividend Payment Date with respect to a
subsequent Rate Period (generally a period of seven days for the Series A AMPS
Page 33
and 28 days for the Series B AMPS, subject to certain exceptions) at the rate
per annum equal to the Applicable Rate for each Rate Period. 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.
The Initial Rate Period for the Series A AMPS will be days and the dividend
rate for this period will be %. The Initial Rate Period for the Series B AMPS
will be days and the dividend rate for this period will be %. Subsequent Rate
Periods will be seven days for the Series A AMPS and 28 days for the Series B
AMPS.
Dividend Payment Dates. Dividends on the AMPS will be payable, when, as and
if declared by the Board, out of legally available funds in accordance with the
Fund's Declaration of Trust and applicable law. Dividend periods generally will
begin on the first Business Day after an Auction. If dividends are payable on a
day that is not a Business Day, then dividends will generally be payable on the
next day if such day is a Business Day, or as otherwise specified in the
Statement. If a Dividend Payment Date is not a Business Day because the NYSE is
closed for business for more than three consecutive Business Days due to an act
of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the dividend payable on such date can not be paid
for any such reason, then:
o the Dividend Payment Date for the affected Rate Period will be the
next Business Day on which the Fund and its paying agent, if any,
are able to cause the dividend to by paid using their reasonable
best efforts;
o the affected Rate Period will end on the day it would have ended had
such event not occurred and the Dividend Payment Date had remained
the scheduled date; and
o the next Rate Period will begin and end on the dates on which it
would have begun and ended had such event not occurred and the
Dividend Payment Date remained the scheduled date.
Dividends will be paid through DTC on each Dividend Payment Date. The
Dividend Payment Date will normally be the first Business Day after the Rate
Period ends. DTC, in accordance with its current procedures, is expected to
distribute dividends received from the Auction Agent in same-day funds on each
Dividend Payment Date to Agent Members (members of DTC that will act on behalf
of existing or potential holders of AMPS). These Agent Members are in turn
expected to distribute such dividends to the persons for whom they are acting as
agents. However, each of the current Broker-Dealers has indicated to the Fund
that dividend payments will be available in same-day funds on each Dividend
Payment Date to customers that use a Broker-Dealer or a Broker-Dealer's designee
as Agent Member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on shares of AMPS by multiplying the Applicable Rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the Rate Period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share. Dividends on AMPS
will accumulate from the date of their original issue, which is , 2004. For each
Rate Period after the Initial Rate Period, the Rate will be determined at
auction. The dividend rate that results from an Auction will not be greater than
the Maximum Rate described below. The Maximum Rate for any regular period will
be the higher of (as set forth in the table below) the Applicable Percentage of
the Reference Rate or the Applicable Spread plus the Reference Rate. The
Reference Rate is the applicable LIBOR Rate (for a dividend period or a special
dividend period of fewer than 365 days), or the applicable Treasury Index Rate
(for a special dividend period of 365 days or more). In the case of a Special
Rate Period, the maximum applicable rate will be specified by the Fund in the
notice of the Special Rate Period for such Dividend Payment Period. The
Applicable Percentage or Applicable Spread is determined on the day that a
notice of a Special Rate Period is delivered if the notice specifies a Maximum
Rate for a Special Rate Period. The Applicable Percentage or Applicable Spread
will be determined based on the lower of the credit rating or ratings assigned
to the AMPS by Moody's and S&P. If Moody's or S&P or both shall not make such
rating available, the rate shall be determined by reference to equivalent
ratings issued by a Substitute Rating Agency.
Credit Ratings for Preferred Shares
-----------------------------------
Applicable Percentage Applicable
Moody's S&P of Reference Rate Spread
------- --- --------------------- ----------
"Aaa" "AAA" 125% 125 bps
"Aa3" to "Aa1" "AA-" to "AA+" 150% 150 bps
"A3" to "A1" "A-" to "A+" 200% 200 bps
"Baa3" to "Baa1" "BBB-" to "BBB+" 250% 250 bps
"Ba1" and below "BB+" and below 300% 300 bps
Page 34
Assuming the Fund maintains an "Aaa"/ "AAA" rating on the AMPS, the
practical effect of the different methods used to calculate the Maximum Rate is
shown in the table below:
Method Used to
Reference Maximum Rate Using the Maximum Rate Using the Determine the
Rate Applicable Percentage Applicable Spread Maximum Rate
--------- ---------------------- ---------------------- --------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
failure to make such deposit may result in the cancellation of an auction. The
Fund does not intend to establish any reserves for the payment of dividends.
The Applicable Percentage and Applicable Rate as so determined will be
further 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. The Fund will take all reasonable
action necessary to enable either Moody's or S&P to provide a rating for each
series of AMPS. If neither Moody's nor S&P will make such a rating available,
the Fund will select another Rating Agency to act as a substitute Rating Agency.
Designation of Special Rate Periods. The Fund may, in certain situations,
at its sole option, declare a Special Rate Period. Prior to declaring a Special
Rate Period, the Fund will give notice (a "notice of Special Rate Period") to
the Auction Agent and to each Broker-Dealer. The notice will state that the next
succeeding Rate Period for the AMPS will be a number of days as specified in
such notice. The Fund may not designate a Special Rate Period unless sufficient
clearing bids were made in the most recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full or
deposited with the Auction Agent. The Fund also must have received confirmation
from S&P and Moody's or any substitute rating agency that the proposed Special
Rate Period will not adversely affect such agency's then-current rating on the
AMPS, and the lead Broker-Dealer designated by the Fund, initially Merrill
Lynch, Pierce, Fenner & Smith Incorporated, must not have objected to the
declaration of a Special Rate Period. The Fund also must have portfolio
securities with a discounted value at least equal to the Preferred Shares Basic
Maintenance Amount. A notice of Special Rate Period also will specify whether
the AMPS will be subject to optional redemption during such Special Rate Period
and, if so, the redemption premium, if any, required to be paid by the Fund in
connection with such optional redemption.
Rating Agency Guidelines
The Fund is required under Moody's and S&P guidelines to maintain Moody's
Eligible Assets and S&P Eligible Assets each having in the aggregate a
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount. Moody's and S&P each have established separate guidelines for
determining Discounted Value. To the extent any particular portfolio holding of
the Fund does not satisfy a Rating Agency's guidelines, all or a portion of the
holding's value will not be included in the calculation of Discounted Value for
purposes of that Rating Agency. The amount of assets included in the Fund's
portfolio at any time may vary depending upon the rating, diversification and
other characteristics of the eligible assets included in the portfolio. The
Moody's and S&P guidelines also impose limitations on the Fund's investments,
which may be in addition to the restrictions applicable to the AMPS imposed by
the Statement. See "Description of AMPS" in the SAI.
The Fund also is required under the 1940 Act to maintain, with respect to
the AMPS, asset coverage of at least 200% with respect to senior securities that
are stock (as that term is used in the 1940 Act), including the AMPS (or other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are stock (as that term is
used in the 1940 Act) of a closed-end investment company as a condition of
declaring dividends on its Common Shares) ("1940 Act Preferred Shares Asset
Coverage"). It is anticipated that the Fund's auditors will certify once per
year, at the end of the Fund's fiscal year, that the Fund is in compliance with
the Preferred Shares Basic Maintenance Amount and, if requested by the Rating
Agency, the 1940 Act Preferred Shares Asset Coverage tests.
Based on the Fund's assets and liabilities as of August 11, 2004 and
assuming the issuance of all AMPS offered hereby, amounts borrowed by the Fund
under the Credit Facility ($100,000,000 as of August 11, 2004, or 51% of the
$195,000,000 available), and the use of proceeds as intended, the 1940 Act
Preferred Shares Asset Coverage with respect to the AMPS would be computed as
follows:
Page 35
Value of Fund assets less liabilities
not representing senior securities $680,192,437
------------------------------------------- = ------------ = 340%
Senior securities representing indebtedness $200,000,000
Plus liquidation value of the AMPS
If the Fund had borrowed 100% of the $195,000,000 available, the 1940 Act
Preferred Shares Asset Coverage, based on the composition of its portfolio as of
August 11, 2004, would be 263%.
If the Fund does not timely cure a failure to maintain (a) a Discounted
Value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(b) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the AMPS, the
Fund will be required by the Statement to redeem AMPS as described under
"--Redemption--Mandatory Redemption."
The Rating Agency guidelines restrict the Fund's use of some types of
investment strategies. For example, the guidelines limit the Fund's use of
futures, options and other derivative transactions for hedging or investment
purposes, prevent the Fund from entering into hedging transactions other than
S&P Hedging Transactions and Moody's Hedging Transactions, restrict the use of
forward commitments and similar transactions, and limit the percentage of the
Fund's assets that may be invested in any one issuer or type or class of issuer.
The Rating Agency guidelines also prohibit the Fund from taking some types
of actions unless it has received written confirmation from the Rating Agencies
that the actions would not impair the ratings then assigned to the AMPS. These
actions include changing restrictions on borrowing money, engaging in short
sales, lending portfolio securities, issuing any class or series of shares
ranking prior to or on a parity with the AMPS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund or merging or consolidating into or with any other entity.
The restrictions in the Rating Agency guidelines may limit the Fund's
ability to make certain investments that First Trust Advisors and Four Corners
believe would benefit the Fund. The descriptions of the Rating Agency guidelines
in this section and in "--Asset Maintenance" are summaries only and are not
complete.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by any Rating Agency. Failure to
adopt any modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any Rating
Agency may, at any time, change or withdraw any rating. The Board may, without
shareholder approval, amend, alter or repeal certain of the definitions and
related provisions which have been adopted by the Fund pursuant to the Rating
Agency guidelines only in the event the Fund receives written confirmation from
the Rating Agency or Agencies that any amendment, alteration or repeal would not
impair the ratings then assigned to the AMPS.
As described by S&P and Moody's, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the AMPS are not recommendations to purchase, hold or sell those
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 AMPS will be able to sell the shares
in an auction or otherwise. The ratings are based on current information
furnished to S&P and Moody's by the Fund and/or the First Trust Advisors and its
affiliates and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, information. The Common Shares have not been rated by any rating agency.
A Rating Agency's guidelines will apply to the AMPS only so long as the
Rating Agency is rating the shares. The Fund will pay certain fees to S&P and
Moody's for rating the AMPS. The Fund may at some future time seek to have the
AMPS rated by an additional or Other Rating Agency.
Restrictions on Dividend, Redemption and Other Payments
Under the 1940 Act, the Fund may not (1) declare any dividend with respect
to the AMPS if, at the time of the declaration (and after giving effect
thereto), asset coverage with respect to any Borrowings of the Fund that are
senior securities representing indebtedness (as defined in the 1940 Act), would
be less than 200% (or any other percentage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
declaring dividends on its AMPS) or (2) declare any other distribution on the
AMPS or purchase or redeem AMPS if at the time of the declaration (and after
giving effect thereto), asset coverage with respect to any Borrowings that are
senior securities representing indebtedness would be less than 300% (or any
higher percentage as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring distributions,
purchases or redemptions of its shares of beneficial interest).
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than shares of beneficial interest) and evidencing indebtedness and could
include the Fund's obligations under any Borrowings. For purposes of determining
asset coverage for senior securities representing indebtedness in connection
with the payment of dividends or other distributions on or purchases or
redemptions of stock, the term "senior security" does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any promissory note or other evidence of
indebtedness in any case where a loan is for temporary purposes only and in an
amount not exceeding 5% of the value of the total assets of the Fund at the time
when the loan is made; a loan is presumed under the 1940 Act to be for temporary
purposes if it is repaid within 60 days and is not extended or renewed;
otherwise it is presumed not to be for temporary purposes. For purposes of
determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on or purchases or
redemptions of AMPS, the asset coverages may be calculated on the basis of
values calculated as of a time within 48 hours (not including Sundays or
holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of AMPS may be prohibited (1) at any time that an event
of default under any Borrowings has occurred and is continuing; or (2) after
giving effect to the declaration, the Fund would not have eligible portfolio
holdings with an aggregated Discounted Value at least equal to any asset
coverage requirements associated with the Borrowings; or (3) the Fund has not
redeemed the full amount of Borrowings, if any, required to be redeemed by any
provision for mandatory redemption.
Upon a failure to pay dividends for two years or more, the holders of AMPS
will acquire certain additional voting rights. See "--Voting Rights" below.
These rights shall be the exclusive remedy of the holders of AMPS upon any
failure to pay dividends on the AMPS.
For so long as any AMPS are outstanding, except in connection with the
liquidation of the Fund, or a refinancing of the AMPS as provided in the
Statement, 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 of beneficial interest, if any, ranking junior to the AMPS as to
dividends or upon liquidation) in respect of Common Shares or any other shares
of the Fund ranking junior to or on a parity with the AMPS as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any Common Shares or any other junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the AMPS as
to dividends and upon liquidation) or any such parity shares (except by
conversion into or exchange for shares of the Fund ranking junior to or on a
parity with the AMPS as to dividends and upon liquidation), unless (1) there is
no event of default under any Borrowings that is continuing; (2) immediately
after the transaction, the Fund would have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
(as defined below) and the Fund would maintain the 1940 Act Preferred Shares
Asset Coverage (as defined below) (see "--Asset Maintenance"); (3) immediately
after the transaction, the Fund would have eligible portfolio holdings with an
aggregated discounted value at least equal to the asset coverage requirements,
if any, under any Borrowings; (4) full cumulative dividends on the AMPS due on
or prior to the date of the transaction have been declared and paid; (5) the
Fund has redeemed the full number of AMPS required to be redeemed by any
provision for mandatory redemption contained in the Statement (see
"--Redemption"); and (6) the Fund has redeemed the full amount of any Borrowings
required to be redeemed by any provision for mandatory redemption.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem AMPS having a Rate Period
of one year or less, in whole or in part, out of funds legally available
therefor, on the Dividend Payment Date upon not less than 15 calendar days' and
not more than 40 calendar days' prior notice. This optional redemption is not
available during the initial Rate Period or during any period during which the
Fund may not, at its option, redeem the AMPS. 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 Rate Period of more than one year are
redeemable at the option of the Fund, in whole or in part, out of funds legally
available therefor, prior to the end of the relevant Rate 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 AMPS by reason of the redemption of AMPS
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.
The Fund also reserves the right to repurchase AMPS in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the AMPS, but is
under no obligation to do so.
Page 37
Mandatory Redemption. If the Fund fails to maintain, as of any Valuation
Date, (1) Eligible Assets with an aggregate Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount or, (2) 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 such Valuation Date in the case
of a failure to maintain the Preferred Shares Basic Maintenance Amount or on the
last Business Day of the following month in the case of a failure to maintain
the 1940 Act Preferred Shares Asset Coverage as of such last Business Day (each
an "Asset Coverage Cure Date"), the AMPS will be subject to mandatory redemption
out of funds legally available therefor. See "--Asset Maintenance." The number
of AMPS to be redeemed in such circumstances will be equal to the lesser of (A)
the minimum number of AMPS 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 having sufficient Eligible Assets to restore the
Preferred Shares Basic Maintenance Amount or 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 AMPS then outstanding will be
redeemed), and (B) the maximum number of AMPS that can be redeemed out of funds
expected to be available therefor on the Mandatory Redemption Date (as defined
below) at the Mandatory Redemption Price (as defined below). In determining the
AMPS required to be redeemed in accordance with the foregoing, the Fund shall
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 Holders of AMPS in proportion to the
number of shares they hold, by lot or by such other method as the Fund shall
deem fair and equitable, subject to mandatory redemption provisions, if any.
The Fund is required to effect any mandatory redemption described above not
later than 30 days after the Fund last satisfied the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as the case
may be (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, the number of AMPS which are subject to mandatory
redemption if sufficient funds were available, or the Fund otherwise is unable
to effect the redemption on or prior to the Mandatory Redemption Date, the Fund
will redeem those AMPS on the earliest practicable date on which the Fund will
have these funds available, upon notice to record owners of shares of the AMPS
to be redeemed 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 upon a 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 redemption date, plus (in the case of a Rate
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 Securities and Exchange
Commission so as to provide at least the minimum notice required by the Rule or
any successor provision (notice currently must be filed with the Securities and
Exchange Commission generally at least 30 calendar days prior to the redemption
date). The Fund shall deliver a redemption notice to the Auction Agent
containing the information described below one Business Day prior to the giving
of notice to Holders in the case of optional redemptions as described above and
on or prior to the 30th day preceding the Mandatory Redemption Date in the case
of a mandatory redemption as described above. The Auction Agent will use its
reasonable efforts to provide notice to each Holder of AMPS called for
redemption by electronic means 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 the 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). This 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 to each holder of record of AMPS called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository ("Notice of Redemption"). Notices of Redemption will be
addressed to the registered owners of the AMPS at their addresses appearing on
the share records of the Fund. This notice will set forth (1) the redemption
date, (2) the number and identity of AMPS to be redeemed, (3) the redemption
price (specifying the amount of accumulated dividends to be included therein),
(4) that dividends on the shares to be redeemed will cease to accumulate on the
redemption date, and (5) 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
applicable law.
If fewer than all of the AMPS are redeemed on any date, the shares to be
redeemed on the date will be selected by the Fund on a pro rata basis in
proportion to the number of shares held by the holders, by lot or by another
method as is determined by the Fund to be fair and equitable, subject to the
terms of any Specific Redemption Provisions. AMPS 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 record holder of all of the AMPS, 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
Page 38
for redemption any shares from the accounts of other beneficial owners.
Notwithstanding the foregoing, if neither the Securities Depository nor its
nominee is the record 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 or by such
other method as the Fund shall deem fair and equitable, as contemplated above.
If a Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect the redemption, dividends on the shares shall cease to
accumulate and the shares shall be no longer deemed to be Outstanding for any
purpose and all rights of the owners of the shares so called for redemption will
cease and terminate, except the right of the owners of the shares to receive the
redemption price, but without any interest or additional amount. Upon written
request, 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 (1) the aggregate redemption price of the AMPS called for redemption
on the date and (2) the other amounts, if any, to which holders of AMPS called
for redemption may be entitled. Any funds so deposited which are unclaimed two
years after the redemption date will be paid, to the extent permitted by law, by
the Paying Agent to the Fund upon its request. Thereupon, Holders of AMPS called
for redemption may look only to the Fund for payment.
So long as any AMPS are held of record by the nominee of the Securities
Depository, the redemption price for the 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 the funds to the
persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no AMPS may
be redeemed unless all dividends in arrears on the outstanding AMPS, and all
shares of beneficial interest of the Fund ranking on a parity with the AMPS 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 AMPS and all shares ranking in a
parity with the AMPS must receive proportionate amounts. The foregoing shall not
prevent the purchase or acquisition of all the Outstanding AMPS pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to, and accepted by, Holders of all Outstanding AMPS.
Except for the provisions described above, nothing contained in the
Statement limits any legal right of the Fund to purchase or otherwise acquire
any AMPS 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 purchase, there is no arrearage in the payment of
dividends on or the mandatory or optional redemption price with respect to, any
AMPS for which a Notice of Redemption has been given and the Fund is in
compliance with the 1940 Act Preferred Shares Asset Coverage and has Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount after giving effect to the 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 AMPS
are redeemed or otherwise acquired by the Fund, the Fund shall give notice of
the 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 AMPS: (1) the Fund must maintain assets in its portfolio that
have a value, discounted in accordance with guidelines set forth by a rating
agency, at least equal to the aggregate liquidation preference of the AMPS plus
specified liabilities, payment obligations and other amounts; and (2) the Fund
must maintain asset coverage for AMPS of at least 200%.
Preferred Shares Basic Maintenance Amount. The Fund must maintain, as of
each Valuation Date on which any share of AMPS is Outstanding, Eligible Assets
having an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount, which is calculated separately for Moody's (if Moody's
is then rating the AMPS), S&P (if S&P is then rating the AMPS) and any Other
Rating Agency which is then rating the AMPS and so requires. If the Fund fails
to maintain Eligible Assets having an aggregated Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount as of any Valuation Date and
the failure is not cured on or before the related Asset Coverage Cure Date, the
Fund will be required in certain circumstances to redeem certain AMPS.
See "--Redemption--Mandatory Redemption."
The "Preferred Shares Basic Maintenance Amount" as of any Valuation Date is
defined as the dollar amount equal to the sum of:
(i) (A) the product of the number of AMPS Outstanding on such date
multiplied by $25,000, plus any redemption premium applicable to the AMPS
then subject to redemption;
(B) the aggregate amount of dividends that will have accumulated
at the respective Applicable Rates to (but not including) the first
respective Dividend Payment dates for the AMPS Outstanding that follow such
Valuation Date;
Page 39
(C) the aggregate amount of cash dividends that would accumulate
on the AMPS Outstanding from such first respective Dividend Payment Date
therefor through the 30th day after such Valuation Date, at the Maximum
Rate for a Seven- Day Rate Period for the Series A AMPS or a 28-Day Rate
Period for the Series B AMPS to commence on such Dividend Payment Date,
multiplied by the Volatility Factor;
(D) the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date;
(E) the amount of any indebtedness or obligations of the Fund
senior in right of payment to the AMPS; and
(F) any current liabilities as of such Valuation Date to the
extent not reflected in any of (i)(A) through (i)(E) (including, without
limitation, any payables for securities purchased as of such Valuation Date
and any liabilities incurred for the purpose of clearing securities
transactions) less
(ii) either (A) the Discounted Value of any of the Fund's assets, or
(B) the face value of any of the Fund's assets if such assets mature prior
to or on the date of redemption of AMPS or payment of a liability and are
either securities issued or guaranteed by the United States Government or
Deposit Securities, in both cases irrevocably deposited by the Fund for the
payment of the amount needed to redeem AMPS subject to redemption or to
satisfy any of (i)(B) through (i)(F).
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, 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
criteria established in connection with rating the AMPS. The 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 Discounted
Value 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 if the Fund receives written confirmation from
each rating agency which is then rating the AMPS and which so requires that any
changes would not impair its rating.
A rating agency's guidelines will apply to AMPS only so long as the rating
agency is rating the shares. The Fund will pay certain fees to Moody's and S&P
for rating AMPS. The ratings assigned to AMPS are not recommendations to buy,
sell or hold AMPS. The ratings may be subject to revision or withdrawal by the
assigning rating agent at any time. Any rating of AMPS should be evaluated
independently of any other rating.
1940 Act Preferred Shares Asset Coverage. The Fund also is required to
maintain, with respect to AMPS, as of the last Business Day on any month in
which any AMPS are outstanding, asset coverage of at least 200% (or another
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 investment 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 AMPS. See "--Redemption--Mandatory Redemption."
Notices. After the Date of Original Issue and in certain other
circumstances, the Fund is required to deliver to any Rating Agency which is
then rating the AMPS (1) a certificate with respect to the calculation of the
Preferred Shares Basic Maintenance Amount; (2) a certificate with respect to the
calculation of the 1940 Act Preferred Shares Asset Coverage and the value of the
portfolio holdings of the Fund; and (3) a letter proposed by the Fund's
independent accountants regarding the accuracy of the calculations. The timing
requirements for such notices are specified under "Description of AMPS
Cumulative Preferred Shares-- Notices" in the SAI.
Liquidation Rights
In the event of a liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the holders of AMPS then outstanding
and any other shares ranking on a parity with the AMPS then outstanding, in
preference to the holders of Common Shares, will be entitled to payment out of
the assets of the Fund, or the proceeds thereof, available for distribution to
shareholders after satisfaction of claims of creditors of the Fund, of a
liquidation preference in the amount equal to $25,000 per share of the AMPS,
plus an amount equal to accumulated dividends (whether or not earned or declared
but without interest) to the date payment of the preference is made in full or a
sum sufficient for the payment thereof is set apart with the Paying Agent.
However, holders of AMPS will not be entitled to any premium to which the holder
would be entitled to receive upon redemption of the AMPS. After payment of the
full amount of the liquidation distribution, the owners of the AMPS will not be
entitled to any further participation in any distribution of assets of the Fund.
If, upon any liquidation, dissolution or winding up of the affairs of the
Fund, whether voluntary or involuntary, the assets of the Fund available for
distribution among the holders of all outstanding Preferred Shares, including
the AMPS, shall be insufficient to permit the payment in full to the holders of
the amounts to which they are entitled, then the available assets shall be
distributed among the holders of all outstanding Preferred Shares, including the
AMPS, ratably in any distribution of assets according to the respective amounts
Page 40
which would be payable on all the shares if all amounts thereon were paid in
full. Upon the dissolution, liquidation or winding up of the affairs of the
Fund, whether voluntary or involuntary, until payment in full is made to the
holders of AMPS of the liquidation distribution to which they are entitled, no
dividend or other distribution shall be made to the holders of Common Shares or
any other class of shares of beneficial interest of the Fund ranking junior to
AMPS upon dissolution, liquidation or winding up and no purchase, redemption or
other acquisition for any consideration by the Fund shall be made in respect of
the Common Shares or any other class of shares of beneficial interest of the
Fund ranking junior to AMPS upon dissolution, liquidation or winding up.
A consolidation, reorganization or merger of the Fund with or into any
other trust or company, or a sale, lease or exchange of all or substantially all
of the assets of the Fund in consideration for the issuance of equity securities
of another trust or company, shall not be deemed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus, the Declaration of Trust,
Statement or as otherwise required by applicable law, holders of AMPS have one
vote per share and vote together with holders of Common Shares as a single
class. Under applicable rules of the NYSE, the Fund is currently required to
hold annual meetings of shareholders.
In connection with the election of the Trustees, the holders of outstanding
Preferred Shares, including the AMPS, 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 beneficial interest of the Fund, to elect two
Trustees of the Fund. The holders of outstanding Common Shares and Preferred
Shares, including the AMPS, voting together as a single class, shall elect the
balance of the Trustees. Notwithstanding the foregoing, if (a) at the close of
business on any Dividend Payment Date accumulated dividends (whether or not
earned or declared) on the Preferred Shares, including AMPS, equal to at least
two full years' dividends shall be due and unpaid; or (b) any time holders of
any Preferred Shares are entitled under the 1940 Act to elect a majority of the
Trustees of the Fund, then the number of members constituting the Board shall
automatically be increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of Preferred Shares, including the
AMPS, as described above, would constitute a majority of the Board as so
increased by the smallest number; and at a special meeting of shareholders which
will be called and held as soon as practicable, and at all subsequent meetings
at which Trustees are to be elected, the holders of Preferred Shares, including
the AMPS, voting as a separate class, will be entitled to elect the smallest
number of additional Trustees that, together with the two Trustees which the
holders will be in any event entitled to elect, constitutes a majority of the
total number of Trustees of the Fund as so increased. The terms of office of the
persons who are Trustees at the time of that election will continue. If the Fund
thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including the AMPS, for
all past Rate Periods, or the voting period is otherwise terminated, the voting
rights stated in the above sentence shall cease, and the terms of office of all
of the additional Trustees elected by the holders of Preferred Shares, including
the AMPS (but not of the Trustees with respect to whose election the holders of
Common Shares were entitled to vote or the two Trustees the holders of Preferred
Shares, including the AMPS, have the right to elect in any event), will
terminate automatically. Any Preferred Shares issued after the date hereof shall
vote with the AMPS as a single class on the matters described above, and the
issuance of any additional Preferred Shares by the Fund may reduce the voting
power of the AMPS.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including the AMPS, determined with reference to a "majority
of outstanding voting securities" as the term is defined in Section 2(a)(42) of
the 1940 Act, voting as a separate class, is required to
(1) amend, alter or repeal any of the preferences, rights or powers of
the class so as to affect materially and adversely the preferences, rights
or powers;
(2) increase the authorized number of shares of Preferred Shares;
(3) create, authorize or issue shares of any class of shares ranking
senior to or on a parity with the Preferred Shares with respect to the
payment of dividends or the distribution of assets, or any securities
convertible into, or warrants, options or similar rights to purchase,
acquire or receive, the shares of beneficial interest ranking senior to or
on parity with the Preferred Shares or reclassify any authorized shares of
beneficial interest of the Fund into any shares ranking senior to or on
parity with the Preferred Shares.
(4) 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 action;
Page 41
(5) 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 AMPS, or arising
in connection with any futures contracts or options thereon, interest rate
swap or cap transactions, forward rate transactions, put or call options,
or other similar transactions, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection
with any indebtedness permitted under clause (6) below and (E) liens to
secure payment for services rendered including, without limitation,
services rendered by the Fund's custodian and the Auction Agent; or
(6) create, authorize, issue, incur or suffer to exist any indebtedness
for borrowed money or any direct or indirect guarantee of the indebtedness
for borrowed money or any direct or indirect guarantee of the 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
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.
With respect to (1), (2) and (3) above, notwithstanding anything contained
therein, the Board of Trustees, without the vote or consent of the holders of
Preferred Shares, may from time to time authorize, create and classify, and the
Fund may from time to time issue shares or series of Preferred Shares, including
other series of AMPS, ranking on a parity with the AMPS with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up to the affairs of the Fund, and may authorize,
reclassify and/or issue any additional shares of the AMPS, including shares
previously purchased or redeemed by the Fund, subject to continuing compliance
by the Fund with 1940 Act Preferred Shares Asset Coverage and Preferred Shares
Basic Maintenance Amount requirements and the receipt by the Fund of
confirmation from S&P and Moody's or any substitute rating agency that the
proposed Special Rate Period will not adversely affect such agency's
then-current rating on the AMPS.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares, including any series of AMPS, 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 the
series in a manner different from that of other series of 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 the matter (1)
alters or abolishes any preferential right of the series; (2) creates, alters or
abolishes any right in respect of redemption of the series; or (3) creates or
alters (other than to abolish) any restriction on transfer applicable to the
series.
The foregoing voting provisions will not apply with respect to the AMPS if,
at or prior to the time when a vote is required, the shares have been (1)
redeemed or (2) called for redemption, and sufficient funds shall have been
deposited in trust to effect the redemption.
The Board of Trustees, without the vote or consent of any holder of
Preferred Shares, including AMPS, or any other shareholder of the Fund, may from
time to time adopt, amend, alter or repeal certain definitions set forth in the
Statement or add covenants and other obligations of the Fund or confirm the
applicability of covenants and other obligations set forth in the Statement in
connection with obtaining or maintaining the rating of Moody's, S&P or any Other
Rating Agency with respect to AMPS and any adoption, amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of AMPS or
the holders thereof, provided the Board of Trustees receives written
confirmation from the relevant rating agency (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 another rating agency's rating)
that any amendment, alteration or repeal would not adversely affect the rating
then assigned by the rating agency.
Also, subject to compliance with applicable law, the Board of Trustees may
amend the definition of Maximum Rate to increase the percentage amount and
spread by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of the Preferred
Shares, including AMPS, or any other shareholder of the Fund, and without
receiving any confirmation from any rating agency after consultation with the
Broker-Dealers, provided that immediately following any increase the Fund would
be in compliance with the Preferred Shares Basic Maintenance Amount.
Unless otherwise required by law, holders of AMPS shall not have any
relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of AMPS shall have no
rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the AMPS, the exclusive remedy of the holders shall be the right to
vote for Trustees as discussed above.
Page 42
Generally, the Declaration of Trust requires a vote by holders of at least
two-thirds of the Common Shares and Preferred Shares, if any, voting together as
a single class, to authorize the conversion of the Fund to open-end status or to
change the Fund's fundamental investment policies. See "Certain Provisions in
the Declaration of Trust" and "Conversion to Open-End Fund" herein and
"Investment Restrictions" in the SAI.
THE AUCTION
General
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for the series of AMPS so long as the Applicable Rate for
shares of the series is to be based on the results of an auction.
The Auction Agent may terminate the Auction Agency Agreement (i) upon prior
notice to the Fund on the date specified in such notice, which date shall be no
earlier than 60 days after delivery of such notice or (ii) upon prior notice to
the Fund on the date specified in such notice if the Fund shall have failed to
pay the amounts due the Auction Agent in connection with its agency under the
Auction Agency Agreement and under the Broker-Dealer Agreements (defined below)
within 30 days of invoice. 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 at any time by so notifying the
Auction Agent, provided that, if any AMPS remain outstanding, prior to such
removal the Fund shall have entered into such an agreement with a successor
Auction Agent.
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 provide for the participation of those
Broker-Dealers in auctions for AMPS.
The Auction Agent after each auction for AMPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge in the amount
equal to (i) the product of (A) a fraction the numerator of which is the number
of days in the Rate Period (calculated by counting the first day of such Rate
Period but excluding the last day thereof) and the denominator of which is 360,
times (B) 1/4 of 1%, times (C) $25,000 times (D) the sum of the aggregate number
of AMPS placed by such Broker-Dealer in the case of any auction immediately
preceding a Rate Period of less than one year, or (ii) the amount mutually
agreed upon by the Fund and the Broker-Dealers, based upon a selling concession
that would be applicable to an underwriting of fixed or variable rate AMPS with
a similar final maturity or variable rate dividend, respectively, at the
commencement of the Rate Period with respect to such Auction, in the case of any
Auction immediately preceding a Rate Period of one year or longer. For the
purposes of the preceding sentence, AMPS shall be placed by a Broker-Dealer if
such shares were (i) the subject of Hold Orders deemed to have been submitted to
the Auction Agent by the Broker-Dealer and were acquired by the Broker-Dealer
for its own account or were acquired by the Broker-Dealer for its customers who
are Beneficial Owners or (ii) the subject of an Order submitted by the Broker-
Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in the
Existing Holder continuing to hold the shares as a result of the Auction or (B)
a Submitted Bid of a Potential Holder that resulted in the Potential Holder
purchasing the shares as a result of the Auction or (iii) a valid Hold Order. A
Broker-Dealer may share a portion of any such fees with non-participating
broker-dealers that submit Orders to the Broker-Dealer for an Auction that are
placed by that Broker-Dealer in such Auction.
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 the termination.
Auction Procedures
Prior to the Submission Deadline on each Auction Date for a series of AMPS,
each 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
the series (a "Beneficial Owner") may submit orders ("Orders") with respect to
shares of the series to that Broker-Dealer as follows:
o Hold Order--indicating its desire to hold shares of such series
without regard to the Applicable Rate for the next Rate Period.
o Bid--indicating its desire to purchase or hold the indicated number
of shares of such series at $25,000 per share if the Applicable Rate
for shares of such series for the next Rate Period is not less than
the rate or spread specified in the bid and which shall be deemed an
irrevocable offer to sell shares of such series at $25,000 per share
if the Applicable Rate for shares of such series for the next Rate
Period is less than the rate of spread specified in the Bid.
Page 43
o Sell Order--indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for the next
Rate Period.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of AMPS then held by the
Beneficial Owner. A Beneficial Owner of shares of the series that submits a Bid
with respect to shares of that series to its Broker-Dealer having a rate higher
than the Maximum Rate for shares of that series on the Auction Date will be
treated as having submitted a Sell Order with respect to the shares to its
Broker-Dealer. A Beneficial Owner of shares of the series that fails to submit
an Order with respect to the shares to its Broker-Dealer will be deemed to have
submitted a Hold Order with respect to the shares of that series to its
Broker-Dealer; provided, however, that if a Beneficial Owner of shares of that
series fails to submit an Order with respect to shares of that series to its
Broker-Dealer for an auction relating to a Special Rate Period of more than 91
days, the Beneficial Owner will be deemed to have submitted a Sell Order with
respect to the shares to its Broker-Dealer. A Sell Order shall constitute an
irrevocable offer to sell the AMPS subject thereto. A Beneficial Owner that
offers to become the Beneficial Owner of additional AMPS is, for purposes of the
offer, a Potential Beneficial Owner.
A Potential Beneficial Owner may submit Bids to its Broker-Dealer in which
it offers to purchase shares of the series at $25,000 per share if the
Applicable Rate for shares of the series for the next Rate Period is not less
than the rate specified in the Bid. A Bid placed by a Potential Beneficial Owner
of shares of the series specifying a rate higher than the Maximum Rate for
shares of the series on the Auction Date will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
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 Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of AMPS held by
it or 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 AMPS held by it. A Broker-Dealer also may submit Orders to the Auction Agent
for its own account as an Existing Holder or Potential Holder, provided it is
not an affiliate of the Fund. If a Broker-Dealer submits an Order for its own
account in any Auction, it may have knowledge of Orders placed though it in that
Auction and therefore have an advantage over other bidders, but such
Broker-Dealer would not have knowledge of Orders submitted by other
broker-dealers in that Auction.
If Sufficient Clearing Bids for a series of AMPS exist (that is, the number
of shares of the series subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate for shares of the series is at least
equal to the number of shares of the series subject to Sell Orders submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Existing Holders), the Applicable Rate for shares of the series for the next
succeeding Rate Period thereof will be the lowest rate specified in the
Submitted Bids which, taking into account the rate and all lower rates bid by
Broker-Dealers as or on behalf of Existing Holders and Potential Holders, would
result in Existing Holders and Potential Holders owning the shares of the series
available for purchase in the auction. If Sufficient Clearing Bids for a series
of AMPS do not exist, the Applicable Rate for shares of the series for the next
succeeding Rate Period thereof will be the Maximum Rate for shares of the series
on the Auction Date therefor. In this event, Beneficial Owners of shares of the
series that have submitted or are deemed to have submitted Sell Orders may not
be able to sell in the Auction all shares of the series subject to the Sell
Orders. If Broker-Dealers submit or are deemed to have submitted to the Auction
Agent Hold Orders with respect to all Existing Holders of a series of AMPS, an
"all-hold" Auction will have occurred and the Applicable Rate for shares of the
series for the next succeeding Rate Period thereof will be 90% of the Reference
Rate.
A Broker-Dealer may bid in an Auction in order to prevent what would
otherwise be (i) a failed Auction, (ii) an "all-hold" Auction, or (iii) an
Applicable Rate that the Broker-Dealer believes, in its sole discretion, does
not reflect the market for the AMPS at the time of the Auction. A Broker-Dealer
may, but is not obligated to, advise Beneficial Owners of AMPS that the
Applicable Rate that would apply in an "all-hold" Auction may be lower than
would apply if Beneficial Owners submit bids, and such advice, if given, may
facilitate the submission of bids by Beneficial Owners that would avoid the
occurrence of an "all-hold" Auction.
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 AMPS that is
fewer than the number of shares of the series specified in its Order. To the
extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers.
Page 44
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
The auctions for AMPS will normally be held every seven days for the Series
A AMPS and every 28 days in the case of the Series B AMPS, and each subsequent
Rate Period will normally begin on the following Business Day.
The first auction for Series A AMPS will be held on , 2004, the Business
Day preceding the Dividend Payment Date for the Initial Rate Period. Thereafter,
except during the Special Rate Periods, auctions for the Series A AMPS normally
will be held every , and each subsequent Rate Period for Series A AMPS normally
will begin on the following Business Day.
The first auction for Series B AMPS will be held on , 2004, the Business
Day preceding the Dividend Payment Date for the Initial Rate Period. Thereafter,
except during the Special Rate Periods, auctions for the Series B AMPS normally
will be held every fourth , and each subsequent Rate Period for Series B AMPS
normally will 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 AMPS of any series, and three current
holders. The three current holders and three potential holders submit orders
through Broker-Dealers at the auction:
Current Holder A...... Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate 500 Shares is less than 4.1%
Current Holder B...... Owns 300 shares, wants to hold Hold order--will take the auction
rate
Current Holder C...... Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares 200 shares is less than 3.9%
Potential Holder D.... Wants to buy 200 shares Places order to buy at or above 4.0%
Potential Holder E.... Wants to buy 300 shares Places order to buy at or above 3.9%
Potential Holder F.... Wants to buy 200 shares Places order to buy at or above 4.1%
The lowest dividend rate that will result in all 1,000 AMPS continuing to
be held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A will
sell its shares because A's dividend rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and potential holder E will buy 300
shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend
rate.
Secondary Market Trading and Transfer of AMPS
The Broker-Dealers may maintain a secondary trading market of AMPS outside
of auctions, but are not obligated to do so, and may discontinue the activity at
any time. There can be no assurance that the secondary trading market of AMPS
will provide owners with liquidity of investment. AMPS are not registered on any
stock exchange or on the NASDAQ Stock Market. Investors who purchase shares in
an auction for a Special Rate Period should note that because the dividend rate
on the shares will be fixed for the length of the Rate Period, the value of the
shares may fluctuate in response to changes in interest rates, and may be more
or less than their original cost if sold on the open market in advance of the
next Auction, therefore, depending upon market conditions. In addition, a
Broker-Dealer may, in its own discretion, decide to sell AMPS in the secondary
market to investors at any time and at any price, including at prices equivalent
to, below or above the par value of the AMPS.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of AMPS 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,
(2) to a Broker- Dealer or (3) to the other persons as may be permitted by the
Fund; provided, however, that (a) a sale, transfer or other disposition of AMPS
from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of the shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a transfer or other
disposition for purposes of the foregoing if the Broker-Dealer remains the
Existing Holder of the shares so sold, transferred or disposed of immediately
after the sale, transfer or disposition and (b) in the case of all transfers
other than pursuant to auctions, the Broker-Dealer (or other person, if
permitted by the Fund) to whom the transfer is made shall advise the Auction
Agent of the transfer.
Page 45
DESCRIPTION OF BORROWINGS
The Declaration of Trust authorizes the Fund, without prior approval of
holders of Common and Preferred Shares, including AMPS, to borrow money. In this
connection, the Fund may issue notes or other evidence of indebtedness
(including bank borrowings or commercial paper) and may secure any Borrowings by
mortgaging, pledging or otherwise subjecting as security the Fund's assets. In
connection with any Borrowings, 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 requirements will increase the cost of borrowing over the
stated interest rate. Any Borrowings will rank senior to the AMPS.
Limitations. Under the requirements of the 1940 Act, the Fund, immediately
after issuing any Borrowings that are senior securities representing
indebtedness (as defined in the 1940 Act), must have an asset coverage of at
least 300%. With respect to any Borrowings, 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, bears to the aggregate amount of any
Borrowings that are senior securities representing indebtedness, issued by the
Fund. Certain types of Borrowings may also result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. In addition, the Fund may be subject to certain
restrictions imposed by guidelines of one or more rating agencies which may
issue ratings for commercial paper or notes issued by the Fund. These
restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any Borrowings will be senior to those
of the AMPS shareholders, and the terms of any Borrowings may contain provisions
which limit certain activities of the Fund, including the payment of dividends
to AMPS shareholders in certain circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to the
Fund's lenders certain voting rights in the event of default in the payment of
interest on or repayment of principal. If the provisions would impair the Fund's
status as a regulated investment company under the Code, the Fund, subject to
its ability to liquidate its portfolio, intends to repay the Borrowings. Any
Borrowing will likely be ranked senior or equal to all other existing and future
borrowings of the Fund.
Credit Facility. The Fund has entered into the Credit Facility which
provides up to $195,000,000 to be used to, among other things, purchase loans
and other instruments in which the Fund may invest, thereby increasing the
leverage of the Fund. The Fund presently intends to borrow up to the full amount
available under the Credit Facility.
Under the terms of the Credit Agreement governing the Credit Facility, the
Fund is subject to usual and customary covenants for this type of transaction,
including, but not limited to, limits on the Fund's ability to: (1) issue
Preferred Shares; (2) incur liens or pledge portfolio securities or investments;
(3) change its investment objectives or fundamental investment policies and
restrictions without the approval of lenders; (4) adopt or carry out any plan of
liquidation, reorganization, incorporation, recapitalization, merger or
consolidation or sell, transfer or otherwise dispose of all or a substantial
portion of the Fund's assets; (5) remove the adviser or the sub-adviser to the
Fund; (6) amend the Fund documents in a manner which could adversely affect the
rights, interests or obligations of any of the lenders; (7) engage in any
business other than the business currently engaged in; (8) create, assume or
suffer to exist certain debt except for certain specific types of debt; and (9)
become a member of any ERISA group or incur any liability or obligation that
could result in the imposition of a lien under the Code or ERISA. Furthermore,
the Fund is prohibited from paying dividends to AMPS shareholders in certain
circumstances, including, but not limited to, the following: (1) if any default
or event of default is ongoing or will result from such payments, (2) if,
immediately after giving effect to such payments, the Fund will not have an
asset coverage of at least 300% or will not comply with other borrowing tests
set forth in the Credit Agreement, (3) if the agent assumes control of the
collateral described in the Credit Agreement, or (4) at any time after the
maturity date of the advances under the Credit Agreement has occurred.
The Board of Trustees presently intends to borrow money only under the
Credit Facility. If the Board of Trustees determines to authorize any other
borrowings, the terms may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration of Trust.
DESCRIPTION OF COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
Common Shares, par value $.01 per share. The Common Shares, when issued and
outstanding, will be fully paid, and except as described below, non-assessable,
have no pre- emptive or conversion rights or rights to cumulative voting and
have equal rights to the payment of dividends and the distribution of assets
upon liquidation. At any time when AMPS are outstanding, holders of Common
Shares will not be entitled to receive any cash distributions from the Fund
unless all accrued dividends on AMPS have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to AMPS would be at least 200% after
giving effect to the distributions.
Page 46
The Common Shares are listed on the NYSE. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and the meetings are required as a condition to the listing.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
of Trust contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of the limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Board of Trustees. The Declaration of Trust further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund solely by reason of being or having been a shareholder of the Fund. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of the circumstances is
remote.
The Declaration of Trust includes provisions that could limit the ability
of other entities or persons to acquire control of the Fund or to convert the
Fund to open-end status. Generally, the Declaration of Trust requires a vote by
holders of at least two-thirds of the Common Shares and Preferred Shares, if
any, voting together as a single class, except as described below and in the
Declaration of Trust, to authorize:
(1) a conversion of the Fund from a closed-end to an open-end
investment company;
(2) a merger or consolidation of the Fund with any corporation,
association, trust or other organization, including a series or class of
the other organization (subject to a limited exception if the acquiring
fund is not an operating entity immediately prior to the transaction);
(3) a sale, lease or exchange of all or substantially all of the Fund's
assets (other than in the regular course of the Fund's investment
activities, in connection with the termination of the Fund, and other
limited circumstances set forth in the Declaration of Trust);
(4) in certain circumstances, a termination of the Fund;
(5) a removal of trustees by shareholders; or
(6) certain transactions in which a Principal Shareholder (as defined
in the Declaration of Trust) is a party to the transaction.
However, with respect to (1) above, if there are Preferred Shares
outstanding, the affirmative vote of the holders of two-thirds of the Preferred
Shares voting as a separate class shall also be required. With respect to (2)
above, except as otherwise may be required, if the transaction constitutes a
plan of reorganization which adversely affects Preferred Shares, if any, then an
affirmative vote of two-thirds of the Preferred Shares voting together as a
separate class is required as well. With respect to (1) through (3), if the
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. The
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's Shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of shareholders is not
required, however, for any transaction, whether deemed a merger, consolidation,
reorganization, exchange of shares or otherwise whereby the Fund issues shares
in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. None of the
foregoing provisions may be amended except by the vote of at least two-thirds of
the Common Shares and Preferred Shares, if any, outstanding and entitled to
vote.
The provisions of the Declaration of Trust described above could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common
Shares by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar transaction. The overall effect of these provisions
is to make a merger or the assumption of control by a third party more
difficult. They provide, however, the advantage of potentially requiring persons
seeking control of the Fund to negotiate with its management regarding the price
to be paid and facilitating the continuity of the Fund's investment objectives
and policies. The Board of Trustees of the Fund has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of
the Fund and its Common Shareholders.
Page 47
Reference should be made to the Declaration of Trust on file with the
Securities and Exchange Commission for the full text of these provisions.
CLOSED-END FUND STRUCTURE
The Fund is a recently organized, diversified, closed-end management
investment company (commonly referred to as a closed- end fund). Closed-end
funds differ from open-end funds (which are generally referred to as mutual
funds) in that closed-end funds generally list their shares for trading on a
stock exchange and do not redeem their common shares at the request of the
shareholder. In a mutual fund, if the shareholder wishes to sell shares of the
fund, the mutual fund will redeem or buy back the shares at net asset value.
Also, mutual funds generally offer new shares on a continuous basis to new
investors, and closed-end funds generally do not. The continuous inflows and
outflows of assets in a mutual fund can make it difficult to manage its
investments. By comparison, closed-end funds are generally able to stay more
fully invested in securities that are consistent with their investment
objectives, and also have greater flexibility to make certain types of
investments, and to use certain investment strategies, such as financial
leverage and investments in illiquid securities.
Common shares of closed-end funds frequently trade at a discount to their
NAV. Because of this possibility and the recognition that any discount may not
be in the interest of common shareholders, the Board of Trustees might consider
from time to time engaging in open-market repurchases, tender offers for shares
or other programs intended to reduce the discount. We cannot guarantee or
assure, however, that the Board of Trustees will decide to engage in any of
these actions. Nor is there any guarantee or assurance that the actions, if
undertaken, would result in the shares trading at a price equal or close to net
asset value per share. Although share repurchases and tenders could have a
favorable effect on the market price of the Fund's Common Shares, you should be
aware that the acquisition of Common Shares by the Fund will decrease the
capital of the Fund and, therefore, may have the effect of increasing the Fund's
expense ratio and decreasing the asset coverage with respect to any Preferred
Shares, including AMPS, outstanding. Any share repurchases or tender offers will
be made in accordance with requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the 1940 Act and the principal stock exchange
on which the Common Shares are traded.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if
approved by the holders of two-thirds of the Fund's shares outstanding and
entitled to vote and by the holders of two-thirds of the outstanding Preferred
Shares, including AMPS, if any, voting together as a single class; provided,
however, that the vote shall be by Majority Shareholder Vote if the action in
question was previously approved by the affirmative vote of two-thirds of the
Board of Trustees. The affirmative vote or consent shall be in addition to the
vote or consent of the holders of the Shares otherwise required by law or any
agreement between the Fund and any national securities exchange. In the event of
conversion, the Common Shares would cease to be listed on the NYSE or other
national securities exchange or market system and any Preferred Shares
outstanding, including AMPS, would be redeemed and the leverage would cease to
exist. The Board of Trustees believes, however, that the closed-end structure is
desirable, given the Fund's investment objectives and policies. Investors should
assume, therefore, that it is unlikely that the Board of Trustees would vote to
convert the Fund to an open-end investment company. 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 net asset value, less the redemption charge, if any, as might be in effect
at the time of a redemption. The Fund expects to pay all the redemption requests
in cash, but intends to reserve the right to pay redemption requests in a
combination of cash or securities. If the partial payment in securities were
made, investors may incur brokerage costs in converting the securities to cash.
If the Fund were converted to an open-end fund, it is likely that new Common
Shares would be sold at net asset value plus a sales load.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based on the
advice of Chapman and Cutler LLP, counsel to the Fund. This discussion assumes
that all AMPS will be treated as equity for federal income tax purposes.
This section and the discussion in the SAI summarize some of the main U.S.
federal income tax consequences of owning shares of the Fund. This section is
current as of the date of this prospectus. Tax laws and interpretations change
frequently, and this summary does not describe all of the tax consequences to
all taxpayers. For example, this summary generally does not describe your
situation if you are a corporation, a non-U.S. person, a broker-dealer, or other
investor with special circumstances. In addition, this section does not describe
your state, local or foreign taxes. As with any investment, you should consult
your own tax professional about your particular consequences. Investors should
consult their own tax advisors regarding the tax consequences of investing in
the Fund.
Page 48
Fund Status
The Fund intends to qualify as a "regulated investment company" under the
federal tax laws. If the Fund qualifies as a regulated investment company and
distributes all of its income, the Fund generally will not pay federal income or
excise taxes.
Distributions
Fund distributions are generally taxable. After the end of each year, you
will receive a tax statement that separates your Fund's distributions into two
categories, ordinary income distributions and capital gains dividends. Ordinary
income distributions are generally taxed at your ordinary tax rate, but, as
further discussed below, if the Fund holds equity securities, under the recently
enacted "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the "Tax Act"),
certain ordinary income distributions received from the Fund may be taxed at new
tax rates equal to those applicable to net capital gains (net long-term capital
gain minus net short-term capital loss for the taxable year). Generally, you
will treat all capital gains dividends as long-term capital gains regardless of
how long you have owned your shares. To determine your actual tax liability for
your capital gains dividends, you must calculate your total net capital gain or
loss for the tax year after considering all of your other taxable transactions,
as described below. In addition, the Fund may make distributions that represent
a return of capital for tax purposes and thus will generally not be taxable to
you. The tax status of your distributions from the Fund is not affected by
whether you reinvest your distributions in additional shares or receive them in
cash. The tax laws may require you to treat distributions made to you in January
as if you had received them on December 31 of the previous year. The Fund does
not expect to pay exempt interest dividends that would be subject to the federal
alternative minimum tax.
Under current federal income tax law, the Fund is required to allocate to
each class of its shares a proportionate share of its net capital gains and its
other income of each year. Thus, under current law, the dividends paid with
respect to the AMPS for a year will be divided between those designated as
capital gains dividends and ordinary income distributions in the same proportion
as the dividends paid with respect to the Fund's other shares for that year.
This allocation and designation will be reflected in the tax statement sent to
you by the Fund after the end of each year.
Dividends Received Deduction
A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to dividends received from the Fund
because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, if the Fund holds
equity securities, certain ordinary income dividends on shares that are
attributable to qualifying dividends received by the Fund from certain domestic
corporations may be designated by the Fund as being eligible for the dividends
received deduction but this amount is not expected to be significant.
If You Sell Shares
If you sell your shares, you will generally recognize a taxable gain or
loss. To determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your AMPS is generally equal to the cost of your shares, generally
including sales charges. In some cases, however, you may have to adjust your tax
basis after you purchase your shares.
Taxation of Capital Gains and Losses and Certain Ordinary Income Dividends
Under the Tax Act, if you are an individual, the maximum marginal federal
tax rate for net capital gain (net long-term capital gain minus net short-term
capital loss for the taxable year) is generally 15% (generally 5% for certain
taxpayers in the 10% and 15% tax brackets). These new capital gains rates are
generally effective for taxable years ending on or after May 6, 2003 and
beginning before January 1, 2009. However, special effective date provisions are
set forth in the Tax Act. For example, there are special transition rules
provided with respect to gain properly taken into account for the portion of the
taxable year before May 6, 2003. For periods not covered by the Tax Act, if you
are an individual, the maximum marginal federal tax rate for capital gains is
generally 20% (10% for certain taxpayers in the 10% and 15% tax brackets). Also,
for periods not covered by the Tax Act, the 20% rate is reduced to 18% and the
10% rate is reduced to 8% for net capital gains from most property acquired
after December 31, 2000, with a holding period of more than five years.
Capital gain or loss is long-term if the holding period for the asset is
more than one year and is short-term if the holding period for the asset is one
year or less. You must exclude the date you purchase your shares to determine
your holding period. However, if you receive a capital gain dividend from the
Fund and sell your share at a loss after holding it for six months or less, the
loss will be recharacterized as long-term capital loss to the extent of the
capital gain dividend received. The tax rates for capital gains realized from
assets held for one year or less are generally the same as for ordinary income.
In addition, the Code treats certain capital gains as ordinary income in special
situations.
Page 49
Pursuant to the Tax Act, if the Fund holds equity securities, ordinary
income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at the same new rates
that apply to net capital gain (as discussed above), but only if certain holding
period requirements are satisfied and the dividends are attributable to
qualifying dividends received by the Fund itself. These special rules relating
to the taxation of ordinary income dividends from regulated investment companies
generally apply to taxable years beginning after December 31, 2002 and beginning
before January 1, 2009. The Fund generally does not expect to generate
qualifying dividends eligible for the new capital gains tax rates.
Deductibility of Fund Expenses
Expenses incurred and deducted by your Fund will generally not be treated
as income taxable to you. In some cases, however, you may be required to treat
your portion of these Fund expenses as income. In these cases you may be able to
take a deduction for these expenses. However, certain miscellaneous itemized
deductions, such as investment expenses, may be deducted by individuals only to
the extent that all of these deductions exceed 2% of the individual's adjusted
gross income.
Foreign Tax Credit
If the Fund invests in any foreign securities, the tax statement that you
receive may include an item showing foreign taxes the Fund paid to other
countries. In this case, dividends taxed to you will include your share of the
taxes the Fund paid to other countries. You may be able to deduct or receive a
tax credit for your share of these taxes.
Backup Withholding
The Fund may be required to withhold, for U.S. federal income tax purposes,
a portion of all taxable distributions (including redemption proceeds) payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number, who fail to make required certifications or who have been
notified by the IRS that they are subject to backup withholding (or if the Fund
has been so notified). Certain corporate and other shareholders specified in the
Code and the regulations thereunder are exempt from 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 provided the
appropriate information is furnished to the IRS.
Other Taxation
Foreign shareholders, including shareholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at
a rate of 30% or the lower rates as may be prescribed by any applicable treaty.
NET ASSET VALUE
The NAV of the Common Shares of the Fund will be computed based upon the
value of the Fund's portfolio securities and other assets. The NAV will be
determined as of the close of regular trading on the NYSE (normally 4:00 p.m.
eastern time) on each day the NYSE is open for trading. Domestic debt securities
and foreign securities will normally be priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund calculates NAV
per Common Share by subtracting the Fund's liabilities (including accrued
expenses, dividends payable and any borrowings of the Fund) and the liquidation
value of any outstanding Preferred Shares from the Fund's Managed Assets (the
value of the securities and other investments the Fund holds plus cash or other
assets, including interest accrued but not yet received) and dividing the result
by the total number of Common Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance with
Valuation Procedures adopted by the Board of Trustees. The Board of Trustees
anticipates that a majority of the Fund's assets will be valued using market
information supplied by third parties. In the event that market quotations are
not readily available, the pricing service does not provide a valuation for a
particular asset, or the valuations are deemed unreliable, or if events
occurring after the close of the principal markets for particular securities
(e.g., domestic debt and foreign securities), but before the Fund values its
assets, would call into doubt whether the earlier market quotations represent
fair value, the Fund may use a fair value method in good faith to value the
Fund's securities and investments. The use of fair value pricing by the Fund
will be governed by valuation procedures established by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
Senior Loans. The Senior Loans in which the Fund invests are not listed on
any securities exchange or board of trade. Senior Loans are typically bought and
sold by institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while having
substantially grown in the past several years, generally has fewer trades and
less liquidity than the secondary market for other types of securities. Some
Senior Loans have few or no trades, or trade infrequently, and information
regarding a specific Senior Loan may not be widely available or may be
incomplete. Accordingly, determinations of the market value of Senior Loans may
Page 50
be based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. For further
information, see "Risks--General Risks of Investing in the Fund--Limited
Secondary Market for Senior Loans; Valuation."
Typically Senior Loans are valued using information provided by an
independent third party pricing service. If the pricing service cannot or does
not provide a valuation for a particular Senior Loan or such valuation is deemed
unreliable, the Fund may value such Senior Loan at a fair value as determined in
good faith under procedures established by the Fund's Board of Trustees, and in
accordance with the provisions of the 1940 Act.
Fair Value. When applicable, fair value is determined by the Board or a
committee of the Board or a designee of the Board. In fair valuing the Fund's
investments, consideration is given to several factors, which may include, among
others, the following:
o the fundamental business data relating to the issuer or borrower;
o an evaluation of the forces which influence the market in which
these securities are purchased and sold;
o the type, size and cost of holding;
o the financial statements of the borrower;
o the credit quality and cash flow of the issuer, based on the
Adviser's or external analysis;
o the information as to any transactions in or offers for the holding;
o the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral securing the loan;
o the business prospects of the issuer/borrower, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's management;
o the prospects for the borrower's industry, and multiples (of
earnings and/or cash flow) being paid for similar businesses in that
industry; and
o other relevant factors.
Other Securities. Securities for which the primary market is a national
securities exchange or the NASDAQ National Market System are valued at the last
reported sale price (NASDAQ Official Closing Price for NASDAQ National Market
Securities) on the day of valuation. Listed securities for which no sale was
reported on that date are valued at the mean between the most recent bid and
asked prices. Securities traded in the over-the-counter market are valued at
their closing bid prices. Valuation of short-term cash equivalent investments
will be at amortized cost.
Page 51
UNDERWRITING
Subject to the terms and conditions stated in the purchase agreement dated
, 2004, each underwriter named below for which Merrill Lynch, Pierce, Fenner
& Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
AMPS set forth opposite the name of such underwriter.
Number of AMPS
--------------
Underwriter Series A Series B
----------- -------- --------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .............................
Oppenheimer & Co. Inc. ...............................
-------- --------
Total ...................................
======== ========
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to approval of legal
matters by counsel and to certain other conditions, including without
limitation, the receipt by the underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of "Aaa" and "AAA"
ratings on the AMPS by Moody's and S&P, respectively, as of the time of the
offering. The underwriters are obligated to purchase all the AMPS if they
purchase any of the AMPS. In the purchase agreement, the Fund, the Adviser and
the Sub-Adviser have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be required to make
for any of those liabilities.
The Fund has been advised by the underwriters that they propose initially
to offer some of the AMPS directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the AMPS to certain
dealers at the public offering price less a concession not in excess of $ per
share. The sales load the Fund will pay of $250 per share is equal to 1% of the
initial offering price. After the initial public offering, the underwriters may
change the public offering price and the concession. Investors must pay for any
AMPS purchased in the initial public offering on or before , 2004.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
underwriters, or their affiliates, may act as counterparties in connection with
the interest rate transactions described above after they have ceased to be
underwriters.
The Fund anticipates that the underwriters or their respective affiliates
may, from time to time, act in auctions as broker-dealers and receive fees as
set forth under "The Auction" and in the SAI. The underwriters are active
underwriters of, and dealers in, securities and act as market makers in a number
of such securities, and therefore can be expected to engage in portfolio
transactions with, and perform services for, the Fund.
Merrill Lynch has advised the Fund that it and certain Broker-Dealers and
other participants in the auction rate securities markets, including both
taxable and tax exempt markets, have received letters from the Securities and
Exchange Commission requesting that each of them voluntarily conduct an
investigation regarding their respective practices and procedures in those
markets. Merrill Lynch is cooperating fully with the Securities and Exchange
Commission in this process. No assurance can be given as to whether the results
of this process will affect the market for the AMPS or the Auctions.
The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York 10080.
The settlement date for the purchase of the AMPS will be , 2004, as
agreed upon by the underwriters, the Fund, the Adviser and the Sub-Adviser
pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
AUCTION AGENT, TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Deutsche Bank Trust Company Americas, 60 Wall Street, New York, New York
10005 will serve as auction agent, transfer agent, registrar and dividend
disbursing agent with respect to the AMPS.
CUSTODIAN AND ADMINISTRATOR
The custodian of the assets of the Fund is PFPC Trust Company (the
"Custodian"), 301 Bellevue Parkway, Wilmington, Delaware 19809. Pursuant to an
Administration and Accounting Services Agreement, PFPC Inc., 301 Bellevue
Parkway, Wilmington, Delaware 19809, provides certain administrative and
accounting services to the Fund, including maintaining the Fund's books of
Page 52
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent public accountant
providing the accountant with various audit-related information with respect to
the Fund; and providing other continuous accounting and administrative services.
As compensation for these services and for transfer agency, shareholder services
and dividend paying agency services provided with respect to the Common Shares,
the Fund has agreed to pay PFPC Inc. an annual fee, calculated daily and payable
on a monthly basis, of 0.06% of the Fund's first $250 million of average Managed
Assets, subject to decrease with respect to additional Fund Managed Assets.
LEGAL MATTERS
Certain legal matters in connection with the AMPS will be passed upon for
the Fund by Chapman and Cutler LLP, Chicago, Illinois, and for the underwriters
by Clifford Chance US LLP, New York, New York. Chapman and Cutler LLP and
Clifford Chance US LLP may rely as to certain matters of Massachusetts law on
the opinion of Bingham McCutchen LLP.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Exchange Act
and the 1940 Act and is required to file reports, proxy statements and other
information with the Securities and Exchange Commission. These documents can be
inspected and copied for a fee at the Securities and Exchange Commission's
public reference room, 450 Fifth Street, N.W., Washington, D.C. 20549. Reports,
proxy statements, and other information about the Fund can be inspected at the
offices of the NYSE.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each statement being qualified in all respects by this
reference.
Additional information about the Fund and AMPS can be found in the Fund's
registration statement (including amendments, exhibits, and schedules) on Form
N-2 filed with the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a web site (http://www.sec.gov) that contains the
Fund's registration statements, other documents incorporated by reference, and
other information the Fund has filed electronically with the Securities and
Exchange Commission, including proxy statements and reports filed under the
Exchange Act.
Page 53
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
The Fund................................................................... 1
Investment Objectives...................................................... 1
Investment Restrictions.................................................... 2
Additional Information about the Fund's Investments........................ 4
Management of the Fund..................................................... 21
Adviser.................................................................... 26
Proxy Voting Procedures.................................................... 29
Sub-Adviser................................................................ 29
Portfolio Transactions..................................................... 30
Net Asset Value............................................................ 31
Description of AMPS........................................................ 32
Additional Information Concerning Auctions for AMPS........................ 34
Concerning The Auction Agent............................................... 34
Broker-Dealers............................................................. 35
Federal Income Tax Matters................................................. 36
Performance Related and Comparative Information............................ 41
Experts.................................................................... 42
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing Agent
and Redemption Agent.................................................... 42
Additional Information..................................................... 42
Report of Independent Registered Public Accounting Firm.................... F-1
Financial Statements....................................................... F-2
Appendix A Statement Establishing and Fixing the Rights and
Preferences of Auction Market Preferred Shares........... A-1
Appendix B Description of Ratings...................................... B-1
Page 54
APPENDIX A
GLOSSARY OF TERMS
As used in this prospectus, 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:
"Adviser" means First Trust Advisors, L.P.
"Affiliate" means any person controlled by, in control of or under common
control with the Fund; provided that no Broker-Dealer controlled by, in control
of or under common control with the Fund shall be deemed to be an Affiliate nor
shall any corporation or any person controlled by, in control of or under common
control with such corporation, one of the trustees, directors or executive
officers of which is also a Trustee of the Fund be deemed to be an Affiliate
solely because such Trustee, director or executive officer is also a Trustee of
the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"AMPS" means Auction Market Preferred Shares.
"Applicable Percentage" means the percentage determined based on the credit
rating assigned to the series of AMPS on such date by Moody's (if Moody's is
then rating the AMPS) and S&P (if S&P is then rating the AMPS) as follows:
Credit Ratings for Preferred Shares
-----------------------------------
Moody's S&P Applicable Percentage
------- --- ---------------------
"Aaa" "AAA" 125%
"Aa3" to "Aa1" "AA-" to "AA+" 150%
"A3" to "A1" "A-" to "A+" 200%
"Baa3" to "Baa1" "BBB-" to "BBB+" 250%
"Ba1" and below "BB+" and below 300%
In the case of a special rate period, the Applicable Percentage is
determined on the day that a notice of a special rate period is delivered if the
notice specifies a Maximum Rate for a special rate period. The Applicable
Percentage will be determined based on the lower of the credit rating or ratings
assigned to the AMPS by Moody's and S&P. If Moody's or S&P or both shall not
make such ratings available, the rate shall be determined by reference to
equivalent ratings issued by a substitute rating agency.
The Applicable Percentage as so determined will be further 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. The Fund will take all reasonable action necessary to
enable either Moody's or S&P to provide a rating for each series of AMPS. If
neither Moody's nor S&P will make such a rating available, the Fund will select
another Rating Agency to act as a substitute Rating Agency.
"Applicable Rate" means, with respect to each Series for each Rate Period
(i) if Sufficient Clearing Bids exist for the Auction in respect thereof, the
Winning Bid Rate, (ii) if Sufficient Clearing Bids do not exist for the Auction
in respect thereof, the Maximum Rate, and (iii) in the case of any Rate Period
if all the shares of a Series are the subject of Submitted Hold Orders for the
Auction in respect thereof, 90% of the Reference Rate corresponding to that
Series.
"Applicable Spread" means the spread determined based on the credit rating
assigned to the series of Preferred Shares on such date by Moody's (if Moody's
is then rating the AMPS) and S&P (if S&P is then rating the AMPS) as follows:
Credit Ratings for Preferred Shares
-----------------------------------
Moody's S&P Applicable Spread
------- --- -----------------
"Aaa" "AAA" 125 bps
"Aa3" to "Aa1" "AA-" to "AA+" 150 bps
"A3" to "A1" "A-" to "A+" 200 bps
"Baa3" to "Baa1" "BBB-" to "BBB+" 250 bps
"Ba1" and below "BB+" and below 300 bps
Page A-1
In the case of a special rate period, the Applicable Spread is determined
on the day that a notice of a special rate period is delivered if the notice
specifies a Maximum Rate for a special rate period. The Applicable Spread will
be determined based on the lower of the credit rating or ratings assigned to the
AMPS by Moody's and S&P. If Moody's or S&P or both shall not make such ratings
available, the rate shall be determined by reference to equivalent ratings
issued by a substitute rating agency.
The Applicable Spread as so determined will be further 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. The Fund will take all reasonable action necessary to enable
either Moody's or S&P to provide a rating for each series of AMPS. If neither
Moody's nor S&P will make such a rating available, the Fund will select another
Rating Agency to act as a substitute Rating Agency.
"Asset Coverage Cure Date" means the fifth Business Day following the
Fund's failure to maintain, as of any Valuation Date, Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, or the last Business Day of the month following the Fund's
failure to maintain the 1940 Act Preferred Shares Asset Coverage as of the last
Business Day of a given month.
"Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
"Auction Agent" means Deutsche Bank Trust Company Americas, unless and
until another commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into an agreement with
the Fund 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 Rate Period.
"Auction Procedures" means the procedures for conducting Auctions set forth
under "The Auction" herein.
"Bank Loan" means a direct purchase of, an assignment of, a participation
in and other interest in (a) any bank loan including term loans and the funded
and unfunded portions of revolving credit lines or (b) any loan made by an
investment bank, investment fund or other financial institution, denominated in
U.S. dollars, provided that the loan under clause (b) is similar to those
typically made, syndicated, purchased or participated by a commercial bank or
institutional loan investor in the ordinary course of business.
"Beneficial Owner," with respect to AMPS, 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 the series.
"Bid" means an order indicating a Beneficial Owner's desire to purchase or
hold the indicated number of shares of a series at $25,000 per share if the
Applicable Rate for shares of such series for the next Rate Period is not less
than the rate or spread specified in the bid and which shall be deemed an
irrevocable offer to sell shares of such series at $25,000 per share if the
Applicable Rate for shares of such series for the next Rate Period is less than
the rate of spread specified in the Bid
"Bidder" means each Beneficial Owner and each Potential Beneficial Owner
placing an Order with a Broker-Dealer, and each such Broker-Dealer placing an
Order with the Auction Agent.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund or
any duly authorized committee thereof as permitted by applicable law.
"Borrower" means an entity holding one of the most senior positions in the
capital structure of a business entity.
"Borrowings" means commercial paper, notes or other borrowings.
"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 Fund and has entered into a
Broker- Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement among the Auction Agent and a
Broker-Dealer, pursuant to which the 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.
Page A-2
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Share" means the shares of beneficial interest, par value $.01 per
share, of the Fund.
"Credit Agreement" means the Revolving Credit and Security Agreement dated
as of August 2, 2004, among the Fund, as borrower, CRC Funding, LLC, as conduit
lender, Citibank, N.A., as secondary lender, and Citicorp North America, Inc.,
as agent.
"Credit Facility" means the $195,000,000 364-day revolving credit facility
entered into among the Fund, the lenders from time to time party thereto and
Citicorp North America, Inc. as agent.
"Custodian" means PFPC Trust Company.
"Date of Original Issue" means, with respect to the AMPS, , 2004.
"Declaration of Trust" means the Fund's Declaration of Trust, dated as of
March 25, 2004.
"Default Period" means, with respect to a particular series, a period that
will commence on any date the Fund 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 or (B) the full amount of any redemption price payable on the
Redemption Date.
"Deposit Securities" means cash and any obligations or securities,
including Short-Term Money Market Instruments that are Eligible Assets, rated at
least "AAA", "A-1", "A-2" or "SP-1" by S&P, except that, for purposes of section
3(a)(i) of this Part I, such obligations or securities shall be considered
"Deposit Securities" only if they are also rated at least "P-2" by Moody's.
"Discounted Value" means the quotient of the Market Value of an Eligible
Asset divided by the applicable discount factor, provided that with respect to
an Eligible Asset that is currently callable, Discounted Value will be equal to
the quotient as calculated above or the call price, whichever is lower, and that
with respect to an Eligible Asset that is prepayable, Discounted Value will be
equal to the quotient as calculated above or the par value, whichever is lower.
"Dividend Payment Date" with respect to the AMPS means any date on which
dividends are payable.
"DTC" means The Depository Trust Company.
"Eligible Assets" means S&P's Eligible Assets or Moody's Eligible Assets
and/or Other Rating Agency Eligible Assets if any Other Rating Agency is then
rating the AMPS, whichever is applicable.
"ERISA" means the Employee Retirement Income Security Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Holder," with respect to shares of a series of AMPS, means a
Broker-Dealer (or any such other Person as may be permitted by the Fund) that is
listed on the records of the Auction Agent as a holder of shares of such series.
"FDIC" means Federal Deposit Insurance Corporation.
"First Trust Advisors" means First Trust Advisors L.P.
"Fitch" means Fitch Ratings and its successors at law.
"Four Corners" means Four Corners Capital Management, LLC.
"Fund" means First Trust/Four Corners Senior Floating Rate Income Fund II.
"High Yield Securities" means municipal obligations not rated by S&P but
rated equivalent to "BBB" or lower by another nationally recognized statistical
rating organization, rated "BB+" or lower by S&P or non-rated.
Page A-3
"Holder" means, with respect to the AMPS, the registered holder of shares
of each Series as the same appears on the share ledger or share records of the
Fund.
"Hold Order" means an order indicating a Beneficial Owner's desire to hold
shares of a series without regard to the Applicable Rate for the next Rate
Period.
"Initial Dividend Payment Date" means, with respect to the AMPS, , 2004.
"Initial Rate Period" means days for the Series A AMPS commencing on and
means days for the Series B AMPS commencing on .
"IRS" means the Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"LIBOR Dealers" means 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, means (i) the rate for deposits in U.S.
dollars for the designated Rate Period, which 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 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 the Auction
Date (the "LIBOR Determination Date"), or (ii) if such rate does not appear on
Telerate Page 3750 or such other page as may replace such Telerate Page 3750,
(A) the LIBOR Dealer will 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 Rate 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 will equal such arithmetic mean of such quotations, (C)
if only one or none of the Reference Banks provide such quotations, LIBOR Rate
will 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 quoting on the relevant LIBOR Determination Date for
deposits in U.S. dollars for the designated Rate 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 will
be LIBOR Rate as determined on the previous Auction Date. If the number of Rate
Period days will be (i) seven or more but fewer than 21 days, such rate will be
the seven-day LIBOR rate; (ii) more than 21 but fewer than 49 days, such rate
will be the one-month LIBOR rate; (iii) 49 or more but fewer than 77 days, such
rate will be the two- month LIBOR rate; (iv) 77 or more but fewer than 112 days,
such rate will be the three-month LIBOR rate; (v) 112 or more but fewer than 140
days, such rate will be the four-month LIBOR rate; (vi) 140 or more but fewer
than 168 days, such rate will be the five-month LIBOR rate; (vii) 168 or more
but fewer than 189 days, such rate will be the six-month LIBOR rate; (viii) 189
or more but fewer than 217 days, such rate will be the seven-month LIBOR rate;
(ix) 217 or more but fewer than 252 days, such rate will be the eight-month
LIBOR rate; (x) 252 or more but fewer than 287 days, such rate will be the nine-
month LIBOR rate; (xi) 287 or more but fewer than 315 days, such rate will be
the ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days, such rate
will be the eleven-month LIBOR rate; and (xiii) 343 or more but fewer than 365
days, such rate will be the twelve-month LIBOR rate.
"Liquidation Preference" means $25,000 per share of AMPS.
"London Business Day" means any day on which commercial banks are generally
open for business in London.
"LSTA" means the Loan Syndications and Trading Association.
"Majority Shareholder Vote" means the affirmative vote of the majority of
the outstanding voting securities, as defined in the 1940 Act.
Page A-4
"Managed Assets" means the average daily gross asset value of the Fund
(including assets attributable to the Fund's Preferred Shares, if any, and the
principal amount of borrowings) minus the sum of the Fund's accrued and unpaid
dividends on any outstanding Preferred Shares and accrued liabilities (other
than the principal amount of any borrowings incurred or of commercial paper or
notes issued by the Fund).
"Mandatory Redemption Date" means the date 30 days after the Fund last
satisfied the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage.
"Mandatory Redemption Price" means the Redemption Price plus (in the case
of a Rate 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.
"Market Value" of any asset shall include any interest accrued thereon and
means the price of an Eligible Asset which is the price obtained from the
Pricing Service. The Pricing Service shall value portfolio securities at the
quoted bid prices or the mean between the quoted bid and asked price or the
yield equivalent when quotations are not readily available. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the Pricing Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
The Pricing Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. In the event the Pricing Service is
unable to value a security, the security shall be valued at the lower of two
dealer bids obtained by the Fund from dealers who are members of the National
Association of Securities Dealers, Inc. and who make a market in the security,
at least one of which shall be in writing. Futures contracts and options are
valued at closing prices for such instruments established by the exchange or
board of trade on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Trustees.
Readily marketable portfolio securities listed on the New York Stock
Exchange are valued, except as indicated below, at the last sale price reflected
on the consolidated tape at the close of the New York Stock Exchange on the
business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the closing bid and
asked prices on such day. If no bid or asked prices are quoted on such day, then
the security is valued by such method as the Board of Trustees shall determine
in good faith to reflect its fair market value. Readily marketable securities
not listed on the New York Stock Exchange but listed on other domestic or
foreign securities exchanges or admitted to trading on the National Association
of Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities. Where securities are
traded on more than one exchange and also over-the-counter, the securities will
generally be valued using the quotations the Board of Trustees believes reflect
most closely the value of such securities.
"Maximum Rate," for shares of a series of AMPS on any Auction Date for
shares of such series, will mean for any rate period, the greater of the
Applicable Percentage of the Reference Rate or the Applicable Spread plus the
Reference Rate. The Auction Agent will round each applicable Maximum Rate to the
nearest one-thousandth (.001) of one percent per annum, with any such number
ending in five ten-thousandths of one percent being rounded upwards to the
nearest one-thousandth (.001) of one percent.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Eligible Assets" means:
(i) Cash (including interest and dividends due on assets rated
(A) "Baa3" or higher by Moody's if the payment date is within five
Business Days of the Valuation Date, (B) "A2" or higher if the payment
date is within thirty days of the Valuation Date, and (C) "A1" or
higher if the payment date is within the Moody's Exposure Period) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades
which generated such receivables are (A) settled through clearing house
firms or (B) (1) with counterparties having a Moody's long-term debt
rating of at least "Baa3" or (2) with counterparties having a Moody's
Short-Term Money Market Instrument rating of at least "P-1;"
(ii) Short-Term Money Market Instruments so long as (A) such
securities are rated at least "P-1," (B) in the case of demand
deposits, time deposits and overnight funds, the supporting entity is
rated at least "A2," or (C) in all other cases, the supporting entity
(1) is rated "A2" and the security matures within one month, (2) is
Page A-5
rated "A1" and the security matures within three months or (3) is rated
at least "Aa3" and the security matures within six months; provided,
however, that for purposes of this definition, such instruments (other
than commercial paper rated by S&P or Fitch and not rated by Moody's)
need not meet any otherwise applicable rating criteria of S&P or Fitch;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Senior Loans and other Bank Loans approved by Moody's;
(vi) Corporate debt securities (including convertible and
convertible preferred) if (A) such securities are rated "Caa" or higher
by Moody's; (B) such securities provide for the periodic payment of
interest in cash in U.S. dollars or euros, except that such securities
that do not pay interest in U.S. dollars or euros shall be considered
Moody's Eligible Assets if they are rated by Moody's, S&P or Fitch; (C)
for securities which provide for conversion or exchange into equity
capital at some time over their lives, the issuer must be rated at
least "B3" by Moody's and the discount factor will be 250%; (D) for
debt securities rated Ba1 and below, no more than 10% of the original
amount of such issue may constitute Moody's Eligible Assets; (E) 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 Fund's investment manager or portfolio manager acting pursuant
to procedures approved by the Board of Trustees, except that such
securities that are not subject to U.S. federal securities laws shall
be considered Moody's Eligible Assets if they are publicly-traded; and
(F) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt
securities not rated at least "Caa" by Moody's or not rated by Moody's
shall be considered to be Moody's Eligible Assets only to the extent
the Market Value of such corporate debt securities does not exceed 10%
of the aggregate Market Value of all Moody's Eligible Assets; provided,
however, that if the Market Value of such corporate debt securities
exceeds 10% of the aggregate Market Value of all Moody's Eligible
Assets, a portion of such corporate debt securities (selected by the
Fund) shall not be considered Moody's Eligible Assets, so that the
Market Value of such corporate debt securities (excluding such portion)
does not exceed 10% of the aggregate Market Value of all Moody's
Eligible Assets; and (y) corporate debt securities rated by none of
Moody's, S&P, or Fitch shall be considered to be Moody's Eligible
Assets only to the extent such securities are issued by entities which
(i) have not filed for bankruptcy within the past three years, (ii) are
current on all principal and interest in their fixed income
obligations, (iii) are current on all preferred stock dividends and
(iv) possess a current, unqualified auditor's report without qualified,
explanatory language.
(vii) Convertible securities (including convertible preferred
stock), provided that (A) the issuer of common stock must have a
Moody's senior unsecured debt of "Caa" or better, or a rating of "CCC"
or better by S&P or Fitch, (B) the common stocks must be traded on the
New York Stock Exchange, the American Stock Exchange, or the NASDAQ,
(C) dividends must be paid in U.S. dollars, (D) the portfolio of
convertible bonds must be diversified as set forth in the table set
forth below, (E) the company shall not hold shares exceeding the
average weekly trading volume during the preceding month and (F)
synthetic convertibles are excluded from asset eligibility.
(viii) Preferred stocks if (A) dividends on such preferred
stock are cumulative, (B) 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, (C) the issuer of such a preferred
stock has common stock listed on either the New York Stock Exchange,
the American Stock Exchange or the NASDAQ, (D) the issuer of such a
preferred stock has a senior debt rating from Moody's of "Baa1" or
higher or a preferred stock rating from Moody's of "Baa3" or higher and
(E) such preferred stock has paid consistent cash dividends in U.S.
dollars or euros over the last three years or has a minimum rating of
"A1" (if the issuer of such preferred stock has other preferred issues
outstanding that have been paying dividends consistently for the last
three years, then a preferred stock without such a dividend history
would also be eligible); provided, however, that convertible preferred
stock shall be treated as convertible securities in accordance with
paragraph (vii) above. In addition, the preferred stocks must have the
following diversification requirements: (X) the preferred stock issue
must be greater than $50 million and (Y) the minimum holding by the
Fund of each issue of preferred stock is $500,000 and the maximum
holding of preferred stock of each issue is $5 million. In addition,
preferred stocks issued by transportation companies will not be
considered Moody's Eligible Assets;
(ix) Asset-backed and mortgage-backed securities:
Page A-6
(A) Asset-backed securities if (1) such securities
are rated at least "Aa3" by Moody's or at least "AA" by S&P or
Fitch, (2) the securities are part of an issue that is $250
million or greater, or the issuer of such securities has a
total of $500 million or greater of asset-backed securities
outstanding at the time of purchase of the securities by the
Fund and (3) the expected average life of the securities is
not greater than 4 years;
(B) Collateralized mortgage obligations ("CMOs"),
including CMOs with interest rates that float at a multiple of
the change in the underlying index according to a pre-set
formula, provided that any CMO held by the Fund (1) has been
rated "Aaa" by Moody's or "AAA" by S&P or Fitch, (2) does not
have a coupon which floats inversely, (3) is not portioned as
an interest-only or principal-only strip and (4) is part of an
issuance that had an original issue size of at least $100
million;
(C) Planned amortization class bonds ("PACs") and
targeted amortization class bonds ("TACs") provided that such
PACs or TACs are (1) backed by certificates of either the
Federal National Mortgage Association ("FNMA"), the Government
National Mortgage Association ("GNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC") representing ownership in
single-family first lien mortgage loans with original terms of
30 years, (2) part of an issuance that had an original issue
size of at least $10 million, (3) part of PAC or TAC classes
that have payment priority over other PAC or TAC classes, (4)
if TACs, TACs that do not support PAC classes, and (5) if
TACs, not considered reverse TACs (i.e., do not protect
against extension risk);
(D) Consolidated senior debt obligations of Federal
Home Loan Banks ("FHLBs"), senior long-term debt of the FNMA,
and consolidated systemwide bonds and FCS Financial Assistance
Corporation Bonds of Federal Farm Credit Banks ("FFCBs")
(collectively, "FHLB, FNMA and FFCB Debentures"), provided
that such FHLB, FNMA and FFCB Debentures are (1) direct
issuance corporate debt rated "Aaa" by Moody's, (2) senior
debt obligations backed by the FHLBs, FFCBs or FNMA, (3) part
of an issue entirely denominated in U.S. dollars and (4) not
callable or exchangeable debt issues;
(E) Mortgage pass-throughs rated at least "Aa" by
Moody's and pass-throughs issued prior to 1987 (if rated "AA"
by S&P or Fitch and based on fixed-rate mortgage loans) by
Travelers Mortgage Services, Citicorp Homeowners, Citibank,
N.A., Sears Mortgage Security or RFC-Salomon Brothers Mortgage
Securities, Inc., provided that (1) certificates must evidence
a proportional, undivided interest in specified pools of fixed
or adjustable-rate mortgage loans, secured by a valid first
lien, on one- to four-family residential properties and (2)
the securities are publicly registered (not issued by FNMA,
GNMA or FHLMC);
(F) Private-placement mortgage pass-throughs provided
that (1) certificates represent a proportional undivided
interest in specified pools of fixed-rate mortgage loans,
secured by a valid first lien, on one- to four- family
residential properties, (2) documentation is held by a trustee
or independent custodian, (3) pools of mortgage loans are
serviced by servicers that have been approved by FNMA or FHLMC
and funds shall be advanced to meet deficiencies to the extent
provided in the pooling and servicing agreements creating such
certificates, and (4) pools have been rated "Aa" or better by
Moody's; and
(G) Whole loans (e.g., direct investments in
mortgages) provided that (1) at least 65% of such loans (a)
have seasoning of no less than six months, (b) are secured by
single-family detached residences, (c) are owner-occupied
primary residences, (d) are secured by a first-lien,
fully-documented mortgage, (e) are neither currently
delinquent (30 days or more) nor delinquent during the
preceding year, (f) have loan-to-value ratios of 80% or below,
(g) carry normal hazard insurance and title insurance, as well
as special hazard insurance, if applicable, (h) have original
terms to maturity not greater than 30 years, with at least one
year remaining to maturity, (i) have a minimum of $10,000
remaining principal balance, (j) for loans underwritten after
January 1, 1978, FNMA and/or FHLMC forms are used for
fixed-rate loans, and (k) are whole loans and not
participations; (2) for loans that do not satisfy the
requirements set forth in the foregoing clause (1), (a)
non-owner occupied properties represent no greater than 15% of
the aggregate of either the adjustable-rate pool or the
fixed-rate pool, (b) multi-family properties (those with five
or more units) represent no greater than 15% of the aggregate
of either the adjustable-rate pool or the fixed-rate pool, (c)
condominiums represent no greater than 10% of the aggregate of
either the adjustable-rate pool or the fixed-rate pool, and
any condominium project must be 80% occupied at the time the
loan is originated, (d) properties with loan-to-value ratios
exceeding 80% represent no greater than 25% of the aggregate
of either the adjustable-rate pool or the fixed-rate pool and
that the portion of the mortgage on any such property that
exceeds a loan-to-value ratio of 80% is insured with Primary
Mortgage Insurance from an insurer rated at least "Baa3" by
Moody's and (e) loan balances in excess of the current FHLMC
limit plus $75,000 represent no greater than 25% of the
aggregate of either the adjustable-rate pool or the fixed-rate
pool, loan balances in excess of $350,000 represent no greater
than 10% of the aggregate of either the adjustable-rate pool
or the fixed-rate pool, and loan balances in excess of
$1,000,000 represent no greater than 5% of the aggregate of
Page A-7
either the adjustable-rate pool or the fixed-rate pool; (3) no
greater than 5% of the pool of loans is concentrated in any
one zip code; (4) the pool of loans contains at least 100
loans or $2 million in loans per servicer; (5) for
adjustable-rate mortgages ("ARMs"), (a) any ARM is indexed to
the National Cost of Funds index, the 11th District Cost of
Funds index, the 1-year Treasury or the 6-month Treasury, (b)
the margin over the given index is between .15% and .25% for
either cost-of-funds index and between .175% and .325% for
Treasuries, (c) the maximum yearly interest rate increase is
2%, (d) the maximum life-time interest rate increase is 6.25%
and (e) ARMs may include Federal Housing Administration and
Department of Veterans Affairs loans; and (6) for "teaser"
loans, (a) the initial discount from the current ARM market
rate is no greater than 2%, (b) the loan is underwritten at
the market rate for ARMs, not the "teaser" rate, and (c) the
loan is seasoned six months beyond the "teaser" period.
(x) Any municipal debt obligation that (A) pays interest in
cash, (B) does not have a Moody's rating, as applicable, suspended by
Moody's, and (C) is part of an issue of municipal debt obligations of
at least $5,000,000, except for municipal debt obligations rated below
"A" by Moody's, in which case the minimum issue size is $10,000,000;
(xi) Structured Notes, rated TRACERs and TRAINs;
(xii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this
definition but only upon receipt by the Fund of a letter from Moody's
specifying any conditions on including such financial contract in
Moody's Eligible Assets and assuring the Fund that including such
financial contract in the manner so specified would not affect the
credit rating assigned by Moody's to the AMPS; and
(xiii) Common stock, preferred stock or any debt security of
REITs or real estate companies.
In addition, portfolio holdings as described below must be
within the following diversification and issue size requirements in
order to be included in Moody's Eligible Assets:
Maximum Maximum Minimum Issue Size
Ratings (1) Single Issuer (2,3) Single Industry (3,4) ($ in Millions) (5)
----------- ------------------- --------------------- -------------------
"Aaa" 100% 100% $100
"Aa" 20 60% 100
"A" 10 40 100
"Baa" 6 20 100
"Ba" 4 12 50 (6)
"B1"-"B2" 3 8 50 (6)
"B3" or below 2 8 50 (6)
(1) Refers to the preferred stock and senior debt rating of the portfolio
holding.
(2) Companies subject to common ownership of 25% or more are considered as one
issuer.
(3) Percentages represent a portion of the aggregate Market Value of corporate
debt securities.
(4) Industries are determined according to Moody's Industry Classifications, as
defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50 million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Fund's total assets.
Where the Fund sells an asset and agrees to repurchase such
asset in the future, the Discounted Value of such asset will constitute
a Moody's Eligible Asset and the amount the Fund is required to pay
upon repurchase of such asset will count as a liability for the
purposes of the Preferred Shares Basic Maintenance Amount. Where the
Fund purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is rated at
least "A2" by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such purchased asset will constitute
a Moody's Eligible Asset. For the purposes of calculation of Moody's
Eligible Assets, portfolio securities which have been called for
redemption by the issuer thereof shall be valued at the lower of Market
Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered
a Moody's Eligible Asset to the extent that it (i) 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 Moody's has indicated
to the Fund will not affect the status of such asset as a Moody's
Page A-8
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 Fund by its
investment manager or portfolio manager, the Fund's custodian, transfer
agent or registrar or the Auction Agent and (D) Liens arising by virtue
of any repurchase agreement, or (ii) has been segregated against
obligations of the Fund in connection with an outstanding derivative
transaction.
"Moody's Industry Classification" means, for the purposes of determining
Moody's Eligible Assets, each of the following industry classifications:
1. Aerospace and Defense: Major Contractor, Subsystems,
Research, Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto
Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit,
Small Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines
and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum,
Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals
(non-agriculture), Industrial Gases, Sulphur, Plastics, Plastic
Products, Abrasives, Coatings, Paints, Varnish, Fabricating
7.Containers, Packaging and Glass: Glass, Fiberglass,
Containers made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing
Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies,
School Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and
Minerals: Fabricating, Distribution, Mining and Sales
12. Ecological: Pollution Control, Waste Removal, Waste
Treatment and Waste Disposal
13. Electronics: Computer Hardware, Electric Equipment,
Components, Controllers, Motors, Household Appliances, Information
Service Communicating Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication,
Securities
15. Farming and Agriculture: Livestock, Grains, Produce,
Agriculture Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs,
Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable
Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Page A-9
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent,
Surety
21. Leisure, Amusement, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records,
Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games,
Toy Manufacturing
22. Machinery (Non-Agriculture, Non-Construction,
Non-Electronic): Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper,
Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales
24. Oil and Gas: Crude Producer, Retailer, Well Supply,
Service and Drilling
25. Personal, Food and Miscellaneous Services
26. Printing and Publishing: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks
27. Cargo Transport: Rail, Shipping, Railroads, Rail-car
Builders, Ship Builders, Containers, Container Builders, Parts,
Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing,
Air Cargo, Transport
28. Retail Stores
29. Telecommunications
30. Textiles and Leather
31. Personal Transportation
32. Utilities
33. Broadcasting and Entertainment
"NAV" means net asset value.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"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 Fund which are stock,
including all Outstanding AMPS (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 stock 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 next preceding the time of
such determination.
"Notice of Redemption" means any notice with respect to the redemption of
AMPS.
"NRSRO" means a nationally recognized statistical rating organization.
"NYSE" means the New York Stock Exchange.
"Order" means the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information relating to a Bid, a Hold Order or a Sell Order.
"Other Rating Agency" means any rating agency other than S&P or Moody's
then providing a rating for the AMPS pursuant to the request of the Fund.
Page A-10
"Other Rating Agency Eligible Assets" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of AMPS.
"Outstanding" or "outstanding" means, as of any date, AMPS theretofore
issued by the Fund except, without duplication, (i) any AMPS theretofore
canceled, redeemed or repurchased by the Fund, or delivered to the Auction Agent
for cancellation or with respect to which the Fund has given notice of
redemption and irrevocably deposited with the Paying Agent sufficient funds to
redeem such AMPS and (ii) any AMPS represented by any certificate in lieu of
which a new certificate has been executed and delivered by the Fund.
Notwithstanding the foregoing, (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum), any of
the AMPS to which the Fund or any Affiliate of the Fund shall be the Existing
Holder shall be disregarded and not deemed Outstanding; (B) in connection with
any Auction, any AMPS as to which the Fund or any person known to the Auction
Agent to be an Affiliate of the Fund shall be the Existing Holder thereof shall
be disregarded and deemed not to be Outstanding; and (C) for purposes of
determining the Preferred Shares Basic Maintenance Amount, AMPS held by the Fund
shall be disregarded and not deemed Outstanding but shares held by any Affiliate
of the Fund shall be deemed Outstanding.
"Paying Agent" means Deutsche Bank Trust Company Americas, unless and until
another entity appointed by a resolution of the Board of Trustees enters into an
agreement with the Fund to serve as paying agent.
"Performing" means with respect to any asset, the issuer of such investment
is not in default of any payment obligations in respect thereof.
"Person" or "person" means and includes an individual, a partnership, a
trust, a Fund, an unincorporated association, a joint venture or other entity or
a government or any agency or political subdivision thereof.
"Potential Beneficial Owner," with respect to shares of a series of AMPS,
means a customer of a Broker-Dealer that is not a Beneficial Owner of shares of
such series but that wishes to purchase shares of such series, or that is a
Beneficial Owner of shares of such series that wishes to purchase additional
shares of such series.
"Potential Credit Agreements," with respect to a leverage borrowing program
instituted by the Fund, means the credit agreements governing such a program.
"Potential Holders" means Potential Beneficial Owners who submit Orders to
the Auction Agent.
"Preferred Shares" means the preferred shares of beneficial interest, par
value $.01 per share, including the AMPS, of the Fund from time to time.
"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 AMPS Outstanding on
such date multiplied by $25,000, plus any redemption premium applicable
to the AMPS then subject to redemption;
(B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates to (but not
including) the first respective Dividend Payment dates for the
AMPS Outstanding that follow such Valuation Date;
(C) the aggregate amount of cash dividends that would
accumulate on the AMPS Outstanding from such first respective
Dividend Payment Date therefor through the 30th day after such
Valuation Date, at the Maximum Rate for a 28-Day Rate Period
to commence on such Dividend Payment Date, multiplied by the
Volatility Factor;
(D) the amount of anticipated expenses of the Fund
for the 90 days subsequent to such Valuation Date;
(E) the amount of any indebtedness or obligations of
the Fund senior in right of payment to the AMPS; and
(F) any current liabilities as of such Valuation Date
to the extent not reflected in any of (i)(A) through (i)(E)
(including, without limitation, any payables for securities
purchased as of such Valuation Date and any liabilities
incurred for the purpose of clearing securities transactions)
less
Page A-11
(ii) either (A) the Discounted Value of any of the Fund's
assets, or (B) the face value of any of the Fund's assets if such
assets mature prior to or on the date of redemption of AMPS or payment
of a liability and are either securities issued or guaranteed by the
United States Government or Deposit Securities, in both cases
irrevocably deposited by the Fund for the payment of the amount needed
to redeem AMPS subject to redemption or to satisfy any of (i)(B)
through (i)(F).
"Pricing Service" means any Loan Pricing Corporation or any other
pricing service designated by the Board of Trustees of the Fund and approved by
S&P or Moody's, as applicable, for purposes of determining whether the Fund has
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
Preferred Shares Basic Maintenance Amount.
"Prime Rate" means the prime rate offered by one or more major United
States banks.
"Rate Period" means, with respect to the AMPS, 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 Rate Period for such series and
ending on the day established for such series by the Fund.
"Rating Agency" means S&P and Moody's as long as such rating agency is
then rating the AMPS.
"Reference Rate" means the applicable LIBOR Rate (for a Rate Period of
fewer than 365 days) or the applicable Treasury Index Rate (for a Rate Period of
365 days or more).
"Rule 144A Securities" means securities which 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 Fund's investment
manager or portfolio manager acting pursuant to procedures approved by the Board
of Trustees of the Fund.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or its successors.
"S&P Discount Factor" means:
Type of S&P Eligible Asset 25 B-d "AAA" Rating
-------------------------- -------------------
Public Equity Common Stocks 170.97%
DRD Eligible Preferred Stock with a senior or preferred stock rating of at least "BBB" 245.00%
Non-DRD Eligible Preferred Stock with a senior or preferred stock rating of at least "BBB" 164.00%
DRD Eligible Preferred Stock with a senior or preferred stock rating below "BBB" 250.78%
Non-DRD Eligible Preferred Stock with a senior or preferred stock rating below "BBB" 169.68%
Un-rated DRD Eligible Preferred Stock 255.78%
Un-rated Non-DRD Eligible Preferred Stock 174.68%
Convertible bonds rated "AAA" to "AAA" 150.90%
Convertible bonds rated "AA+" to "AA" 157.58%
Convertible bonds rated "A+" to "A" 164.25%
Convertible bonds rated "BBB+" to "BBB" 170.92%
Convertible bonds rated "BB+" to "BB" 177.60%
Convertible bonds rated "B+" to "B" 184.27%
Convertible bonds rated "B" 184.27%
Convertible bonds rated "CCC+" 190.94%
Convertible bonds rated "CCC". 205%
U.S. Short-Term Money Market Investments with maturities of 180 days or less 104.5%
U.S. Short-Term Money Market Investments with maturities of between 181 and 360 days 114.2%
U.S. Government Obligations (52 week Treasury Bills) 102.23%
U.S. Government Obligations (Two-Year Treasury Notes) 104.23%
U.S. Government Obligations (Five-Year Treasury Notes) 110.27%
U.S. Government Obligations (Ten-Year Treasury Notes) 117.23%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130.38%
Agency Mortgage Collateral (Fixed 15-Year) 132.2%
Agency Mortgage Collateral (Fixed 30-Year) 134.9%
Agency Mortgage Collateral (ARM 1/1) 124.2%
Agency Mortgage Collateral (ARM 3/1) 124.7%
Agency Mortgage Collateral (ARM 5/1) 125.2%
Agency Mortgage Collateral (ARM 10/1) 125.4%
Bank Loans (S&P Loan Category A) 117.79%
Bank Loans (S&P Loan Category B) 125.47%
Bank Loans (S&P Loan Category C) 154.08%
Bank Loans (S&P Loan Category D) 178.25%
Corporate Bonds rated at least "AAA" 110%
Corporate Bonds rated at least "AA+ 111%
Page A-12
Type of S&P Eligible Asset 25 B-d "AAA" Rating
-------------------------- -------------------
Corporate Bonds rated at least "AA" 113%
Corporate Bonds rated at least "AA" 115%
Corporate Bonds rated at least "A+" 116%
Corporate Bonds rated at least "A" 117%
Corporate Bonds rated at least "A" 118%
Corporate Bonds rated at least "BBB+" 120%
Corporate Bonds rated at least "BBB" 122%
Corporate Bonds rated at least "BBB" 124%
Corporate Bonds rated at least "BB+" 129%
Corporate Bonds rated at least "BB" 135%
Corporate Bonds rated at least "BB" 142%
Corporate Bonds rated at least "B+" 156%
Corporate Bonds rated at least "B" 169%
Corporate Bonds rated at least "B" 184%
Corporate Bonds rated at least "CCC+" 202%
Corporate Bonds rated at least "CCC" 252%
Corporate Bonds rated at least "CCC" 350%
Cash and Cash Equivalents 100%
Municipal Bonds rated "AAA" 143.4%
Municipal Bonds rated "AA" 146.4%
Municipal Bonds rated "A" 149.4%
Municipal Bonds rated "BBB" 152.4%
Municipal Bonds rated "BB" 175.1%
Municipal Bonds rated "B" 195.1%
Municipal Bonds rated "CCC" 215.1%
Unrated Municipal Bonds 220.0%
Common Stock of REITs and other real estate companies 149.51%
Mortgage Pass-Through Certificates 15-yr 134.2%
Mortgage Pass-Through Certificates 30-yr 136.9%
Mortgage Pass-Through Certificates 1/1 128.1%
Mortgage Pass-Through Certificates 3/1 128.5%
Mortgage Pass-Through Certificates 5/1 129.0%
Mortgage Pass-Through Certificates 10/1 129.3%
Conventional/FHA/VA Mortgages and Whole Loans 15-year 136.4%
Conventional/FHA/VA Mortgages and Whole Loans 30-year 139.1%
Conventional/FHA/VA Mortgages and Whole Loans 1/1 132.3%
Conventional/FHA/VA Mortgages and Whole Loans 3/1 133.5%
Conventional/FHA/VA Mortgages and Whole Loans 5/1 133.3%
Conventional/FHA/VA Mortgages and Whole Loans 10/1 133.5%
Collateralized Mortgage Obligations (WAL less than 5-years) 135%
Collateralized Mortgage Obligations (WAL more than 5-years and more than 10-years) 145%
FHA-Insured Multifamily Loans 190%
ABS (Automobile loans and fixed-rate credit card receivables with WAL less than 5-years) 130%
ABS (Automobile loans and fixed-rate credit card receivables with WAL more than 5-yr and
less than 10-years) 140%
ABS (Floating-rate credit cards) 114.2%
Notwithstanding the foregoing, the S&P Discount Factor for
short-term Municipal Obligations will be 115% so long as such Municipal
Obligations are rated "A-1+" or "SP-1+" by S&P and mature or have a
demand feature exercisable within 30 days or less, or 123% so long as
such Municipal Obligations are rated "A-1" or "SP-1" by S&P and mature
or have a demand feature exercisable in 30 days or less, or 125% if
such Municipal Obligations are not rated by S&P but are rated
equivalent to "A-1+" or "SP-1" by another nationally recognized
statistical rating organization, on a case by case basis; provided,
however, that any such non-S&P rated short-term Municipal Obligations
which have demand features exercisable within 30 days or less must be
backed by a letter of credit, liquidity facility or guarantee from a
bank or other financial institution with a short-term rating of at
least "A-l+" from S & P; and further provided that such non-S&P rated
short-term Municipal Obligations may comprise no more than 50% of
short-term Municipal Obligations that qualify as S&P Eligible Assets;
provided, however, that Municipal Obligations not rated by S&P but
rated equivalent to "BBB" or lower by another nationally recognized
statistical rating organization, rated "BB+" or lower by S&P or
non-rated (such Municipal Obligations are hereinafter referred to as
"High Yield Securities") may comprise no more than 20% of the
short-term Municipal Obligations that qualify as S&P Eligible Assets;
(ii) the S&P Discount Factor for Receivables for Municipal Obligations
Sold that are due in more than five Business Days from such Valuation
Date will be the S&P Discount Factor applicable to the Municipal
Obligations sold; (iii) no S&P Discount Factor will be applied to cash
or to Receivables for Municipal Obligations Sold if such receivables
are due within five Business Days of such Valuation Date; and (iv)
except as set forth in clause (i) above, in the case of any Municipal
Obligation that is not rated by S&P but qualifies as an S&P Eligible
Asset pursuant to clause (iii) of that definition, such Municipal
Obligation will be deemed to have an S&P rating one full rating
category lower than the S&P rating category that is the equivalent of
the rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible
Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date.
Page A-13
The Fund may adopt S&P Discount Factors for Municipal Obligations other
than Municipal Obligations provided that S&P advises the Fund in
writing that such action will not adversely affect its then current
rating on the AMPS. For purposes of the foregoing, Anticipation Notes
rated "SP-1+" or, if not rated by S&P, equivalent to "A-l+" or "SP-1+"
by another nationally recognized statistical rating organization, on a
case by case basis, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall
be considered to be short-term Municipal Obligations.
The S&P Discount Factor applied to cash, cash equivalents and
demand deposits in an "A-l+" rated institution will be 100%. "A-1+"
rated commercial paper, with maturities no greater then 30 calendar
days and held instead of cash until maturity is valued at 100%.
Securities with next-day maturities invested in "A-1+" rated
institutions are considered cash equivalents and are valued at 100%.
Securities maturing in 181 to 360 calendar days are valued at 114.2%.
The S&P Discount Factor for shares of unrated affiliated Money
Market Funds used as "sweep" vehicles will be 110%. Money Market Funds
rated "AAAm" will be discounted at the appropriate level as dictated by
the exposure period. No S&P Discount Factor will be applied to Money
Market Funds rated "AAAm" by S&P with effective next day maturities.
Receivables due within five business days of a valuation will
be treated as cash and are valued at 100%.
Receivables that are due in more than five business days of a
valuation date qualify as a S&P's-eligible asset at a value no greater
than the settlement price discounted at the applicable credit rating
and/or exposure period discount factor.
For purposes of determining the discount factors applicable to
collateral not rated by S&P, the collateral will carry an S&P rating
one full rating category lower than the equivalent S&P rating.
"S&P Eligible Assets" means:
(i) Deposit Securities;
(ii) U.S. Government Obligations and U.S. Government Agencies;
(iii) Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are not convertible into or exchangeable or
exercisable for stock of a corporation (except to the extent of ten
percent (10%) in the case of a share exchange or tender offer) ("Other
Debt") and that satisfy all of the following conditions:
(A) no more than 10% of the Other Debt may be
unrated;
(B) the remaining term to maturity of such Other Debt
shall not exceed thirty (30) years;
(C) and such Other Debt must provide for periodic
interest payments in cash over the life of the security;
(D) the issuer of such evidences of indebtedness
files periodic financial statements with the Commission;
provided, however, non-rated evidences of such indebtedness or
issuers of Other Debt may not constitute more than 10% of the Fund's
Other Debt;
(iv) Convertible Corporate Indebtedness. Evidences of
indebtedness other than Deposit Securities, U.S. Government Obligations
and Municipal Obligations that are convertible into or exchangeable or
exercisable for stock of a corporation and that satisfy all of the
following conditions:
(A) such evidence of indebtedness is rated at least
"CCC" by S & P; and
(B) if such evidence of indebtedness is rated "BBB"
or lower by S&P, the market capitalization of the issuer of
such evidence of indebtedness is at least $100 million;
Page A-14
(v) Agency Mortgage Collateral. Certificates guaranteed by
U.S. Government Agencies (as defined below) (e.g., FNMA, GNMA and
FHLMC) for timely payment of interest and full and ultimate payment of
principal. Agency Mortgage Collateral also evidence undivided interests
in pools of level-payment, fixed, variable, or adjustable-rate, fully
amortizing loans that are secured by first liens on one- to four-family
residences residential properties (or in the case of Plan B FHLMC
certificates, five or more units primarily designed for residential
use) ("Agency Mortgage Collateral"). Agency Mortgage Collateral the
following conditions apply:
(A) For GNMA certificates backed by pools of
graduated payment mortgages, levels are 20 points above
established levels;
(B) Qualifying "large pool" FNMA mortgage-backed
securities and FHLMC participation certificates are acceptable
as eligible collateral. The eligible fixed-rate programs
include FNMA MegaPools, FNMA Majors, FHLMC Multilender Swaps,
and FHLMC Giant certificates. Eligible adjustable-rate
mortgage ("ARMs") programs include nonconvertible FNMA ARM
MegaPools and FHLMC weighted average coupon ARM certificates.
Eligible FHLMC Giant programs exclude interest-only and
principal only stripped securities;
(C) FNMA certificates backed by multifamily ARMs
pegged to the 11th District Cost of Funds Index are acceptable
as eligible collateral at 5 points above established levels;
and
(D) Multiclass REMICs issued by FNMA and FHLMC are
acceptable as eligible collateral at the collateral levels
established for CMOs.
(vi) Mortgage Pass-Through Certificates. Publicly issued
instruments maintaining at least a "AA-" ratings by S&P. Certificates
evidence proportional, undivided interests in pools of whole
residential mortgage loans. Pass-through certificates backed by pools
of convertible ARMs are acceptable as eligible collateral at 5 points
above the levels established for pass-through certificates backed by
fixed or non-convertible ARM pools.
(vii) Mortgage-backed securities.
(A) Mortgage Pass-through Certificates are publicly
issued instruments rated at least "AA-" by S&P. Pass-throughs
backed by pools of convertible adjustable-rate mortgages
(ARMs) are discounted at an additional five percentage points
above the levels established for pass-throughs backed by fixed
or nonconventional ARM pools.
(B) Fixed-Rate and Adjustable-rate mortgage
collateral (conventional/FHA/VA and Whole Loans) Pool must
consist of at least 100 loans each secured by single-family,
one-unit, detached primary residence. 25% of the total pool
may have an LTV greater than 80% but less than or equal to
90%. 10% may have an original LTV of no greater than 95%.
Loans with LTV greater than 80% must have a "AA" rated primary
mortgage insurance. 25% may have balances between $400,000 and
$600,000, provided the maximum size of any loan is appropriate
with respect to the market area of the originator. 10% of the
pool may represent condominiums that are four stories or less.
High LTVs, high loan balance, and condominiums, in aggregate,
should not exceed 35% of the pool.
(C) FHAA-Insured Multifamily Loans must have a
minimum principal balance of $100,000 and have at least a
one-year remaining maturity. The aggregate market value of any
one loan may not exceed 5% of the aggregate market value of
the portfolio. Such loans should be initially included in
minimum blocks of $5 million. Project loans must have at least
a 90% occupancy rate at the time the loan is pledged. After 90
days defaulted mortgage loans must be valued at zero. A loan
in default should be liquidated or substituted within a 90-day
period.
(D) Collateralized Mortgage Obligations tranches are
publicly issued instruments rated "AAA" by S&P. No more than
25% of the total market value of collateral may be from one
private sector issuer.
(viii) Rule 144A Securities;
(ix) Senior Loans, provided, however, that the initial issue
amount (facility size) is at least $100 million. The minimum accepted
holding size (notional amount at purchase prior to amortization) of any
given loan not rated by S&P, Moody's or other nationally recognized
rating agency is at least $1 million, provided, that participation
loans are limited to not more than 10% of the aggregate value of the
S&P Eligible Asset. For loans rated by S&P, Moody's or other nationally
recognized rating agency, there is no minimum accepted holding size. If
the holding size is less than $1 million (notional amount at purchase
Page A-15
prior to amortization), then the loan must be rated "B-" (or its
equivalent by another rating agency) or higher by S&P. Loans not rated
by S&P shall be considered S&P Eligible Assets only to the extent the
Market Value of such obligation does not exceed 50% of the aggregate
Market Value of S&P Eligible Assets; and in the case of any loan that
is not rated by S&P but is rated by another nationally recognized
statistical rating organization, such loan will be deemed to have an
S&P rating one full rating category lower than the S&P rating category
that is the equivalent of the rating category in which such loan is
placed by such other nationally recognized statistical rating
organization. Senior Loan Participations and non-Senior Loans will
qualify as S&P Eligible Assets only up to an aggregate maximum of 15%
of the Fund's total assets. These levels apply to U.S. loans only; any
international loans are excluded.
"Senior Loan" means any secured Bank Loan that is not subordinated by its
terms to any other indebtedness of the borrower.
"Senior Loan Participations" means participations by the Fund in a lender's
portion of a Bank Loan where the Fund has a contractual relationship with such
lender and not the borrower.
(x) Preferred stocks that satisfy all of the following
conditions:
1. The preferred stock issue has a senior rating from
S&P, or the preferred issue must be rated. In the case of
Yankee preferred stock, the issuer should have an S&P senior
rating of at least "BBB-", or the preferred issue must be
rated at least "BBB-".
2. The issuer--or if the issuer is a special purpose
corporation, its parent--is listed on either the New York
Stock Exchange, the American Stock Exchange or NASDAQ if the
traded par amount is less than $1,000. If the traded par
amount is $1,000 or more exchange listing is not required.
3. The collateral pays cash dividends denominated in
U.S. dollars.
4. Private placements under Rule 144A with
registration rights are eligible assets.
5. The minimum market capitalization of eligible
issuers is $100 million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to preferred stock with a
Rate Period of less than or equal to 49 days, except for a new
issue, where the first Rate Period may be up to 64 days.
2. The floating-rate preferred stock may not have
been subject to a failed auction.
Restrictions for adjustable- or auction-rate preferred stock:
1. The total fair market value of adjustable-rate
preferred stock held in the portfolio may not exceed 10% of
eligible assets.
Concentration Limits:
1. Total issuer exposure in preferred stock of any
one issuer is limited to 10% of the fair market value of
eligible assets.
2. Preferred stock rated below "B-" (including
non-rated preferred stock) are limited to no more than 15% of
the fair market value of the eligible assets.
3. Add 5 points to over-collateralization level for
issuers with a senior rating or preferred stock rating of less
than "BBB-."
4. Add 10 point to over-collateralization level of
issuers with no senior rating, preferred stock rating or
dividend history.
(xi) Common Stocks. Common stocks that satisfy all of the
following conditions:
1. The issuer can hold no more than the average
monthly trading volume over the past year.
Page A-16
2. Each stock must have a minimum market
capitalization of at least $100 million.
3. Master limited partnerships or limited liability
partnerships are ineligible.
4. Restricted stocks (144A securities) or any pink
sheet stocks (generally, stocks that are not carried in daily
over-the-counter newspaper listings) are ineligible.
5. The issuer may not hold any equity unless it has
been listed on an exchange or traded for more than one year
and one quarter, or 15 months (eligible stock exchanges are
the New York Stock Exchange, American Stock Exchange,
Philadelphia Stock Exchange, Boston Stock Exchange, Washington
Stock Exchange, Midwest Stock Exchange, NASDAQ, and National
Market Quotations). (Add 20 percentage points to the
overcollateralization level for common stock that do not meet
the requirement.)
6. The collateral is owned by the fund, or the
trustee or collateral agent has a first perfected priority
security interest in the collateral. (For S&P's perfection of
Security Interest Criteria, see Legal Criteria For Structured
Finance Transactions, April 2002).
(xii) Municipal Obligations. A Municipal Obligation owned by
the Fund that (i) is interest bearing and pays interest at least
semi-annually; (ii) is payable with respect to principal and interest
in U.S. Dollars; (iii) has an original issuance size of $10 million or
greater and any securities with an issuance size of under $10 million
must be rated "AA" or better by S & P; or, if not rated by S&P but
rated "AAA" by another nationally recognized statistical rating
organization, on a case by case basis; (iv) except for Inverse
Floaters, is not part of a private placement of Municipal Obligations;
(v) is issued by any of the 50 states of the U.S., its territories, and
their subdivisions, counties, cities, towns, villages, and school
districts; by agencies such as authorities and special districts
created by the states; and by certain federally sponsored agencies such
as local housing authorities. Payments made on these bonds are exempt
from federal income taxes and are generally exempt from state and local
taxes in the state of issuance; and (vi) Fifty percent of the aggregate
fair market value of the pledged pool may be rated by a nationally
recognized statistical rating organization other than S&P.
Notwithstanding the foregoing limitations:
(A) Municipal Obligations (excluding Escrowed Bonds)
of any one issuer or guarantor (excluding bond insurers) rated
at least "BBB" by S&P or "A" by another NRSRO shall be
considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations (including short-term
Municipal Obligations) does not exceed 10% of the aggregate
Market Value of S&P Eligible Assets, provided that either (i)
2% is added to the S&P Discount Factor for every 1% by which
the Market Value for any issuer exceeds 5%, up to a maximum of
10% or (ii) 10% is added to the S&P Discount Factor for any
issuer that exceeds 5% of the aggregate S&P Eligible Assets.
High Yield Securities of any one issuer shall be considered
S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 5% of the aggregate
Market Value of S&P Eligible Assets;
(B) Municipal Obligations not rated by S&P shall be
considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 50% of the
aggregate Market Value of S&P Eligible Assets; provided,
however, that High Yield Securities (as defined below) shall
be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Obligations does not exceed 20%
of the aggregate Market Value of S&P Eligible Assets; and
(C) Municipal Obligations issued by issuers in any
one state or territory will be considered S&P Eligible Assets
only to the extent the Market Value of such Municipal
Obligations does not exceed 25% of the aggregate Market Value
of S&P Eligible Assets; or
(xiii) Asset-Backed Securities. Receivables-backed tranches
are publicly issued with a rating of "AA" or higher by S&P, tranches
are current interest-bearing, fixed- or floating-rate, and are backed
by automobile loans or credit card (fixed-rate only) receivables with
an original issuance size of at least $200 million. No more than 25% of
the total market value of the collateral can be from one private sector
issuer. With respect to floating-rate credit card receivables, not more
than 25% of the collateral may be from one investment-grade private
sector issuer. No more than 10% of the market value of the collateral
may be from one noninvestment-grade private sector issuer.
Escrow Bonds may comprise 100% of the Fund's S&P Eligible
Assets. Bonds that are legally defeased and secured by direct U.S.
government obligations are not required to meet any minimum issuance
size requirement. Bonds that are economically defeased or secured by
other U.S. agency paper must meet the minimum issuance size requirement
for the Fund described above. Bonds initially rated or rerated as an
escrow bond by another NRSRO are limited to 50% of the Fund's S&P
Page A-17
Eligible Assets, and carry one full rating lower than the equivalent
S&P rating for purposes of determining the applicable discount factors.
Bonds economically defeased and either initially rated or rerated by
S&P or another NRSRO are assigned that same rating level as its debt
issuer, and will remain in its original industry category.
The Fund's portfolio must consist of no less than 20 issues
representing no less than 10 industries as determined by the S&P Global
Industry Classification System.
"S&P Hedging Transactions" means the purchases or sales of futures
contracts based on the Municipal Index or Treasury Bonds, the writings,
purchases or sales of put and call options on such contracts, purchases of
interest rate locks, interest rate caps, interest rate floors, interest rate
collars, and entering into interest rate swaps. For so long as any AMPS are
rated by S&P, the Fund will not purchase or sell futures contracts, write,
purchase or sell options on futures contracts or write put options (except
covered put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the AMPS by S&P
except that the Fund may engage in S&P Hedging Transactions, subject to the
following limitations.
(i) the Fund will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than Closing Transactions), which
would cause the Fund at the time of such transaction to own or have
sold the least of (A) more than 1,000 outstanding futures contracts
based on the Municipal Index, (B) outstanding futures contracts based
on the Municipal Index exceeding in number 50% of the quotient of the
Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would
cause the Fund at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts based on Treasury Bonds and
on the Municipal Index exceeding in number 50% of the quotient of the
Market Value of the Fund's total assets divided by $100,000 ($200,000
in the case of the two-year United States Treasury Note) or (B)
outstanding futures contracts based on Treasury Bonds exceeding in
number 10% of the average number of daily traded futures contracts
based on Treasury Bonds in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close
out any outstanding futures contract which the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the
Fund does not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance
Amount on two consecutive Valuation Dates and (B) the Fund is required
to pay variation margin on the second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close
out any outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures contract or
option thereon unless the Fund holds the securities deliverable under
such terms; and
(v) when the Fund writes a futures contract or option thereon,
it will either (A) maintain an amount of cash, cash equivalents or high
grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of initial margin and variation margin held
in the account of or on behalf of the Fund's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, (B) in the event the Fund writes a futures
contract or option thereon which requires delivery of an underlying
security, hold such underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of initial margin or variation margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked-to-market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund, plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
The Fund will only enter into interest rate swaps subject to the
following conditions:
1. The counterparty to the swap transaction has a short-term
rating of "A-l" or equivalent by S&P, or, if the counterparty does not
have a short-term rating, the counterparty's senior unsecured long-term
debt rating is "A+," or equivalent by S&P, or higher.
Page A-18
2. The original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation preference
of the AMPS.
3. The interest rate swap transaction will be marked-to-market weekly by
the swap counterparty.
4. If the Fund fails to maintain an aggregate discounted value at least
equal to the Preferred Shares Basic Maintenance Amount on two consecutive
valuation dates then the agreement shall terminate immediately.
5. For the purpose of calculating the Preferred Shares Basic Maintenance
Amount: (i) 90% of any positive mark-to-market valuation of the Fund's rights
will be S&P Eligible Assets and (ii) 100% of any negative mark-to-market
valuation of the Fund's rights will be included in the calculation of the basic
maintenance amount.
6.The Fund must maintain liquid assets with an aggregate value at least
equal to the net amount of the excess, if any, of the Fund's obligations over
its entitlement with respect to each swap. For caps/floors, the Fund must
maintain liquid assets with an aggregate a value at least equal to the Fund's
obligations with respect to such caps or floors.
"S&P Loan Category" means the following four categories (and, for
purposes of this categorization, the Market Value of an S&P Eligible Asset
trading at par is equal to $1.00):
(i) "S&P Loan Category A" means Performing Senior Loans which
have a Market Value greater than $.90;
(ii) "S&P Loan Category B" means Performing Senior Loans which
have a Market Value greater than $.85 but equal to or less than $.90;
(iii) "S&P Loan Category C" means non-Performing Senior Loans
which have a Market Value greater than $.85;
(iv) "S&P Loan Category D" means (1) Performing Senior Loans
which have a Market Value less than $.85 and (2) Non-Performing Senior
Loans which have a Market Value less than or equal to $.85.
"Securities Act" means the Securities Act of 1933, as amended from time
to time.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of AMPS.
"Sell Order" means an order indicating a Beneficial Owner's desire to
sell shares of a series at $25,000 per share without regard to the Applicable
Rate for the next Rate Period.
"Senior Loan" means any secured Bank Loan that is not subordinated by
its terms to any other indebtedness of the borrower.
"Series A AMPS" means 2,000 Auction Market Preferred Shares,
liquidation preference $25,000 per share.
"Series B AMPS" means 2,000 Auction Market Preferred Shares,
liquidation preference $25,000 per share.
"Short-Term Money Market Instrument" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated "A-1" if such commercial paper
matures in 30 days or "A-1+" if such commercial paper matures in over
30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia or (B) a United States
branch office or agency of a foreign depository institution (provided
that such branch office or agency is subject to banking regulation
under the laws of the United States, any state thereof or the District
of Columbia);
(iii) overnight funds;
Page A-19
(iv) U.S. Government Securities; and
(v) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a depository
institution or trust company if the certificates of deposit, if any,
and the long-term unsecured debt obligations (other than such
obligations the ratings of which are based on the credit of a person or
entity other than such depository institution or trust company) of such
depository institution or Fund company that have (1) credit ratings on
such Valuation Date of at least "P-1" from Moody's and either "F1+"
from Fitch or "A-1+" from S&P, in the case of commercial paper or
certificates of deposit, and (2) credit ratings on each Valuation Date
of at least "Aa3" from Moody's and either "AA-" from Fitch or "AA-"
from S&P, in the case of long-term unsecured debt obligations;
provided, however, that in the case of any such investment that matures
in no more than one Business Day from the date of purchase or other
acquisition by the Fund, all of the foregoing requirements shall be
applicable except that the required long-term unsecured debt credit
rating of such depository institution or trust company from Moody's,
Fitch and S&P shall be at least "A2," "A" and "A," respectively; and
provided further, however, that the foregoing credit rating
requirements shall be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or
trust company is the principal depository institution in a holding
company system, (2) the certificates of deposit, if any, of such
depository institution or Fund company are not rated on any Valuation
Date below "P-1" by Moody's, "F1+" by Fitch or "A-1+" by S&P and there
is no long-term rating, and (3) the holding company shall meet all of
the foregoing credit rating requirements (including the preceding
proviso in the case of investments that mature in no more than one
Business Day from the date of purchase or other acquisition by the
Fund); and provided further, that the interest receivable by the Fund
shall not be subject to any withholding or similar taxes.
"Special Rate Period" means a Rate Period that is not a Standard Rate
Period.
"Special Situation Investments" means the securities and debt of
distressed issuers.
"Specific Redemption Provisions" means, with respect to any Special
Rate Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Trustees after consultation with
the Broker- Dealers, during which the shares subject to such Special Rate Period
are not subject to redemption at the option of the Fund pursuant to Section
3(a)(ii) and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Rate Period shall be redeemable at the Fund's option pursuant to Section 3(a)(i)
and/or in connection with any mandatory redemption pursuant to Section 3(a)(ii)
at a price per share equal to $25,000 plus accumulated but unpaid dividends plus
a premium expressed as a percentage or percentages of $25,000 or expressed as a
formula using specified variables as determined by the Board of Trustees after
consultation with the Broker-Dealers.
"Standard Rate Period" means a Rate Period of seven days in the case of
Series A AMPS and 28 days in the case of Series B AMPS.
"Statement" means the Statement Establishing and Fixing the Rights and
Preferences of Auction Market Preferred Shares dated , 2004.
"Sub-Adviser" means Four Corners Capital Management, LLC.
"Submission Deadline" means 1:00 P.M., Eastern Standard time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" means a Bid Order as submitted or deemed submitted by a
Broker-Dealer.
"Submitted Hold Order" means a Hold Order as submitted or deemed
submitted by a Broker-Dealer.
"Submitted Order" means an Order as submitted or deemed submitted by a
Broker-Dealer.
"Submitted Sell Order" means a Sell Order as submitted or deemed
submitted by a Broker-Dealer.
"Substitute LIBOR Dealer" means LIBOR Dealers appointed by the Fund
from time to time to act as substitute LIBOR Dealers.
"Substitute U.S. Government Securities Dealer" means U.S. Government
Securities Dealers appointed by the Fund from time to time to act as substitute
U.S. Government Securities Dealers.
Page A-20
"Sufficient Clearing Bids" means the number of Outstanding shares of
the series subject to Submitted Bids of Potential Holders specifying one or more
rates equal to or lower than the Maximum Rate (for all Rate Periods) for shares
of the series if such number equals or exceeds the sum of the number of
Outstanding shares of the series subject to Submitted Bids of Existing Holders
specifying one or more rates higher than the Maximum Rate (for all Rate Periods)
for shares of the series and the number of Outstanding shares of the series
subject to Submitted Sell Orders.
"Tax Act" means the Jobs and Growth Tax Relief Reconciliation Act of
2003.
"Transfer Agent" means Deutsche Bank Trust Company Americas, unless and
until another entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as transfer agent.
"Treasury Index Rate," means the average yield to maturity for actively
traded, marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Rate
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Rate Periods with a length greater than
the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three U.S.
Government Securities Dealers selected by the Fund; provided further, however,
that if one of the U.S. Government Securities Dealers does not quote a rate
required to determine the Treasury Index Rate, the Treasury Index Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute U.S. Government Securities Dealer or Substitute U.S. Government
Securities Dealers selected by the Fund to provide such rate or rates not being
supplied by the U.S. Government Securities Dealer; provided further, that if the
U.S. Government Securities Dealer and Substitute U.S. Government Securities
Dealers are required but unable to determine a rate in accordance with at least
one of the procedures provided above, the Treasury Index Rate shall be the
Treasury Index Rate as determined on the previous Auction Date.
"U.S. Government Securities" mean securities that are direct
obligations of, and obligations the timely payment of principal and interest on
which is fully guaranteed by, the United States of America or any agency or
instrumentality of the United States of America, the obligations of which are
backed by the full faith and credit of the United States of America and in the
form of conventional bills, bonds and notes.
"U.S. Government Securities Dealer" means any recognized dealer in U.S.
Government Securities selected by the Fund as to which Moody's (if Moody's is
then rating the AMPS) or S&P (if S&P is then rating the AMPS) shall not have
objected, and in each case their respective affiliates or successors, if such
entity is a recognized dealer in U.S. Government Securities.
"U.S. Treasury Securities" means direct obligations of the United
States Treasury that are entitled to the full faith and credit of the United
States.
"U.S. Treasury Strips" means securities based on U.S. Treasury
Securities created through the Separate Trading of Registered Interest and
Principal of Securities program.
"Valuation Date" means every Friday, or, if such day is not a Business
Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Fund; provided,
further, however, that such date shall be not more than one week from the date
on which its AMPS initially are issued.
"Winning Bid Rate" means, if Sufficient Clearing Bids for shares of the
series exist, the lowest rate specified in such Submitted Bids.
Page A-21
================================================================================
Until , 2004 (25 days after the date of this prospectus), all dealers that
buy, sell or trade the AMPS, whether or not participating in this offering, may
be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
$100,000,000
First Trust/Four Corners Senior Floating Rate
Income Fund II
Auction Market Preferred Shares ("AMPS")
2,000 Shares, Series A
2,000 Shares, Series B
Liquidation Preference $25,000 per Share
----------
PROSPECTUS
----------
Merrill Lynch & Co.
Oppenheimer & Co.
, 2004
===============================================================================
Back Cover
SUBJECT TO COMPLETION, DATED AUGUST 23, 2004
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF ADDITIONAL INFORMATION
First Trust/Four Corners Senior Floating Rate Income Fund II (the
"Fund") is a recently organized, closed-end, diversified management investment
company. The Fund's primary investment objective is to seek a high level of
current income. As a secondary objective, the Fund will attempt to preserve
capital. The Fund will pursue these objectives through investment in a portfolio
of senior secured floating rate corporate loans ("Senior Loans"). There can be
no assurance the Fund will achieve its investment objectives. Investment in
Senior Loans involves credit risk and, during periods of generally declining
credit quality, it may be particularly difficult for the Fund to achieve its
secondary investment objective. The Fund may not be appropriate for all
investors. Senior Loans pay income that floats with the prevailing level of
interest rates. Floating rate products are typically less sensitive to interest
rate changes than traditional fixed-income securities. Income-oriented investors
typically have limited alternatives in a rising interest rate environment. This
Statement of Additional Information relating to the Fund's preferred shares of
beneficial interest (referred to as "Auction Market Preferred Shares" or "AMPS")
does not constitute a prospectus, but should be read in conjunction with the
Fund's Prospectus dated __________, 2004 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing AMPS, and investors should obtain and
read the Prospectus prior to purchasing the shares. A copy of the Prospectus may
be obtained without charge by calling (800) 988-5891. You also may obtain a copy
of the Prospectus on the Securities and Exchange Commission's (the "Commission")
web site (http://www.sec.gov). Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus.
This Statement of Additional Information is dated __________, 2004.
TABLE OF CONTENTS
Page
The Fund.....................................................................1
Investment Objectives........................................................1
Investment Restrictions......................................................2
Additional Information about the Fund's Investments..........................4
Management of the Fund......................................................21
Adviser.....................................................................26
Proxy Voting Procedures.....................................................29
Sub-Adviser.................................................................29
Portfolio Transactions......................................................30
Net Asset Value.............................................................31
Description of AMPS.........................................................32
Additional Information Concerning Auctions for AMPS.........................34
Concerning The Auction Agent................................................34
Broker-Dealers..............................................................35
Federal Income Tax Matters..................................................36
Performance Related and Comparative Information.............................41
Experts.....................................................................42
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing Agent
and Redemption Agent.....................................................42
Additional Information......................................................42
Report of Independent Registered Public Accounting Firm....................F-1
Financial Statements.......................................................F-2
Appendix A Statement Establishing and Fixing the Rights and
Preferences of Auction Market Preferred Shares................A-1
Appendix B Description of Ratings........................................B-1
-i-
THE FUND
The Fund was organized as a Massachusetts business trust pursuant to a
Declaration of Trust (the "Declaration") on March 25, 2004. Under Massachusetts
law, shareholders of a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations
of the Fund and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
board of trustees of the Fund (the "Board of Trustees" or "Trustees"). The
Declaration further provides for indemnification out of the assets and property
of the Fund for all loss and expense of any shareholder personally liable for
the obligations of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance exists and the Fund itself is unable to meet its
obligations. The Fund believes the likelihood of these circumstances is remote.
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to seek a high level of
current income. As a secondary objective, the Fund will attempt to preserve
capital. The Fund will pursue these objectives through investment in a portfolio
of Senior Loans. Under normal conditions, the Fund will invest at least 80% of
its Managed Assets in a diversified portfolio of Senior Loans. The Fund cannot
change this investment policy unless the Fund's shareholders receive at least 60
days' prior notice of any such change.
The Senior Loans in which the Fund will invest will be lower grade debt
instruments. The Sub-Adviser anticipates that generally at least 80% of the
Fund's Managed Assets will be invested in lower grade debt investments, and from
time to time, 100% all of the Fund's Managed Assets may be invested in lower
grade debt instruments. Lower grade debt instruments are rated "Ba1" or lower by
Moody's Investors Service, Inc. ("Moody's"), "BB+" or lower by Standard & Poor's
Ratings Group, a division of the McGraw Hill Companies ("S&P"), comparably rated
by another nationally recognized statistical rating organization ("NRSRO"), or
are unrated securities of comparable credit quality. Lower grade debt
instruments are commonly referred to as "junk bonds" and are considered
speculative with respect to the issuer's capacity to pay interest and repay
principal. They involve greater risk of loss, are subject to greater price
volatility and are less liquid, especially during periods of economic
uncertainty or change, than higher rated debt instruments. See Appendix B to
this Statement of Additional Information for further information about debt
ratings.
"Managed Assets" generally means the average daily gross asset value of
the Fund (including assets attributable to the Preferred Shares of the Fund, if
any, and the principal amount of borrowings) minus the sum of the Fund's accrued
and unpaid dividends or any outstanding Preferred Shares and accrued liabilities
(other than the principal amount of any borrowings incurred, commercial paper or
notes issued by the Fund and the liquidation preference of any outstanding
Preferred Shares). For purposes of determining Managed Assets, the liquidation
preference of the Preferred Shares is not treated as a liability. Percentage
limitations described in this Statement of Additional Information are as of the
-1-
time of investment by the Fund and could from time to time be exceeded on a
going-forward basis as a result of market value fluctuations of the Fund's
portfolio and other events.
An investment in the Fund may not be appropriate for all investors and
is not intended to be a complete investment program. No assurance can be given
that the Fund will achieve its investment objectives. For further discussion of
the Fund's portfolio composition and associated special risk considerations, see
"The Fund's Investments" in the Prospectus.
INVESTMENT RESTRICTIONS
The Fund's investment objectives and certain fundamental investment
policies of the Fund are described in the Prospectus. The Fund, as a fundamental
policy, may not:
1. With respect to 75% of its total assets, purchase any
securities, if as a result more than 5% of the Fund's total assets
would then be invested in securities of any 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 Government securities
(as defined in the Investment Company Act of 1940 (the "1940 Act")),
securities issued by other investment companies and cash items
(including receivables) shall not be counted for purposes of this
limitation.
2. Purchase any security if, as a result of the 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; 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. Borrow money, except as permitted by the 1940 Act, the
rules thereunder and interpretations thereof or pursuant to a
Commission exemptive order.
4. Issue senior securities, as defined in the 1940 Act,
other than: (i) Preferred Shares which immediately after issuance will
have asset coverage of at least 200%; (ii) indebtedness which
immediately after issuance will have asset coverage of at least 300%;
(iii) the borrowings permitted by investment restriction 3 above, or
(iv) pursuant to a Commission exemptive order.
5. Make loans of money or property to any person, except for
obtaining interests in Senior Loans in accordance with its investment
objectives, through loans of portfolio securities or the acquisition of
securities subject to repurchase agreements; or pursuant to a
Commission rule or exemptive order.
6. Act as an underwriter of securities, except to the extent
the Fund may be deemed to be an underwriter in certain cases when
disposing of its portfolio investments or acting as an agent or one of
a group of co-agents in originating Senior Loans.
-2-
7. Purchase or sell real estate, commodities or commodities
contracts except pursuant to the exercise by the Fund of its rights
under loan agreements, bankruptcy or reorganization, or pursuant to a
Commission rule or exemptive order, and 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.
For purposes of fundamental investment restriction numbers 1 and 2
above, the Fund will treat the Lender selling a participation and any persons
interpositioned between the Lender and the Fund as an issuer.
Except as noted above, the foregoing fundamental investment policies,
together with the investment objectives of the Fund, cannot be changed without
approval by holders of a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, which includes Common Shares and Preferred
Shares, if any, voting together as a single class, and of the holders of the
outstanding Preferred Shares voting as a single class. Under the 1940 Act a
"majority of the outstanding voting securities" means the vote of: (A) 67% or
more of the Fund's shares present at a meeting, if the holders of more than 50%
of the Fund's shares are present or represented by proxy; or (B) more than 50%
of the Fund's shares, whichever is less.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
1. 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.
2. 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
Commission under the 1940 Act, as amended from time to time; or (iii)
an exemption or other relief from the provisions of the 1940 Act. The
Fund will rely on representations of Borrowers in Loan Agreements in
determining whether the Borrowers are investment companies.
3. 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
control or participation.
The Fund does not have a minimum holding period for its investments and
may engage in the trading of securities for the purpose of realizing short-term
profits. Moreover, it will adjust its portfolio as it deems advisable in view of
prevailing or anticipated market conditions to accomplish the Fund's investment
objectives. Frequency of portfolio turnover will not be a limiting factor if the
-3-
Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that the annual portfolio turnover rate of the Fund will be less
than 100%.
The foregoing restrictions and limitations will apply only at the time
of purchase of securities, and the percentage limitations will not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of an acquisition of securities, unless otherwise indicated.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS
Senior Loans
Senior Loans are typically arranged through private negotiations
between a borrower ("Borrower") and several lenders ("Lenders") represented in
each case by one or more Lenders acting as agent of the several Lenders (the
"Agent"). On behalf of the several Lenders, the Agent, which is frequently the
entity that originates the Senior Loan and invites the other parties to join the
lending syndicate, will be primarily responsible for negotiating the Senior Loan
agreements that establish the relative terms, conditions and rights of the
Borrower and the several Lenders (the "Loan Agreements"). The co-agents, on the
other hand, are not responsible for administration of a Senior Loan, but are
part of the initial group of Lenders that commit to providing funding for a
Senior Loan once the Borrower and an Agent negotiate and agree on material
terms. In large transactions, it is common to have several Agents; however, one
Agent typically has primary responsibility for documentation and administration
of the Senior Loan. The Fund will not act as sole Agent in a transaction. The
Agent is required to administer and manage the Senior Loan and to service or
monitor the collateral. The Agent also is responsible for the collection of
principal and interest and fee payments from the Borrower and the apportionment
of these payments to the credit of all Lenders which are parties to the Loan
Agreement. The Agent is generally responsible for monitoring compliance by the
Borrower with the restrictive covenants in the Loan Agreement and of notifying
the Lenders of any adverse change in the Borrower's financial condition. In
addition, the Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan.
Lenders generally rely on the Agent to collect their portion of the
payments on the Senior Loan and to use appropriate creditor remedies against the
Borrower. Typically under Loan Agreements, the Agent is given broad discretion
in enforcing the Loan Agreement. The Borrower compensates the Agent for these
services. Compensation may include special fees paid on structuring and funding
the Senior Loan and other fees paid on a continuing basis. The precise duties
and rights of an Agent are defined in the Loan Agreement.
When the Fund is an Agent, it has, as a party to the Loan Agreement, a
direct contractual relationship with the Borrower and, prior to allocating
portions of the Senior Loan to Lenders, if any, assumes all risks associated
with the Senior Loan. The Agent may enforce compliance by the Borrower with the
terms of the Loan Agreement. Agents also have voting and consent rights under
the applicable Loan Agreement. Action subject to Agent vote or consent generally
-4-
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relevant Loan Agreement. 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 all or substantially all of the
collateral therefor, frequently require the consent of all Lenders affected.
Each Lender in a Senior Loan is generally responsible for performing
its own credit analysis and its own investigation of the financial condition of
the Borrower. Generally, Loan Agreements will hold the Fund, as Agent, liable
for any action taken or omitted constituting gross negligence or willful
misconduct. In the event of a Borrower's default on a loan, the Loan Agreements
generally provide that the Lenders do not have recourse against the Agent.
Instead, Lenders will be required to look to the Borrower for recourse.
Acting in the capacity of an Agent in a Senior Loan may subject the
Fund to certain risks in addition to those associated with the Fund's role as a
Lender. An Agent is charged with the above described duties and responsibilities
to Lenders and Borrowers subject to the terms of the Loan Agreement. Failure to
adequately discharge responsibilities in accordance with the standard of care
set forth in the Loan Agreement may expose the Fund to liability for breach of
contract. If a relationship of trust is found between the Agent and the Lenders,
the Agent will be held to a higher standard of conduct in administering the
loan. In consideration of these risks, the Fund will invest no more than 20% of
its Managed Assets in Senior Loans in which it acts as an Agent or co-agent and
the size of any individual loan will not exceed 5% of the Fund's Managed Assets.
Lending Fees. In the process of buying, selling and holding Senior
Loans the Fund may receive certain fees. These fees are in addition to interest
payments received and may include facility fees, commitment fees, commissions
and prepayment penalty fees. When the Fund buys a Senior Loan it may receive a
facility fee and when it sells a Senior Loan it may pay a facility fee. On an
ongoing basis, the Fund may receive a commitment fee based on the undrawn
portion of the underlying line of credit portion of a Senior Loan. In certain
circumstances, the Fund may receive a prepayment penalty fee upon the prepayment
of a Senior Loan by a Borrower. Other fees received by the Fund may include
covenant waiver fees and covenant modification fees.
Borrower Covenants. A Borrower must comply with various restrictive
covenants contained in a Loan Agreement. These covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the Borrower to maintain specific minimum financial ratios,
and limits on total debt. In addition, the Loan Agreement may contain a covenant
requiring the Borrower to prepay the Senior Loan with any free cash flow. Free
cash flow is generally defined as net cash flow after scheduled debt service
payments and permitted capital expenditures, and includes the proceeds from
asset dispositions or sales of securities. A breach of a covenant which is not
waived by the Agent, or by the Lenders directly, as the case may be, is normally
an event of acceleration; i.e., the Agent, or the Lenders directly, as the case
may be, has the right to call the outstanding Senior Loan. The typical practice
of an Agent or a Lender in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower. In the case of a Senior
Loan in the form of a participation, the agreement between the buyer and seller
-5-
may limit the rights of the holder of a Senior Loan to vote on certain changes
which may be made to the Loan Agreement, such as waiving a breach of a covenant.
However, the holder of the participation will, in almost all cases, have the
right to vote on certain fundamental issues such as changes in principal amount,
payment dates and interest rate.
Administration of Loans. The Agent typically administers the terms of
the Loan Agreement. In these cases, the Agent is normally responsible for the
collection of principal and interest payments from the Borrower and the
apportionment of these payments to the credit of all institutions which are
parties to the Loan Agreement. The Fund will generally rely upon the Agent or an
intermediate participant to receive and forward to the Fund its portion of the
principal and interest payments on the Senior Loan. Furthermore, unless under
the terms of a Participation Agreement the Fund has direct recourse against the
Borrower, the Fund will rely on the Agent and the other members of the lending
syndicate to use appropriate credit remedies against the Borrower. The Agent is
typically responsible for monitoring compliance with covenants contained in the
Loan Agreement based upon reports prepared by the Borrower. The seller of the
Senior Loan usually does, but is often not obligated to, notify holders of
Senior Loans of any failures of compliance. The Agent may monitor the value of
the collateral and, if the value of the collateral declines, may accelerate the
Senior Loan, may give the Borrower an opportunity to provide additional
collateral or may seek other protection for the benefit of the holders of the
Senior Loan. The Agent is compensated by the Borrower for providing these
services under a Loan Agreement. Compensation may include special fees paid upon
structuring and funding the Senior Loan and other fees paid on a continuing
basis.
A financial institution's appointment as Agent may be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan Agreement should remain available to holders of Senior
Loans. However, if assets held by the Agent for the benefit of the Fund were
determined to be subject to the claims of the Agent's general creditors, the
Fund might incur certain costs and delays in realizing payment on a Senior Loan,
or suffer a loss of principal and/or interest. In situations involving other
intermediate participants similar risks may arise.
Prepayments. Senior Loans may require, in addition to scheduled
payments of interest and principal, the prepayment of the Senior Loan from free
cash flow or asset sales. The degree to which Borrowers prepay Senior Loans,
whether as a contractual requirement or at their election, may be affected by,
among other factors, general business conditions, the financial condition of the
Borrower and competitive conditions among Lenders. As such, prepayments cannot
be predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. However, the Fund may receive both a prepayment penalty fee from the
prepaying Borrower and a facility fee upon the purchase of a new Senior Loan
with the proceeds from the prepayment of the former. Prepayments generally will
not materially affect the Fund's performance because the Fund should be able to
reinvest prepayments in other Senior Loans that have similar or identical yields
and because receipt of such fees may mitigate any adverse impact on the Fund's
yield.
-6-
Other Information Regarding Senior Loans. The Fund may acquire
interests in Senior Loans which are designed to provide temporary or "bridge"
financing to a Borrower pending the sale of identified assets or the arrangement
of longer-term loans or the issuance and sale of debt obligations. The Fund also
may invest in Senior Loans of Borrowers who have obtained bridge loans from
other parties. A Borrower's use of bridge loans involves a risk that the
Borrower may be unable to locate permanent financing to replace the bridge loan,
which may impair the Borrower's perceived creditworthiness.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that this
stock will decline in value. Such a decline, whether as a result of bankruptcy
proceedings or otherwise, could cause the Senior Loan to be undercollateralized
or unsecured. In most credit agreements there is no formal requirement to pledge
additional collateral. In addition, the Fund may invest in Senior Loans
guaranteed by, or fully secured by assets of, shareholders or owners, even if
the Senior Loans are not otherwise collateralized by assets of the Borrower;
provided, however, that the guarantees are fully secured. There may be temporary
periods when the principal asset held by a Borrower is the stock of a related
company, which may not legally be pledged to secure a Senior Loan. On occasions
when the stock cannot be pledged, the Senior Loan will be temporarily unsecured
until the stock can be pledged or is exchanged for or replaced by other assets,
which will be pledged as security for the Senior Loan. However, the Borrower's
ability to dispose of the securities, other than in connection with such pledge
or replacement, will be strictly limited for the protection of the holders of
Senior Loans. During any period in which the Senior Loan is temporarily
unsecured, the Senior Loan will not be treated as a secured Senior Loan for
purposes of the Fund's policy of investing in normal circumstances at least 80%
of its Managed Assets in secured Senior Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the loan collateral or subordinate
the Fund's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Fund. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Borrower, but were instead paid to other persons (such as shareholders of the
Borrower) in an amount which left the Borrower insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Fund's security interest in loan
collateral. If the Fund's security interest in loan collateral is invalidated or
the Senior Loan is subordinated to other debt of a Borrower in bankruptcy or
other proceedings, it is unlikely that the Fund would be able to recover the
full amount of the principal and interest due on the Loan.
Senior Loans generally hold the most senior position in the capital
structure of a business entity. Their secured position in a Borrower's capital
structure typically provides the holder of a Senior Loan with the first right to
cash flows and/or proceeds from the sale of collateral in the event of
liquidation after default. In order of priority, Senior Loans are typically
repaid before unsecured senior loans, unsecured senior bonds, subordinated debt,
-7-
trade creditors, and preferred and common stockholders. However, these factors
do not assure full payment of principal or interest, and delays or limitations
may result in the event of bankruptcy.
Senior Loans are floating rate instruments which are issued at a fixed
spread over some pre-defined base rate. The spread is set at the time the loan
is originated, and is typically referenced to the London Inter-Bank Offered Rate
("LIBOR") but also can be referenced to the rate on certificates of deposit or
the Prime Rate. The spread at the time of origination of a loan is a function of
several factors, including credit quality of the issuer, the structure of the
individual deal, and the general market conditions at the time of the
origination. As conditions change, the required spreads that market participants
demand from a specific borrower, or industry, may change and could result in
required spreads narrowing or widening for all corporate credits. It should be
noted that since most corporate loans may be pre-paid at par without penalty,
should general market spreads narrow, there is a high probability that the
Borrower would choose to refinance at a lower spread. Should an existing loan be
refinanced at a lower rate, or should there be a decrease in credit spreads in
the corporate loan market in general or for a particular industry, it is
expected there will be a decrease in portfolio income and a decrease in overall
portfolio return. The use of leverage in the portfolio will increase the impact
of the decreased income due to spread compression. Senior Loans also may
incorporate pre-determined "step-ups" where the spread increases by some
specified amount if the credit quality of the issuer deteriorates and
"step-downs" where the spread increases if the credit quality of the borrower
improves. Should credit quality decline, and the step-up be triggered, the
coupon income associated with loans to this borrower will increase. Similarly,
should a borrower's credit quality improve and the step-down become operative,
investor income will decrease due to the decrease in income associated with that
particular borrower.
Senior Loans are direct obligations of corporations or other business
entities and are arranged by banks or other commercial lending institutions and
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, and leveraged buyouts. Senior Loans usually include restrictive
covenants which must be maintained by the Borrower. A breach of a covenant,
which is not waived by the Agent, is normally an event of acceleration, i.e.,
the Agent has the right to call the outstanding Senior Loan. These covenants, in
addition to the timely payment of interest and principal, may include
restrictions on dividend payments, and usually state that a Borrower must
maintain specific minimum financial ratios, as well as establishing limits on
total debt. In addition, Senior Loan covenants may include mandatory prepayment
provisions stemming from free cash flow. Free cash flow is cash that is in
excess of capital expenditures plus debt service requirements of principal and
interest. The free cash flow shall be applied to prepay the Senior Loan in an
order of maturity described in the loan documents. Under certain interests in
Senior Loans, the Fund may have an obligation to make additional loans upon
demand by the Borrower. The Fund intends to reserve against contingent
obligations by segregating sufficient assets in high quality short-term liquid
investments or borrowing to cover the obligations.
Senior Loans, unlike certain bonds, usually do not have call
protection. This means that investments comprising the Fund's portfolio, while
having a stated one to ten-year term, may be prepaid, often without penalty.
-8-
The Fund may be required to pay and receive various fees and
commissions in the process of purchasing, selling and holding Senior Loans. The
fee component may include any, or a combination of, the following elements:
arrangement fees, assignment fees, non-use fees, facility fees, letter of credit
fees and ticking fees. Arrangement fees are paid at the commencement of a Senior
Loan as compensation for the initiation of the transaction. An assignment fee
may be paid when a Senior Loan is assigned to another party. A non-use fee is
paid based upon the amount committed but not used typically under a revolving
credit facility, which may be issued coincident to the Senior Loan. Facility
fees are on-going annual fees paid in connection with a Senior Loan. Letter of
credit fees are paid if a Senior Loan involves a letter of credit. Ticking fees
are paid from the initial commitment indication until Senior Loan closing if for
an extended period. The fees are negotiated at the time of transaction.
Lower Grade Debt Instruments
The Senior Loans in which the Fund invests are generally lower grade.
These lower grade debt instruments may become the subject of bankruptcy
proceedings or otherwise subsequently default as to the repayment of principal
and/or payment of interest or be downgraded to ratings in the lower rating
categories ("Ca" or lower by Moody's, "CC" or lower by S&P or comparably rated
by another NRSRO). The value of these securities is affected by the
creditworthiness of the issuers of the securities and by general economic and
specific industry conditions. Issuers of lower grade debt instruments are not
perceived to be as strong financially as those with higher credit ratings, so
the securities are usually considered speculative investments. These issuers
generally are more vulnerable to financial setbacks and recession than more
creditworthy issuers which may impair their ability to make interest and
principal payments. Lower grade debt instruments tend to be less liquid than
higher grade debt instruments.
Investing in lower grade debt instruments involves additional risks
than investment-grade debt instruments. Lower grade debt instruments are
securities rated "Ba1" or lower by Moody's or "BB+" or lower by S&P, or
comparably rated by any other NRSRO or considered to be of comparable credit
quality. When prevailing economic conditions cause a narrowing of the spreads
between the yields derived from lower grade or comparable debt instruments and
those derived from higher rated issues, the Fund may invest in higher rated debt
instruments which provide similar yields but have less risk. In addition, the
Fund may be forced to buy higher rated, lower yielding debt instruments, which
would decrease the Fund's return, if issuers redeem their lower grade debt
instruments at a higher than expected rate. Changes in economic or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on securities rated "Ba1" or lower by Moody's or "BB+" or
lower by S&P than is the case with higher grade securities.
The Fund will normally invest in securities rated below "B" by both
Moody's and S&P (or comparably rated by another NRSRO) only if it is determined
that the financial condition of the issuer or the protection afforded to the
particular securities is stronger than would otherwise be indicated by the lower
ratings. Lower grade debt instruments tend to offer higher yields than higher
rated debt instruments with the same maturities because the historical financial
condition of the issuers of the securities may not have been as strong as that
of other issuers. Since lower grade debt instruments generally involve greater
-9-
risk of loss of income and principal than higher rated debt instruments,
investors should consider carefully the relative risks associated with
investments in lower grade debt instruments. Investment in these securities is a
long-term investment strategy and, accordingly, investors in the Fund should
have the financial ability and willingness to remain invested for the long-term.
See "Risks Relating to Investing in Lower Grade Debt Instruments" below.
Fluctuations in the prices of fixed-income debt instruments may be
caused by, among other things, the supply and demand for similarly rated debt
instruments. In addition, the prices of debt instruments fluctuate in response
to the general level of interest rates. Fluctuations in the prices of debt
instruments subsequent to their acquisition will not affect cash income from
such debt instruments but will be reflected in the Fund's net asset value.
The Fund will perform its own investment analysis and rating
assignment, and will not rely principally on the ratings assigned by the rating
services, although these ratings will be considered. A description of corporate
bond ratings is contained in Appendix B to this Statement of Additional
Information. Ratings of securities represent the rating agencies' opinions
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. Therefore, the financial history, the financial
condition, the prospects and the management of an issuer, among other things,
also will be considered in selecting securities for the Fund's portfolio. Since
some issuers do not seek ratings for their securities, non-rated securities also
will be considered for investment by the Fund only when it is determined that
the financial condition of the issuers of the securities and/or the protection
afforded by the terms of the securities themselves limit the risk to the Fund to
a degree comparable to that of rated securities that are consistent with the
Fund's objectives and policies.
Risks Relating to Investing in Lower Grade Debt Instruments. Senior
Loans are subject to the risk of an issuer's inability to meet principal and
interest payments on the obligations (credit risk) and also may be subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower grade or similar unrated debt instruments are more likely
to react to developments affecting market and credit risk than are more highly
rated debt instruments, which react primarily to movements in the general level
of interest rates. Both credit risk and market risk will be considered in making
investment decisions for the Fund. The achievement of its investment objectives
may be more dependent on the Fund's own credit analysis and rating assignment
than is the case for higher quality securities.
Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for lower
grade debt instruments, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated debt
instruments. Under adverse market or economic conditions, the secondary market
-10-
for lower grade debt instruments could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if the securities were widely
traded. Prices realized upon the sale of lower grade debt instruments, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value. Under circumstances where the Fund owns the majority of an
issue, market and credit risks may be greater. Moreover, from time to time, it
may be more difficult to value lower grade debt instruments than more highly
rated debt instruments.
In addition to the risk of default, there are the related costs of
recovery on defaulted issues. The Fund will attempt to reduce these risks
through diversification of the portfolio and by analysis of each issuer and its
ability to make timely payments of income and principal, as well as broad
economic trends in corporate developments.
Since investors generally perceive that there are greater risks
associated with the lower grade debt instruments of the type in which the Fund
may invest, the yields and prices of these debt instruments may tend to
fluctuate more than those for higher rated debt instruments. In the lower
quality segments of the Senior Loan market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality Senior Loan securities which, as a general
rule, fluctuate in response to the general level of interest rates.
Lower grade or unrated debt instruments also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors.
Special Situation Investments
The Fund may invest up to 10% of its Managed Assets in secured senior
loans and, on limited occasions, equity and other debt securities acquired in
connection therewith, of firms that, at the time of acquisition, have defaulted
on their debt obligations and/or filed for protection under Chapter 11 of the
U.S. Bankruptcy Code or have entered into a voluntary reorganization in
conjunction with their creditors and stakeholders in order to avoid a bankruptcy
filing, or those same issuers prior to an event of default whose acute operating
and/or financial problems have resulted in the markets' valuing their respective
securities and debt at sufficiently discounted prices so as to be yielding,
should they not default, a significant premium over comparable duration U.S.
Treasury bonds ("Special Situation Investments").
Special Situation Investments are speculative and involve significant
risk. Special Situation Investments frequently do not produce income while they
are outstanding and may require the Fund to bear certain extraordinary expenses
in order to protect and recover its investment. Therefore, the Fund's ability to
achieve current income for its stockholders may be diminished. The Fund also
will be subject to significant uncertainty as to when and in what manner and for
what value the obligations evidenced by the Special Situation Investments
eventually will be satisfied (e.g., through a liquidation of the obligor's
assets, an exchange offer or plan of reorganization involving the Special
Situation Investments or a payment of some amount in satisfaction of the
-11-
obligation). In addition, even if an exchange offer is made or a plan of
reorganization is adopted with respect to Special Situation Investments held by
the Fund, there can be no assurance that the securities or other assets received
by the Fund in connection with the exchange offer or plan of reorganization will
not have a lower value or income potential than may have been anticipated when
the investment was made. Moreover, any securities received by the Fund upon
completion of an exchange offer or plan of reorganization may be restricted as
to resale. As a result of the Fund's participation in negotiations with respect
to any exchange offer or plan of reorganization with respect to an issuer of
Special Situation Investments, the Fund may be restricted from disposing of the
securities.
Illiquid Securities
The Fund may invest without limit in illiquid securities. Most of the
Senior Loans in which the Fund will invest will be, at times, illiquid. Illiquid
securities also include repurchase agreements that have a maturity of longer
than seven days, certain securities with legal or contractual restrictions on
resale (restricted securities) and securities that are not readily marketable
either within or outside the United States. The Sub-Adviser will monitor the
liquidity of restricted securities under the supervision of the Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as restricted securities and
are purchased directly from the issuer or in the secondary market ("Direct
Placement Securities"). Limitations on resale may have an adverse effect on the
marketability of portfolio securities and the Fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices. The
Fund might also have to register the restricted securities to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede the public offering of securities.
Over time, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities,
convertible securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Foreign Securities
The Fund may invest up to 15% of its Managed Assets in U.S. currency
denominated fixed-income issues of foreign governments and other foreign issuers
(based on issuer's domicile), and preferred stock. But in no case will the Fund
invest in debt securities of issuers located in emerging markets. "Foreign
government securities" include debt securities issued or guaranteed, as to
-12-
payment of principal and interest, by governments, semi-governmental entities,
governmental agencies, supranational entities and other governmental entities
(each a "Governmental Entity" and collectively, "Governmental Entities") of
foreign countries denominated in the currencies of such countries or in U.S.
dollars (including debt securities of a Governmental Entity in any such country
denominated in the currency of another such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "semi-governmental entities" are
issued by entities owned by a national, state, or equivalent government or are
obligations of a political unit that are not backed by the national government's
"full faith and credit" and general taxing powers. Examples of semi-government
issuers include, among others, the Province of Ontario and the City of
Stockholm.
Investment in Sovereign Debt Can Involve a High Degree of Risk. The
Governmental Entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A Governmental Entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
Governmental Entity's policy toward the International Monetary Fund and the
political constraints to which a Governmental Entity may be subject.
Governmental Entities also may depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make disbursements may be conditioned on a Governmental
Entity's implementation of economic reforms and/or economic performance and the
timely service of the debtor's obligations. Failure to implement such reforms,
achieve the levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the Governmental Entity, which may further impair the debtor's ability
or willingness to service its debts in a timely manner. Consequently,
Governmental Entities may default on their sovereign debt. Holders of sovereign
debt (including the Funds) may be requested to participate in the rescheduling
of the debt and to extend further loans to Governmental Entities. There is no
bankruptcy proceeding by which sovereign debt on which Governmental Entities
have defaulted may be collected in whole or in part.
Foreign Securities Involve Certain Risks. These risks include political
or economic instability in the country of issue, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange
controls, and the seizure or nationalization of foreign deposits. Such
securities also may be subject to greater fluctuations in price than securities
issued by United States corporations or issued or guaranteed by the U.S.
Government, its instrumentalities or agencies. In addition, there may be less
publicly available information about a foreign issuer or government than about a
domestic issuer or the U.S. Government. Foreign issuers generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers. There is generally less
-13-
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and, with respect to certain foreign countries,
there is a possibility of confiscatory taxation and diplomatic developments
which could affect investment. In many instances, foreign fixed-income
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These securities may be less liquid than
securities of U.S. issuers, its instrumentalities or agencies. Finally, in the
event of a default of any foreign debt obligations, it may be more difficult for
the Fund to obtain or to enforce a judgment against the issuers of these
securities.
Investing in the fixed-income markets of developing countries involves
exposure to economies that are generally less diverse and mature and to
political systems which can be expected to have less stability than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. The risks associated with investments in foreign securities may be
greater with respect to investments in developing countries and are certainly
greater with respect to investments in the securities of financially and
operationally troubled issuers.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign countries may impose taxes on
income on foreign investments. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
Pay-in-Kind and Deferred Payment Securities
The Fund may invest in pay-in-kind and deferred payment securities only
if the Fund receives the instruments in connection with owning Senior Loans of
an issuer. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that pay no or a reduced rate of interest until a predetermined
date, at which time the stated coupon rate becomes effective and interest
becomes payable at regular intervals. Holders of certain of these types of
securities are deemed to have received income ("phantom income") annually,
notwithstanding that cash may not be received currently. The Fund accrues income
with respect to these securities for federal income tax and accounting purposes
prior to the receipt of cash payments. The effect of owning instruments which do
not make current interest payments is that a fixed yield is earned not only on
the original investment but also, in effect, on all discount accretion during
the life of the obligations. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the deferred payment portion of bond, but at the
same time eliminates the holder's ability to reinvest at higher rates in the
future. For this reason, some of these securities may be subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest currently,
which fluctuation increases the longer the period to maturity. These investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of cash. Pay-in-kind and deferred payment securities may be
-14-
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparable rated securities paying cash interest
at regular intervals. The Fund also may buy loans that provide for the payment
of additional income if certain operational benchmarks are achieved by the
Borrower that is to be paid on a deferred basis at an uncertain future date.
In addition to the above described risks, there are certain other risks
related to investing in pay-in-kind and deferred payment securities. During a
period of severe market conditions, the market for the securities may become
even less liquid. In addition, as these securities may not pay cash interest,
the Fund's investment exposure to these securities and their risks, including
credit risk, will increase during the time these securities are held in the
Fund's portfolio. Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Fund is required to distribute income
to its shareholders and, consequently, may have to dispose of its portfolio
securities under disadvantageous circumstances to generate the cash, or may have
to leverage itself by borrowing the cash to satisfy these distributions, as they
relate to the distribution of phantom income and the value of the paid-in-kind
interest. The required distributions will result in an increase in the Fund's
exposure to these securities.
Credit Default Swap Transactions
The Fund may invest up to 5% of its Managed Assets in credit default
swap transactions (as measured by the notional amounts of the swaps), including
credit-linked notes (described below) for hedging and investment purposes.
However, given the current state of developments in the market, the Sub-Adviser
has no present intention to utilize such instruments. The "buyer" in a credit
default contract is obligated to pay the "seller" a periodic stream of payments
over the term of the contract provided that no event of default on an underlying
reference obligation has occurred. If an event of default occurs, the seller
must pay the buyer the full notional value, or "par value," of the reference
obligation. Credit default swap transactions are either "physical delivery"
settled or "cash" settled. Physical delivery entails the actual delivery of the
reference asset to the seller in exchange for the payment of the full par value
of the reference asset. Cash settled entails a net cash payment from the seller
to the buyer based on the difference of the par value of the reference asset and
the current value of the reference asset that may have, through default, lost
some, most or all of its value. The Fund may be either the buyer or seller in a
credit default swap transaction. If the Fund is a buyer and no event of default
occurs, the Fund will have made a series of periodic payments and recover
nothing of monetary value. However, if an event of default occurs, the Fund (if
the buyer) will receive the full notional value of the reference obligation
either through a cash payment in exchange for the asset or a cash payment in
addition to owning the reference assets. As a seller, the Fund receives a fixed
rate of income throughout the term of the contract, which typically is between
six months and five years, provided that there is no event of default. The Fund
will segregate assets in the form of cash and cash equivalents in an amount
equal to the aggregate market value of the credit default swaps of which it is
the seller, marked to market on a daily basis. If an event of default occurs,
the seller must pay the buyer the full notional value of the reference
obligation through either physical settlement or cash settlement. Credit default
swap transactions involve greater risks than if the Fund had invested in the
reference obligation directly.
-15-
The Fund also may purchase credit default swap contracts in order to
hedge against the risk of default of debt securities it holds, in which case the
Fund would function as the counterparty referenced in the preceding paragraph.
This would involve the risk that the swap may expire worthless and would only
generate income in the event of an actual default by the issuer of the
underlying obligation (as opposed to a credit downgrade or other indication of
financial instability). It would also involve credit risk that the seller may
fail to satisfy its payment obligations to the Fund in the event of a default.
Credit-Linked Notes
The Fund may invest in credit-linked notes. Credit-linked notes are
securities that are collateralized by one or more credit default swaps on
corporate credits. The difference between a credit default swap and a
credit-linked note is that the buyer of a credit-linked note receives the
principal payment from the seller at the time the contract is originated.
Through the purchase of a credit-linked note, the buyer assumes the risk of the
reference asset and funds this exposure through the purchase of the note. The
buyer takes on the exposure to the seller to the full amount of the funding it
has provided. The seller has hedged its risk on the reference asset without
acquiring any additional credit exposure. The Fund has the right to receive
periodic interest payments from the issuer of the credit-linked note at an
agreed-upon interest rate, and a return of principal at the maturity date.
Credit-linked notes are subject to credit risk of the corporate credits
underlying the credit default swaps. If one of the underlying corporate credits
defaults, the Fund may receive the security that has defaulted, and the Fund's
principal investment would be reduced by the difference between the original
face value security and the current value of the defaulted security.
Credit-linked notes typically are privately negotiated transactions
between two or more parties. The Fund bears the risk that the issuer of the
credit-linked note will default or become bankrupt. The Fund bears the risk of
loss of its principal investment, and the periodic interest payments expected to
be received for the duration of its investment in the credit-linked note.
The market for credit-linked notes is, or suddenly can become,
illiquid. The other parties to the transaction may be the only investors with
sufficient understanding of the derivative to be interested in bidding for it.
Changes in liquidity may result in significant, rapid and unpredictable changes
in the prices for credit-linked notes. In certain cases, a market price for a
credit-linked note may not be available. The collateral for a credit-linked note
is one or more credit default swaps, which, as described above, are subject to
additional risk.
New financial products continue to be developed and the Fund may invest
in any products that may be developed to the extent consistent with its
investment objectives and the regulatory and federal tax requirements applicable
to investment companies.
-16-
Structured Notes and Related Instruments
The Fund may invest up to 5% of its Managed Assets in "structured"
notes and other related instruments, which are privately negotiated debt
obligations where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate (an "embedded"
index), such as selected securities or debt investments, an index of such, or
specified interest rates, or the differential performance of two assets or
markets, such as indexes reflecting bonds. However, given the current state of
developments in the market, the Sub-Adviser has no present intention to utilize
such instruments. The terms of structured instruments normally provide that
their principal and/or interest payments are to be adjusted upwards or downwards
(but ordinarily not below zero) to reflect changes in the embedded index while
the structured instruments are outstanding. As a result, the interest and/or
principal payments that may be made on a structured product may vary widely,
depending on a variety of factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be determined by
applying a multiplier to the performance or differential performance of the
referenced index(es) or other assets. Application of a multiplier involves
leverage that will serve to magnify the potential for gain and the risk of loss.
As a result, a relatively small decline in the value of a referenced Senior Loan
or basket of Senior Loans could result in a relatively large loss in the value
of a structured note.
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 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 also may 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. The Fund
also may engage in hedging transactions to seek to protect the value of its
portfolio against declines in net asset value resulting from changes in interest
rates or other market changes. Market conditions will determine whether and in
what circumstances the Fund would employ any of the hedging and risk management
techniques described below. 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
Sub-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 total rate of return
swaps or purchase or sell interest rate caps or floors. Interest rate swaps
involve the exchange by the Fund with another party of their respective
-17-
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 with 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.
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
interest obligations are determined although no actual exchange of principal
occurs) from the party selling the 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 the interest rate floor.
In circumstances in which the Sub-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 Sub-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 Sub-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.
Because these hedging transactions are entered into for good-faith risk
management purposes, the Sub-Adviser and the Fund believe these obligations do
not constitute senior securities. The Fund usually will 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 an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
-18-
obligations under each 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 New York Stock Exchange 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 the transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
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 Sub-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.
The Fund also may engage in credit derivative transactions. Default
risk derivatives are linked to the price of reference securities or loans after
a default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index. There are three basic
transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If the Sub-Adviser is incorrect in its
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. Moreover, even if the Sub-Adviser
is correct in its forecasts, there is a risk that a credit derivative position
may correlate imperfectly with the price of the asset or liability being hedged.
Credit derivative transaction exposure will be limited to 20% of the Managed
Assets of the Fund. Such exposure will be attained through the use of
derivatives described above and through credit default swap transactions and
credit linked securities, both of which are discussed below.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend
its portfolio securities in any amount to brokers, dealers and financial
institutions, provided that loans are callable at any time by the Fund and are
at all times secured by cash or equivalent collateral that is equal to at least
the market value, determined daily, of the loaned securities. During the time
portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on the securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. The advantage of the
loans is that the Fund continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested in
short-term obligations.
-19-
A loan may be terminated by the borrower on one business day's notice
or by the Fund at any time. If the borrower fails to maintain the requisite
amount of collateral, the loan automatically terminates, and the Fund could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
to be creditworthy. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass
to the borrower, the Fund will follow the policy of calling the loan, in whole
or in part as may be appropriate, to permit the exercise of its rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders, administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
Other Investment Companies
The Fund may invest up to 38% of its Managed Assets in securities of
other open- or closed-end investment companies that invest primarily in
securities of the types in which the Fund may invest directly. In addition, the
Fund may invest a portion of its Managed Assets in pooled investment vehicles
(other than investment companies) that invest primarily in securities of the
types in which the Fund may invest directly. For instance, the Fund may purchase
the Select Aggregate Market Index, or SAMI. SAMI is a synthetic composite of
performance of the leveraged loan market through credit derivatives based on 50
of the most widely traded leveraged, or high yield, loans. The Fund generally
expects that it may invest in other investment companies and/or pooled
investment vehicles such as SAMI or similar indices either during periods when
it has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or Preferred
Shares and/or borrowings, or during periods when there is a shortage of
attractive securities of the types in which the Fund may invest in directly
available in the market. As an investor in an investment company, the Fund will
bear its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. The Sub-Adviser will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available securities of the types in which the Fund may invest directly. In
addition, the securities of other investment companies also may be leveraged and
therefore will be subject to the same leverage risks described herein. As
described in the section entitled "Risks- General Risks of Investing in the
Fund-Leverage Risk," in the Prospectus, the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares. The Fund will
treat its investments in such investment companies as investments in Senior
Loans for all purposes, such as for purposes of determining compliance with the
requirement set forth above that at least 80% of the Fund's Managed Assets be
invested under normal market circumstances in Senior Loans.
-20-
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Investment Management Agreement, is the
responsibility of the Board of Trustees. The Trustees set broad policies for the
Fund and choose the Fund's officers. The following is a list of the Trustees and
officers of the Fund and a statement of their present positions and principal
occupations during the past five years, with the Trustee who is an "interested
person" (as such term is defined in the 1940 Act) of the Fund indicated by an
asterisk.
Number of
Portfolios
in Fund
Term of Office Complex Other
and Year First Overseen by Trusteeships
Position and Elected or Principal Occupations Trustee or Held by
Name, Address and Age Offices with Fund Appointed During Past 5 Years Officer Trustee
--------------------- ----------------- -------------- --------------------- ------------ ------------
Trustee who is an Interested
Person of the Fund
----------------------------
James A. Bowen(1)* President, o One Year(2) President, First 19 Portfolios None
D.O.B.: 09/55 Chairman of the o 2004 Trust Portfolios and
1001 Warrenville Road, Board, Chief First Trust Advisors;
Suite 300 Executive Officer Chairman of the Board
Lisle, IL 60532 and Trustee of Directors, Bond
Wave, LLC
Trustees who are not Interested
Persons of the Fund
-------------------------------
Richard E. Erickson Trustee o One Year(2) Physician, 19 Portfolios None
D.O.B.: 04/51 o 2004 Sportsmed/Wheaton
c/o First Trust Advisors L.P. Orthopedics
1001 Warrenville Road,
Suite 300
Lisle, IL 60532
Niel B. Nielson Trustee o One Year(2) President (2002 to 19 Portfolios Director of
D.O.B.: 03/54 o 2004 Present), Covenant Good News
c/o First Trust Advisors L.P. College; Pastor (1997 Publishers -
1001 Warrenville Road, to 2002), College Crossway
Suite 300 Church in Wheaton Books; Covenant
Lisle, IL 60532 Transport Inc.
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 19 Portfolios None
D.O.B.: 11/57 o 2004 Financial Officer
c/o First Trust Advisors L.P. (1990 to Present),
1001 Warrenville Road, ADM Investor
Suite 300 Services, Inc.
Lisle, IL 60532 (Futures Commission
Merchant); Registered
Representative (2000
to Present), Segerdahl
& Company, Inc., an NASD
member (Broker-Dealer)
David M. Oster Trustee o One Year(2) Trader (Self-Employed) 8 Portfolios None
D.O.B.: 03/64 o 2004 (1987 to Present)
c/o First Trust Advisors L.P. (Options Trading
1001 Warrenville Road, and Market Making)
Suite 300
Lisle, IL 60532
-21-
Number of
Portfolios
in Fund
Term of Office Complex Other
and Year First Overseen by Trusteeships
Position and Elected or Principal Occupations Trustee or Held by
Name, Address and Age Offices with Fund Appointed During Past 5 Years Officer Trustee
--------------------- ----------------- -------------- --------------------- ------------ ------------
Officers of the Fund
--------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial 19 Portfolios N/A
D.O.B.: 11/57 Controller, Chief term Officer, Managing
1001 Warrenville Road, Financial Officer o 2004 Director, First Trust
Suite 300 and Chief Portfolios and First
Lisle, IL 60532 Accounting Officer Trust Advisors
Susan M. Brix Assistant Vice o Indefinite Representative, First 19 Portfolios N/A
D.O.B.: 01/60 President term Trust Portfolios;
1001 Warrenville Road, o 2004 Assistant Portfolio
Suite 300 Manager, First Trust
Lisle, IL 60532 Advisors
Robert F. Carey Vice President o Indefinite Senior Vice 19 Portfolios N/A
D.O.B.: 07/63 term President, First
1001 Warrenville Road, o 2004 Trust Portfolios and
Suite 300 First Trust Advisors
Lisle, IL 60532
W. Scott Jardine Secretary and o Indefinite General Counsel, 19 Portfolios N/A
D.O.B.: 05/60 Chief Compliance term First Trust
1001 Warrenville Road, Officer o 2004 Portfolios and First
Suite 300 Trust Advisors;
Lisle, IL 60532 Secretary, Bond Wave,
LLC
Kristi A. Maher Assistant o Indefinite Assistant General 19 Portfolios N/A
D.O.B.:12//66 Secretary term Counsel (March 2004
1001 Warrenville Road, o 2004 to Present), First
Suite 300 Trust Portfolios;
Lisle, IL 60532 Associate (1995 to
March 2004), Chapman
and Cutler LLP
Roger Testin Vice President o Indefinite Vice President 19 Portfolios N/A
D.O.B.: 06/66 term (August 2001 to
1001 Warrenville Road, o 2004 Present), First Trust
Suite 300 Advisors; Analyst
Lisle, IL 60532 (1998 to 2001), Dolan
Capital Management
____________________
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his
position of President of First Trust Advisors, investment adviser of the
Fund.
(2) Trustees are elected each year by shareholders and serve a one year term
until their successors are elected. Mr. Bowen's officer positions with
the Fund have an indefinite term.
The Board of Trustees of the Fund has four standing committees, the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee, and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Fund's Declaration of Trust and By-laws. The members of
the Executive Committee shall also serve as a special committee of the Board
known as the Pricing and Dividend Committee which is authorized to exercise all
of the powers and authority of the Board in respect of the issuance and sale,
through an underwritten public offering, of the Common Shares of the Fund and
all other such matters relating to such financing, including determining the
price at which such shares are to be sold and approval of the final terms of the
underwriting agreement, including approval of the members of the underwriting
syndicate. Such committee is also responsible for the declaration and setting of
-22-
dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The
Nominating and Governance Committee is responsible for appointing and nominating
non-interested persons to the Fund's Board of Trustees. Messrs. Erickson,
Nielson, Kadlec and Oster are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including Shareholders. When a
vacancy on the Board occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including Shareholders of the Fund. To
submit a recommendation for nomination as a candidate for a position on the
Board, Shareholders of the Fund shall mail such recommendation to W. Scott
Jardine at the Fund's address, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532. Such recommendation shall include the following information: (a) evidence
of Fund ownership of the person or entity recommending the candidate (if a Fund
Shareholder), (b) a full description of the proposed candidate's background,
including their education, experience, current employment, and date of birth,
(c) names and addresses of at least three professional references for the
candidate, (d) information as to whether the candidate is an "interested person"
in relation to such Fund, as such term is defined in the 1940 Act, as amended,
and such other information that may be considered to impair the candidate's
independence and (e) any other information that may be helpful to the Committee
in evaluating the candidate. If a recommendation is received with satisfactorily
completed information regarding a candidate during a time when a vacancy exists
on the Board or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chair of the Nominating and Governance Committee and the outside counsel to
the independent trustees. Recommendations received at any other time will be
kept on file until such time as the Nominating and Governance Committee is
accepting recommendations, at which point they may be considered for nomination.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec and Oster are members of the
Valuation Committee. The Audit Committee is responsible for overseeing the
Fund's accounting and financial reporting process, the system of internal
controls, audit process and evaluating and appointing independent auditors
(subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Oster
serve on the Audit Committee. The Executive Committee (and Pricing and Dividend
Committee) met once during the Fund's fiscal year ended May 31, 2004. The
Nominating and Governance Committee, the Valuation Committee, and the Audit
Committee did not meet during the Fund's fiscal year ended May 31, 2004.
Messrs. Erickson, Nielson, Kadlec and Bowen are also trustees of First
Defined Portfolio Fund, LLC, an open-end fund advised by First Trust Advisors
with 11 portfolios. Messrs. Bowen, Erickson, Nielson, Kadlec and Oster are also
trustees of the First Trust Value Line(R) 100 Fund, First Trust Value Line(R)
Dividend Fund, First Trust/Four Corners Senior Floating Rate Income Fund,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund,
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund and Energy Income
and Growth Fund, closed-end funds advised by First Trust Advisors. None of the
Trustees who are not "interested persons" of the Fund, nor any of their
immediate family members, has ever been a director, officer or employee of, or
consultant to, First Trust Advisors, First Trust Portfolios or their affiliates.
In addition, Mr. Bowen and the other officers of the Fund hold the same
positions with the First Defined Portfolio Fund, LLC, First Trust Value Line(R)
100 Fund, First Trust Value Line(R) Dividend Fund, First Trust/Four Corners
-23-
Senior Floating Rate Income Fund, Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, First Trust/Value Line(R) &
Ibbotson Equity Allocation Fund and Energy Income and Growth Fund, as they hold
with the Fund.
Effective June 7, 2004, the Trustees approved a revised compensation plan.
Under the revised plan, the Fund pays each Trustee who is not an officer or
employee of First Trust Advisors, any sub-adviser or any of their affiliates
("Independent Trustees") an annual retainer of $10,000 which includes
compensation for all regular quarterly board meetings and regular committee
meetings. No additional meeting fees are paid in connection with regular
quarterly board meetings or regular committee meetings. Additional fees of
$1,000 and $500 are paid to Independent Trustees for special board meetings and
non-regular committee meetings, respectively. These additional fees are shared
by the funds in the First Trust Fund complex that participate in the particular
meeting and are not per fund fees. Trustees are also reimbursed for travel and
out-of-pocket expenses in connection with all meetings. The Trustees adopted the
revised plan because the increase in the number of funds in the First Trust
complex had the effect of rapidly increasing their compensation under the
previous arrangements. Prior to June 7, 2004, the Fund paid each Independent
Trustee an annual fee of $10,000 plus $1,000 as compensation for each board
meeting (in-person or by electronic means) and $500 per committee meeting
(in-person or by electronic means) attended. The Board of Trustees of the Fund
held one meeting during the fiscal year ended May 31, 2004. Each of the Trustees
attended the meeting. The aggregate fees and expenses paid to the Trustees by
the Fund for the fiscal year ended May 31, 2004 (including reimbursement for
travel and out-of-pocket expenses) amounted to $4,000.
-24-
ESTIMATED
TOTAL COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND(1) FUND COMPLEX(2)
--------------- ------------------------- ------------------
Richard E. Erickson $16,000 $117,875
Thomas R. Kadlec $16,000 $101,000
Niel B. Nielson $16,000 $117,875
David M. Oster $16,000 $101,000
____________________
(1) The compensation estimated to be paid by the Fund to the Independent
Trustees for the first full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and Fund Complex for a
full calendar year is based on estimated compensation to be paid to these
Trustees for a full calendar year for services as Trustees to the First
Defined Portfolio Fund, LLC, an open-end fund (with 11 portfolios)
advised by First Trust Advisors plus estimated compensation to be paid to
these Trustees by the First Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund, the Macquarie/First Trust Global Infrastructure/Utilities
Dividend & Income Fund, First Trust/Value Line(R) & Ibbotson Equity
Allocation Fund, Energy Income and Growth Fund and the Fund for a full
calendar year. Mr. Oster is currently not a Trustee of the First Defined
Portfolio Fund, LLC. Accordingly, his estimated total compensation is
based on the estimated compensation to be paid by the First Trust Value
Line(R) 100 Fund, the First Trust Value Line(R) Dividend Fund, the First
Trust/Four Corners Senior Floating Rate Income Fund, the Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First
Trust/Value Line(R) & Ibbotson Equity Allocation Fund, Energy Income and
Growth Fund and the Fund for a full calendar year.
The Fund has no employees. Its officers are compensated by First Trust
Advisors. The Shareholders of the Fund will elect trustees at the next annual
meeting of shareholders.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds overseen by
the Trustees in the First Trust Fund Complex as of July 31, 2004:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
DOLLAR RANGE OF REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
------- ----------------- -------------------------------
Mr. Bowen None Over $100,000
Mr. Erickson None $1-$10,000
Mr. Kadlec None $50,001-$100,000
Mr. Nielson None $10,000-$50,000
Mr. Oster None $50,001-$100,000
As of July 31, 2004, the Trustees of the Fund who are not
"interested persons" of the Fund and immediate family members do not own
beneficially or of record any class of securities of an investment adviser or
principal underwriter of the Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund.
-25-
As of July 31, 2004, the Fund knows of no person who owns beneficially or
of record 5% or more of the Fund's Common Shares. As of July 31, 2004, the
Trustees and executive officers as a group beneficially owned no shares of the
Fund.
ADVISER
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, is the investment adviser to the Fund. As investment adviser,
First Trust Advisors provides the Fund with professional investment supervision
and selects the Fund's Sub-Adviser and permits any of its officers or employees
to serve without compensation as Trustees or officers of the Fund if elected to
such positions. First Trust Advisors supervises the activities of the Fund's
Sub-Adviser and provides the Fund with certain other services necessary with the
management of the portfolio.
First Trust Advisors is an Illinois limited partnership formed in 1991
and an investment adviser registered with the Commission under the Investment
Advisers Act of 1940. First Trust Advisors is a limited partnership with one
limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one
general partner, The Charger Corporation. Grace Partners is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. Grace Partners' and The Charger Corporation's primary business
is investment advisory and broker/dealer services through their interests. The
Charger Corporation is an Illinois corporation controlled by the Robert Donald
Van Kampen family. First Trust Advisors is controlled by Grace Partners and The
Charger Corporation.
First Trust Advisors is also adviser or sub-adviser to approximately
eight mutual funds and seven closed-end funds (including the Fund) and is the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios. First Trust Portfolios specializes in the underwriting, trading and
distribution of unit investment trusts and other securities. First Trust
Portfolios, an Illinois limited partnership formed in 1991, acts as sponsor for
successive series of The First Trust Combined Series, FT Series (formerly known
as The First Trust Special Situations Trust), the First Trust Insured Corporate
Trust, The First Trust of Insured Municipal Bonds and The First Trust GNMA.
First Trust Portfolios introduced the first insured unit investment trust in
1974 and to date, more than $48 billion in First Trust Portfolios unit
investment trusts have been deposited.
First Trust Advisors acts as investment adviser to the Fund pursuant to
an Investment Management Agreement. The Investment Management Agreement
continues in effect for the Fund from year to year after its initial two-year
term so long as its continuation is approved at least annually by the Trustees
including a majority of the Trustees who are not parties to the agreement or
interested persons of any such party except in their capacity as Trustees of the
Fund, or the vote of a majority of the outstanding voting securities of the
Fund. It may be terminated at any time without the payment of any penalty upon
60 days' written notice by either party, or by a majority vote of the
outstanding voting securities of the Fund (accompanied by appropriate notice),
and will terminate automatically upon assignment. The Investment Management
Agreement also may be terminated, at any time, without payment of any penalty,
by the Board or by vote of a majority of the outstanding voting securities of
-26-
the Fund, in the event that it shall have been established by a court of
competent jurisdiction that the Adviser, or any officer or director of the
Adviser, has taken any action which results in a breach of the covenants of the
Adviser set forth in the Investment Management Agreement. The Investment
Management Agreement provides that First Trust Advisors, shall not be liable for
any loss sustained by reason of the purchase, sale or retention of any security,
whether or not the purchase, sale or retention shall have been based upon the
investigation and research made by any other individual, firm or corporation, if
the recommendation shall have been selected with due care and in good faith,
except loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Adviser in performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
Investment Management Agreement. As compensation for its services, the Fund pays
First Trust Advisors a fee as described in the Prospectus. Provisions regarding
expense limitations are described in the Prospectus. See "Management of the
Fund--Investment Management Agreement" in the Fund's Prospectus.
In addition to the fee of First Trust Advisors, the Fund pays all other
costs and expenses of its operations, including compensation of its Trustees
(other than those affiliated with First Trust Advisors), custodian, transfer
agency, administrative, accounting and dividend disbursing expenses, legal fees,
sub-licensing fee, expenses of independent auditors, expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any. All fees and expenses are
accrued daily and deducted before payment of dividends to investors.
On April 18, 2004, the Trustees of the Fund met with members of First
Trust Advisors and the Sub-Adviser (the "Fund Advisers") to consider, among
other things, the possible approval of the Investment Management Agreement
between the Fund and First Trust Advisors and the Sub-Advisory Agreement between
the Adviser, the Sub-Adviser and the Fund. Prior to the meeting, the Independent
Trustees received a memorandum describing their legal obligations and duties
relating to the approval of an investment advisory contract, including the
duties of the Trustees under the 1940 Act and the general principles of state
law; the requirements of the 1940 Act in such matters; the fiduciary duty of the
Adviser; the standards used in determining whether boards of trustees have
fulfilled their duties; and various factors to be considered by the Trustees in
voting on whether to approve advisory agreements. In evaluating the Investment
Management Agreement and the Sub-Advisory Agreement, the Independent Trustees
met with their legal counsel privately (outside the presence of the interested
Trustee and officers of the Fund Advisers) to discuss their responsibilities and
obligations with respect to the Investment Management Agreement and Sub-Advisory
Agreement and the terms of the proposed agreements.
In evaluating the Investment Management Agreement and the Sub-Advisory
Agreement, the Trustees considered narrative information concerning, among other
things, the nature of the services to be provided by the respective adviser or
sub-adviser (as described below), the fees to be paid to the respective adviser
and the sub-adviser and the experience, resources and staffing of the respective
adviser and sub-adviser.
More specifically, First Trust Advisors already serves as investment
adviser on the various funds in the First Trust complex. Accordingly, the
-27-
Trustees noted that they were already well informed as to its personnel,
staffing, experience, investment philosophy and fees paid by other clients. In
evaluating the Investment Management Agreement, the Trustees reviewed the
supervisory services to be provided by First Trust Advisors, as the investment
adviser, the personnel resources available to fulfill such function (including
the job descriptions and background of newly-hired employees) and the advisory
fees to be paid to First Trust Advisors. More specifically, First Trust Advisors
updated the Trustees regarding its activities that are designed to strengthen
its regulatory oversight systems and its ability to monitor the various
sub-advisers serving the Funds. In this regard, First Trust Advisors has hired
an Assistant General Counsel as well as a manager responsible for sub-adviser
oversight. The Trustees reviewed the division of services provided to the Fund
by the Adviser and the Sub-Adviser and the corresponding allocation of fees,
which were the product of arm's length negotiations between the parties. In this
review, the Trustees also took into account the role of First Trust Advisors in
connection with the use of leverage by the Fund and the additional monitoring
and supervision required for this activity.
In evaluating the Sub-Advisory Agreement with Four Corners, the
Trustees similarly considered the nature of the services to be provided and the
fees to be paid. More specifically, Four Corners already serves as a sub-adviser
to funds in the First Trust complex, including funds investing in the senior
loan asset class. Accordingly, the Trustees were already well informed of Four
Corner's experience and skill with the senior loan asset class (including the
performance of the existing funds), its personnel, resources, investment
personnel (their qualifications, duties and their historical experience with
this asset class), investment philosophy and process and fees received for
similar services and took these factors into account when considering Four
Corners as sub-adviser for this Fund. In particular, the co-Portfolio Managers
of the Fund, Mr. McAdams and Mr. Bernstein, have been significantly involved in
the structuring and the management of senior loans since the 1980s. In addition,
the Trustees reviewed the financial resources and ownership of Four Corners,
including its affiliation with Macquarie Group, an international financial
services firm. The Trustees also reviewed Four Corners' regulatory filings
(e.g., its most recent Form ADV filing). In approving the Sub-Advisory Agreement
and the fees payable thereunder, the Trustees also took into account, in
particular, the level of complexity required in managing this asset class, Four
Corners' investment philosophy and the experience of the co-Portfolio Managers
in managing this asset class. The Trustees were also made aware of Four Corners'
performance history in the senior loan asset class, including default rates for
senior loan assets held in portfolios managed by Four Corners.
In evaluating the overall advisory arrangement, the Trustees also
received and reviewed written information regarding advisory fees paid by other
analogous closed-end funds and their respective expense ratios. It was noted
that another closed-end fund sub-advised by Four Corners has performed very well
as compared to its peer group.
The Board of Trustees, including all of the Independent Trustees of the
Fund, and the sole shareholder of the Fund, each approved the Investment
Management Agreement and the Sub-Advisory Agreement. The Independent Trustees
determined that the terms of the Fund's Investment Management Agreement and the
Sub-Advisory Agreement, including the fees, are fair and reasonable, and that
they will enable the Fund to obtain high quality investment management services.
The Trustees did not identify in their discussions any single factor as all
-28-
important or controlling but rather reviewed all pertinent in formation as part
of their deliberations.
The Fund, Adviser and Sub-Adviser have adopted codes of ethics under
Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the code
to invest in securities, including securities that may be purchased or held by
the Fund. These codes can be reviewed and copied at the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at (202) 942-8090. The
codes of ethics are available on the EDGAR Database on the Commission's web site
(http://www.sec.gov), and copies of these codes may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission Public Reference Section,
Washington, D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
A senior member of the Adviser is responsible for oversight of the
Fund's proxy voting process. The Adviser has engaged the services of
Institutional Shareholder Services, Inc. ("ISS"), to make recommendations to the
Adviser on the voting of proxies relating to securities held by the Fund. ISS
provides voting recommendations based upon established guidelines and practices.
The Adviser reviews ISS recommendations and frequently follows the ISS
recommendations. However, on selected issues, the Adviser may not vote in
accordance with the ISS recommendations when the Adviser believes that specific
ISS recommendations are not in the best economic interest of the Fund. If the
Adviser manages the assets of a company or its pension plan and any of the
Adviser's clients hold any securities in that company, the Adviser will vote
proxies relating to that company's securities in accordance with the ISS
recommendations to avoid any conflict of interest. If a client requests the
Adviser to follow specific voting guidelines or additional guidelines, the
Adviser will review the request and inform the client only if the Adviser is not
able to follow the client's request.
The Adviser has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on the
Adviser's general voting policies.
When required by applicable regulations, information regarding how the
Fund voted proxies relating to portfolio securities will be available without
charge by calling (800) 988-5891 or by accessing the Commission's website at
http://www.sec.gov.
SUB-ADVISER
Four Corners Capital Management, LLC acts as investment sub-adviser to
the Fund with responsibility for the overall management of the Fund. Its address
-29-
is 515 South Flower Street, Suite 4310, Los Angeles, California 90071. Four
Corners is 66.67% owned by Macquarie Bank Limited ("MBL") through a subsidiary
and 33.33% by its senior management.
The Sub-Adviser, subject to the Board of Trustees' and Adviser's
supervision, provides the Fund with discretionary investment services.
Specifically, the Sub-Adviser is responsible for managing the investments of the
Fund in accordance with the Fund's investment objectives, policies, and
restrictions as provided in the Prospectus and this Statement of Additional
Information, as may be subsequently changed by the Board of Trustees. The
Sub-Adviser further agrees to conform to all applicable laws and regulations of
the Commission in all material respects and to conduct its activities under the
Sub-Advisory Agreement in accordance with applicable regulations of any
governmental authority pertaining to its investment advisory services. In the
performance of its duties, the Sub-Adviser will satisfy its fiduciary duties to
the Fund, will monitor the Fund's investments in Senior Loans (and other assets
in which the Sub-Adviser is authorized to invest), and will comply with the
provisions of the Fund's Declaration of Trust and By-laws, as amended from time
to time, and the stated investment objectives, policies and restrictions of the
Fund. The Sub-Adviser is responsible for effecting all security transactions on
behalf of the Fund. Pursuant to a Sub-Advisory Agreement between the Adviser,
the Sub-Adviser and the Fund, the Adviser has agreed to pay for the services and
facilities provided by the Sub-Adviser through a sub-advisory fee, as set forth
in the Prospectus. For purposes of calculation of the sub-advisory fee, the
Fund's "managed assets" shall mean the average daily gross asset value of the
Fund (which includes assets attributable to the Fund's preferred shares, if any,
and the principal amount of any borrowings), minus the sum of the Fund's accrued
and unpaid dividends on any outstanding preferred shares and accrued liabilities
(other than the principal amount of any borrowings incurred, commercial paper or
notes issued by the Fund and the liquidation preference of any outstanding
preferred shares). Through a separate agreement, the Adviser has committed to
pay the Sub-Adviser a sum equal to 1.5 times the annualized pro-forma
Sub-Advisory Fee in effect if the Sub-Advisory Agreement is terminated for any
reason other than for cause or the appointment of the Sub-Adviser as the Fund's
investment adviser.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The Sub-Advisory Agreement has been approved by a
majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
PORTFOLIO TRANSACTIONS
The Sub-Adviser is responsible for decisions to buy and sell securities
for the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in the securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from the Fund's affiliates except in compliance with the 1940 Act.
With respect to interests in Senior Loans, the Fund generally will
engage in privately negotiated transactions for purchase or sale in which the
-30-
Sub-Adviser will negotiate on behalf of the Fund, although a more developed
market may exist for certain Senior Loans. The Fund may be required to pay fees,
or forego a portion of interest and any fees payable to the Fund, to the Lender
selling participations or assignments to the Fund. The Sub-Adviser will identify
and choose 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 may 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 Sub-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 its interests. See "Risks" in the Prospectus.
The Fund expects that substantially all other portfolio transactions
will be effected on a principal (as opposed to an agency) basis and,
accordingly, does not expect to pay any brokerage commissions. Purchases from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include the spread between the bid
and asked price. It is the policy of the Sub-Adviser to seek the best execution
under the circumstances of each trade. The Sub-Adviser evaluates price as the
primary consideration, with the financial condition, reputation and
responsiveness of the dealer considered secondary in determining best execution.
Given the best execution obtainable, it will be the Sub-Adviser's practice to
select dealers which, in addition, furnish research information (primarily
credit analyses of issuers and general economic reports) and statistical and
other services to the Sub-Adviser. It is not possible to place a dollar value on
information and statistical and other services received from dealers. Since it
is only supplementary to the Sub-Adviser's own research efforts, the receipt of
research information is not expected to reduce significantly the Sub-Adviser's
expenses. While the Sub-Adviser will be primarily responsible for the placement
of the business of the Fund, the policies and practices of the Sub-Adviser in
this regard must be consistent with the foregoing and will, at all times, be
subject to review by the Board of Trustees of the Fund.
Securities considered as investments for the Fund also may be
appropriate for other investment accounts managed by the Sub-Adviser or its
affiliates. Whenever decisions are made to buy or sell securities by the Fund
and one or more of the other accounts simultaneously, the Sub-Adviser may
aggregate the purchases and sales of the securities and will allocate the
securities transactions in a manner which it believes to be equitable under the
circumstances. As a result of the allocations, there may be instances where the
Fund will not participate in a transaction that is allocated among other
accounts. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the
benefits from the Sub-Adviser organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.
NET ASSET VALUE
The net asset value of the Common Shares of the Fund will be computed
based upon the value of the Fund's portfolio securities and other assets. The
net asset value will be determined as of the close of regular trading on the
NYSE on each day the NYSE is open for trading. Domestic debt securities and
-31-
foreign securities will normally be priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund calculates net
asset value per Common Share by subtracting the Fund's liabilities (including
accrued expenses, dividends payable and any borrowings of the Fund) and the
liquidation value of any outstanding Preferred Shares from the Fund's Managed
Assets (the value of the securities and other investments the Fund holds plus
cash or other assets, including interest accrued but not yet received) and
dividing the result by the total number of Common Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance
with valuation procedures adopted by the Board of Trustees. The Sub-Adviser
anticipates that a majority of the Fund's assets will be valued using market
information supplied by third parties. If market quotations are not readily
available, the pricing service does not provide a valuation for the particular
assets, or the valuations are deemed unreliable, or if events occurring after
the close of the principal markets for particular securities (e.g., domestic
debt and foreign securities) but before the Fund values its assets would
materially affect net asset value, the Adviser may use a fair value method in
good faith to value the Fund's securities and investments. The use of fair value
pricing by the Fund will be governed by valuation procedures established by the
Fund's Board of Trustees, and in accordance with the provisions of the 1940 Act.
Other Assets
Securities for which the primary market is a national securities
exchange or the NASDAQ National Market System are valued at the last reported
sale price (NASDAQ Official Closing Price for NASDAQ National Market System
securities) on the valuation date. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the most recent bid and asked prices.
Securities traded in the over-the-counter market are valued at their closing bid
prices. Valuation of short-term cash equivalent investments will be at amortized
cost.
DESCRIPTION OF AMPS
Notices
The Fund shall deliver to Moody's (if Moody's is then rating AMPS), S&P
(if S&P is then rating AMPS) and any other rating agency which is then rating
AMPS and which so requires a certificate which sets forth a determination of
certain items (the "Preferred Shares Basic Maintenance Report"), including the
assets of the Fund, the Market Value and the Discounted Value thereof
(separately and in aggregate), the Preferred Shares Basic Maintenance Amount,
trade price, NAV, and total return, signed by the President, or Chief Financial
Officer of the Fund as of the related Valuation Date. The Preferred Shares Basic
Maintenance Report shall be delivered on or before the fifth Business Day
following the Date of Original Issue and on or before the third Business Day
after a valuation date on which the Fund failed to satisfy the Preferred Shares
Basic Maintenance Amount. The Fund shall deliver the Preferred Shares Basic
Maintenance Report to the Auction Agent in the event action would be required to
be taken, or may be taken, by the Auction Agent in connection therewith.
-32-
The Fund shall deliver to the Auction Agent, Moody's (if Moody's is
then rating AMPS), S&P (if S&P is then rating AMPS) and any Other Rating Agency
which is then rating AMPS and which so requires a certificate with respect to
the calculation of the 1940 Act Preferred Shares Asset Coverage and the value of
the portfolio holdings of the Fund (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 the Business Day on
or before the Asset Coverage Cure Date relating to the failure to satisfy the
1940 Act Preferred Shares Asset Coverage. The 1940 Act Preferred Shares Asset
Coverage Certificate shall be delivered in the case of clause (i) on or before
the fifth Business Day following the Date of Original Issue and in the case of
clause (ii) on or before the third Business Day after a valuation date on which
the Fund failed to satisfy the Preferred Shares Basic Maintenance Amount.
Within ten Business Days of the Date of Original Issue, the Fund shall
deliver to the Auction Agent, Moody's (if Moody's is then rating AMPS), S&P (if
S&P is then rating AMPS) and any Other Rating Agency which is then rating AMPS
and which so requires, a letter prepared by the Fund's independent accountants
(an "Accountant's Certificate") regarding the accuracy of the calculations made
by the Fund in the Preferred Shares Basic Maintenance Report and the 1940 Act
Preferred Shares Asset Coverage Certificate required to be delivered by the Fund
as of the Date of Original Issue. Within ten Business Days after the last
Valuation Date of each fiscal year of the Fund on which a Preferred Shares Basic
Maintenance Report is required to be delivered, the Fund will deliver to the
Auction Agent, Moody's (if Moody's is then rating AMPS), S&P (if S&P is then
rating AMPS) and any other Rating Agency which is then rating AMPS and which so
requires, an Accountant's Certificate regarding the accuracy of the calculations
made by the Fund in such Preferred Shares Basic Maintenance Certificate and in
any other Preferred Shares Basic Maintenance Report randomly selected by the
Fund's independent accountants during such fiscal year. Within ten Business Days
after the last Valuation Date of each fiscal year of the Fund on which a 1940
Act Preferred Shares Asset Coverage Certificate is required to be delivered, the
Fund will deliver to the Auction Agent, Moody's (if Moody's is then rating
AMPS), S&P (if S&P is then rating AMPS) and any Other Rating Agency which is
then rating AMPS and which so requires, an Accountant's Certificate regarding
the accuracy of the calculations made by the Fund in such 1940 Act Preferred
Shares Asset Coverage Certificate. In addition, the Fund will deliver to the
relevant persons specified in the preceding sentence an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund on each Preferred
Shares Basic Maintenance Report and 1940 Act Preferred Shares Asset Coverage
Certificate delivered within ten days after the relevant Asset Coverage Cure
Date.
Asset Coverage Cure Date
If an Accountant's Certificate delivered with respect to an Asset
Coverage Cure Date shows an error was made in the Fund's report with respect to
such Asset Coverage Cure Date, the calculation or determination made by the
Fund's independent accountants will be conclusive and binding on the Fund with
respect to the report. If any other Accountant's Certificate shows that an error
was made in any such report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund; provided,
however, any errors shown in the Accountant's Certificate filed on an annual
-33-
basis shall not be deemed to be a failure to maintain the Preferred Shares Basic
Maintenance Amount on any prior Valuation Dates.
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR AMPS
Auction Agency Agreement
The Fund has entered into an Auction Agency Agreement (the "Auction
Agency Agreement") with the Auction Agent (currently, Deutsche Bank Trust
Company Americas) which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for the AMPS so long as the Applicable Rate is to be based on the results
of an 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 provide for
the participation of those Broker-Dealers in Auctions for AMPS. See
"Broker-Dealers" below.
Securities Depository
The Depository Trust Company ("DTC") will act as the Securities
Depository for the Agent Members with respect to the AMPS. One certificate for
all of the shares of the AMPS will be registered in the name of Cede & Co., as
nominee of the Securities Depository. The certificate will bear a legend to the
effect that the certificate is issued subject to the provisions restricting
transfers of AMPS contained in the Statement. The Fund also will issue
stop-transfer instructions to the transfer agent for the AMPS. 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 AMPS--Voting Rights" in
the Prospectus, Cede & Co. will be the holder of record of all shares of the
AMPS and owners of the shares will not be entitled to receive certificates
representing their ownership interest in the shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the 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 participant
(the "Agent Member") in AMPS, whether for its own account or as a nominee for
another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
-34-
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of AMPS, 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 "The
Auction--Secondary Market Trading and Transfer of AMPS" in the Prospectus and
notices from the Fund. The Auction Agent is not required to accept any notice of
transfer delivered 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 the Auction.
The Auction Agent may terminate the Auction Agency Agreement (i) upon
prior notice to the Fund on the date specified in such notice, which date shall
be no earlier than 60 days after delivery of such notice or (ii) upon prior
notice to the Fund on the date specified in such notice if the Fund shall have
failed to pay the amounts due the Auction Agent in connection with its agency
under the Auction Agency Agreement and under the Broker-Dealer Agreements within
30 days of invoice. 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 at any time by so notifying the
Auction Agent, provided that, if any AMPS remain outstanding, 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 AMPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge in the amount
equal to (i) the product of (A) a fraction the numerator of which is the number
of days in the Rate Period (calculated by counting the first day of such Rate
Period but excluding the last day thereof) and the denominator of which is 360,
times (B) 1/4 of 1%, times (C) $25,000 times (D) the sum of the aggregate number
of AMPS placed by such Broker-Dealer in the case of any auction immediately
preceding a Rate Period of less than one year, or (ii) the amount mutually
agreed upon by the Fund and the Broker-Dealers, based upon a selling concession
that would be applicable to an underwriting of fixed or variable rate AMPS with
a similar final maturity or variable rate dividend, respectively, at the
commencement of the Rate Period with respect to such Auction, in the case of any
Auction immediately preceding a Rate Period of one year or longer. For the
purposes of the preceding sentence, AMPS shall be placed by a Broker-Dealer if
such shares were (i) the subject of Hold Orders deemed to have been submitted to
the Auction Agent by the Broker-Dealer and were acquired by the Broker-Dealer
for its own account or were acquired by the Broker-Dealer for its customers who
are Beneficial Owners or (ii) the subject of an Order submitted by the
Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in
the Existing Holder continuing to hold the shares as a result of the Auction or
(B) a Submitted Bid of a Potential Holder that resulted in the Potential Holder
purchasing the shares as a result of the Auction or (iii) a valid Hold Order.
-35-
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 Bids 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 the 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; the Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon
the advice of Chapman and Cutler LLP, counsel to the Fund. This discussion
assumes that all AMPS will be treated as equity for federal income tax purposes.
General
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. Unless otherwise noted, this discussion
assumes you are a U.S. shareholder and that you hold your shares as a capital
asset. This discussion is based upon present provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder,
and judicial and administrative ruling authorities, all of which are subject to
change, which change may be retroactive. Prospective investors should consult
their own tax advisors with regard to the federal tax consequences of the
purchase, ownership, or disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, locality, non-U.S. country, or
other taxing jurisdiction.
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer generally
-36-
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer, or two or more issuers which the Fund controls and are engaged in the
same, similar or related trades or businesses; and (c) distribute at least 90%
of its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) and at least 90% of its net tax-exempt interest income each
taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on its investment company taxable income (as
that term is defined in the Code, but without regard to the deduction for
dividends paid) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, that it distributes to shareholders.
The Fund intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Fund retains any net capital gain or investment company taxable income,
it will generally be subject to federal income tax at regular corporate rates on
the amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, the Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. To prevent application of
the excise tax, the Fund intends to make its distributions in accordance with
the calendar year distribution requirement. A distribution will be treated as
paid on December 31 of the current calendar year if it is declared by the Fund
in October, November or December with a record date in such a month and paid by
the Fund during January of the following calendar year. These distributions will
be taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
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 income. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for treatment as a regulated investment company.
If, at any time when the Fund's shares are outstanding, the Fund fails
to meet the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage, it will be required to suspend distributions to Common
Shareholders until such maintenance amount or asset coverage, as the case may
be, is restored. See "Description of AMPS--Asset Maintenance" in the Prospectus.
Such a suspension may prevent the Fund from satisfying its distribution
requirement and may therefore jeopardize its qualification for treatment as a
-37-
regulated investment company or cause it to incur an income tax or excise tax
liability, or both. If the Fund fails to meet such maintenance amount or asset
coverage when its shares are outstanding, it will be required to redeem its
shares to maintain or restore such maintenance amount or asset coverage, as the
case may be, and avoid the adverse consequences to the Fund and its stockholders
of failing to qualify for treatment as a regulated investment company, There can
be no assurance, however, that any such redemption would achieve that objective.
Distributions
Dividends paid out of the Fund's investment company taxable income
generally are taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, pursuant to the recently enacted "Jobs and Growth Tax Relief
Reconciliation Act of 2003" (the "Tax Act"), if the Fund holds equity
securities, certain ordinary income distributions received from the Fund may be
taxed at new capital gains tax rates. In particular, under the Tax Act, ordinary
income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at the same new rates
that apply to net capital gain, provided certain holding period requirements are
satisfied and provided the dividends are attributable to qualifying dividends
received by the Fund itself. Dividends received by the Fund from REITs and
foreign corporations are qualifying dividends eligible for this lower tax rate
only in certain circumstances. These special rules relating to the taxation of
ordinary income dividends from regulated investment companies generally apply to
taxable years beginning after December 31, 2002 and beginning before January 1,
2009. The Fund generally does not expect to generate qualifying dividends
eligible for the new capital gains tax rates. The Fund does not expect to pay
exempt-interest dividends that would be subject to the federal alternative
minimum tax.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund shares. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the value of a
share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her shares. To the extent that the
amount of any distribution exceeds the shareholder's basis in his or her shares,
the excess will be treated by the shareholder as gain from a sale or exchange of
the shares.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the value of those shares.
Under current federal income tax law, the Fund is required to allocate
to each class of its shares a proportionate share of its net capital gains and
its other income of each year. Thus, under current law, the dividends paid with
respect to the AMPS for a year will be divided between those designated as
capital gains dividends and ordinary income distributions in the same proportion
as the dividends paid with respect to the Fund's other shares for that year.
-38-
This allocation and designation will be reflected in the tax statement sent to
you by the Fund after the end of each year.
Dividends Received Deduction
A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to dividends received from the Fund
because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, if the Fund holds
equity securities, certain ordinary income dividends on shares that are
attributable to qualifying dividends received by the Fund from certain domestic
corporations may be designated by the Fund as being eligible for the dividends
received deduction but this amount is not expected to be significant.
Sale or Exchange of Fund Shares
Upon the sale or other disposition of shares of the Fund, which a
shareholder holds as a capital asset, a shareholder may realize a capital gain
or loss which will be long-term or short-term, depending upon the shareholder's
holding period for the shares. Generally, a shareholder'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 on a sale or exchange will be disallowed to the
extent that shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In this case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gain received by the
shareholder with respect to the shares.
The Fund may, at its option, redeem AMPS in whole or in part and is
required to redeem AMPS to the extent required to maintain the Preferred Shares
Basic Maintenance Amount and the 1940 Act Preferred Shares Asset Coverage. Gain
or loss, if any, resulting from such a redemption will be taxed as gain or loss
from the sale or exchange of AMPS rather than as a dividend, but only if the
redemption distribution (1) is deemed not to be essentially equivalent to a
dividend, (2) is in complete redemption of an owner's interest in the Fund, (3)
is substantially disproportionate with respect to the owner's interest in the
Fund (provided that the shareholder owns and is deemed to own less than 50% of
the total combined voting power of all classes of stock in the Fund entitled to
vote) or (4) with respect to non-corporate owners, is in partial liquidation of
the Fund. For purposes of clauses (1), (2) and (3) above, a shareholder's
ownership of the Fund's common shares will be taken into account.
Under current U.S. federal income tax regulations, if a stockholder
recognizes a loss with respect to shares of $2 million or more in any single
taxable year (or $4 million or more in the taxable year in which the loss is
recognized and the five succeeding taxable years) for an individual stockholder,
or five times those amounts for a corporate stockholder, the stockholder must
-39-
file with the Internal Revenue Service a disclosure statement on Form 8886.
Direct stockholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance stockholders of a regulated
investment company are not excepted. Future guidance may extend the current
exception from this reporting requirement to stockholders 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. Stockholders should consult their own tax
advisers to determine the applicability of these Regulations in light of their
individual circumstances.
Nature of the Fund's Investments
Certain of the Fund's investment practices may be subject to special
and complex federal income tax provisions that may, among other things, (1)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (2) convert lower taxed long-term capital gain into higher taxed
short-term capital or ordinary income, (3) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (4)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (5) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (6) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions,
will make the appropriate tax elections and take appropriate actions in order to
mitigate the effect of these rules and prevent disqualification of the Fund from
being taxed as a regulated investment company.
Backup Withholding
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2011, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from backup withholding. This withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
Non-U.S. Shareholders
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
-40-
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld
from such distributions.
Distributions of capital gain dividends and any amounts retained by the
Fund which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S.
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In
the case of a non-U.S. shareholder who is a nonresident alien individual, the
Fund may be required to withhold U.S. income tax from distributions of net
capital gain unless the non-U.S. shareholder certifies his or her non-U.S.
status under penalties of perjury or otherwise establishes an exemption. If a
non-U.S. shareholder is a nonresident alien individual, any gain the shareholder
realizes upon the sale or exchange of the shareholder's shares of the Fund in
the United States will ordinarily be exempt from U.S. tax unless the gain is
U.S. source income and the shareholder is physically present in the United
States for more than 182 days during the taxable year and meets certain other
requirements.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a non-U.S.
shareholder, then distributions of investment company taxable income and capital
gain dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate shareholders may also be subject to the branch profits tax imposed by
the Code. The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Fund.
Other Taxation
Foreign shareholders, including shareholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at
a rate of 30%, or the lower rates as may be prescribed by any applicable treaty.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar,
Inc. or other independent services. Comparison of the Fund to an alternative
investment should be made with consideration of differences in features and
-41-
historical asset class performance. The Fund may obtain data from sources or
reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that
the Fund believes to be generally accurate.
For the period from June 1, 2004 through July 31, 2004, the Fund's
net increase in net assets resulting from investment operations was $2,929,105.
EXPERTS
The Financial Statements of the Fund as of May 31, 2004, appearing in
this Statement of Additional Information have been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. Deloitte & Touche LLP provides accounting and auditing services to the
Fund. The principal business address of Deloitte & Touche LLP is 180 North
Stetson Avenue, Chicago, Illinois 60601.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of the Fund is PFPC Trust Company (the
"Custodian"), 301 Bellevue Parkway, Wilmington, Delaware 19809. Deutsche Bank
Trust Company Americas, 60 Wall Street, New York, New York 10005 is the Auction
Agent with respect to the AMPS and acts as transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to the AMPS.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission. The Fund's Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the shares offered hereby, reference is made to the
Fund's Registration Statement. Statements contained in the Fund's Prospectus and
this Statement of Additional Information as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by such reference. Copies of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
-42-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of First Trust/Four Corners Senior
Floating Rate Income Fund II:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of First Trust/Four Corners Senior
Floating Rate Income Fund II (the "Fund"), as of May 31, 2004 and the related
statements of operations, changes in net assets, cash flows and the financial
highlights for the period May 18, 2004 (inception) through May 31, 2004. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of May 31, 2004, by correspondence with the
Funds' custodian, brokers and selling or agent banks; where replies were not
received, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund at May 31, 2004, the results of its operations, the changes
in its net assets and cash flows, and the financial highlights for the period
May 18, 2004 (inception) through May 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
Chicago, Illinois
July 22, 2004
F-1
FINANCIAL STATEMENTS
(AUDITED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS
May 31, 2004
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
--------- ------------------------------------------------------ ----------
SENIOR FLOATING RATE INTERESTS - 24.5%
ADVERTISING - 1.1%
$5,000,000 Adams Outdoor Advertising, LP, Term Loan, 10/15/11... $5,041,665
----------
BROADCAST MEDIA - 0.5%
2,000,000 Salem Communications Holding Corp., Term Loan B,
3/31/10.......................................... 2,010,000
----------
CABLE TELEVISION - 1.6%
3,030,000 Century Cable Holdings, LLC, Term Loan, 6/30/09...... 2,937,836
4,000,000 Charter Communications Operating, LLC, Term Loan A,
4/27/10.......................................... 3,913,888
----------
6,851,724
----------
CASINOS & Gaming - 0.5%
2,000,000 Boyd Gaming Corp., Term Loan B, 6/24/08.............. 2,010,000
----------
COMMERCIAL SERVICES - 0.9%
2,000,000 Quanta Services, Inc., Term Loan, 6/19/08............ 2,002,500
United Rentals,
1,666,667 Term Loan, 2/14/11................................... 1,681,250
333,333 Term Loan B, 2/14/11................................. 336,250
----------
4,020,000
----------
CONSTRUCTION MATERIALS - 0.5%
2,000,000 Builders FirstSource, Inc., Term Loan, 2/25/10....... 2,015,000
250,000 Juno Lighting, Inc., Term Loan, 10/29/10............. 252,188
----------
2,267,188
----------
ELECTRONIC EQUIPMENT & Instruments - 0.7%
3,000,000 Global Cash Access, LLC, Term Loan B, 3/10/10........ 3,030,000
----------
ENTERTAINMENT - 2.0%
3,000,000 Metro-Goldwyn-Mayer Studios, Inc., Term Loan B,
4/30/11.......................................... 3,009,750
1,949,965 Rainbow Media Holdings LLC, Term Loan C, 3/31/09..... 1,962,558
3,995,000 WMG Acquisition Corp., Term Loan, 2/28/11............ 4,034,119
----------
9,006,427
----------
See Notes to Financial Statements.
F-2
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
--------- ------------------------------------------------------ ----------
SENIOR FLOATING RATE INTERESTS - CONTINUED
ENVIRONMENTAL SERVICES - 0.7%
$3,000,000 Duratek, Inc., Term Loan, 12/16/09................... $2,996,250
----------
FOOD, BEVERAGES, & TOBACCO - 2.1%
2,000,000 Golden State Foods Corp., Term Loan B, 2/25/11....... 2,010,000
5,000,000 Pinnacle Foods Holding Corp., Term Loan DD, 11/25/10. 5,046,875
2,000,000 THL Food Products Company, Term Loan, 11/21/11....... 2,047,500
----------
9,104,375
----------
HEALTHCARE (EQUIPMENT & SUPPLIES) - 0.5%
2,000,000 VWR International, Inc., Term Loan B, 4/07/11........ 2,024,500
----------
HEALTHCARE (PROVIDERS & SERVICES) - 1.6%
1,147,632 Genesis Healthcare Corp., Term Loan, 12/01/10........ 1,158,630
2,000,000 Team Health, Inc., Term Loan B, 3/23/11.............. 2,000,000
4,000,000 Vanguard Health Systems, Inc., Term Loan, 5/18/11.... 4,008,332
----------
7,166,962
----------
HOUSEHOLD PRODUCTS - 0.5%
2,000,000 United Industries Corp., Term Loan, 4/30/11.......... 2,022,500
----------
MISCELLANEOUS - 1.1%
5,000,000 Moran Transportation Company, Term Loan, 8/08/09..... 5,031,250
----------
OIL & GAS - 1.6%
2,807,143 Basic Energy Services, LP, Term Loan, 10/03/09....... 2,821,179
2,000,000 BPL Acquisition (Buckeye Pipeline), Term Loan,
6/10/10.......................................... 2,002,500
2,000,000 Vulcan Energy Corp., Term Loan, 2/23/10.............. 2,018,750
----------
6,842,429
----------
PAPER & FOREST PRODUCTS - 0.4%
2,000,000 Koch Cellulose, Term Loan B, 5/07/11................. 2,005,000
----------
PUBLISHING & PRINTING - 1.8%
1,000,000 F & W Publications, Inc., Term Loan, 12/31/09........ 1,005,625
2,750,000 Freedom Communications, Inc., Term Loan B, 5/18/12... 2,770,625
4,000,000 Transwestern Publishing Company, 2/25/12............. 4,026,668
----------
7,802,918
----------
REAL ESTATE - 0.5%
2,100,000 CB Richard Ellis, 3/31/10, Term Loan C, 3/31/10...... 2,114,438
----------
TELECOMMUNICATIONS (WIRELESS) - 2.1%
2,000,000 American Tower Corp., Term Loan B, 8/31/11........... 2,012,500
Nextel Communications, Inc.,
1,500,000 Term Loan A, 12/31/07............................ 1,492,633
3,500,000 Term Loan E, 12/15/10............................ 3,524,150
2,000,000 Nextel Partners, Inc., Term Loan C, 5/31/11.......... 2,014,376
----------
9,043,659
----------
See Notes to Financial Statements.
F-3
PRINCIPAL MARKET
VALUE DESCRIPTION VALUE
--------- ------------------------------------------------------ ----------
SENIOR FLOATING RATE INTERESTS - CONTINUED
UTILITY (ELECTRIC) - 3.9%
$1,500,000 Allegheny Energy Supply Company, LLC, Term Loan B,
3/08/11.......................................... $1,500,804
2,500,000 Astoria Energy LLC, Term Loan, 4/16/12............... 2,509,375
2,000,000 Centerpoint Energy, Inc., Term Loan, 10/07/06........ 2,027,858
1,000,000 Cogentrix Delaware Holdings, Inc., Term Loan, 2/25/09 1,003,333
2,000,000 Mission Energy Holdings International, LLC, Term
Loan, 12/11/06................................... 2,010,626
2,500,000 Reliant Resources, Inc., Term Loan A, 3/15/07........ 2,459,375
5,500,000 Saguaro Utility Group I Corp. (Unisource), Term Loan
DD, 3/25/11+..................................... 5,424,375
-----------
16,935,746
-----------
TOTAL SENIOR FLOATING RATE INTERESTS................. 107,327,031
-----------
(Cost $102,285,872)
REPURCHASE AGREEMENT - 100.2%
(Cost $439,000,000)
$439,000,000 Agreement with Wachovia Capital Markets, LLC, 1.00%
dated 5/28/04, to be repurchased at $439,048,778 on
6/01/04, collateralized by $451,516,356 GNMA Bonds,
5.50% and 5.00% due 4/20/34 and 5/20/34
(Value $448,987,531)............................. $439,000,000
------------
UNFUNDED LOAN COMMITMENTS - (1.3)%................... (5,521,250)
------------
TOTAL INVESTMENTS - 123.4%........................... 540,805,781
(Cost $541,285,872)*
PAYABLES FOR INVESTMENTS PURCHASED - (23.3)%......... (102,285,872)
NET OTHER ASSETS AND LIABILITIES - (0.1)%............ (574,594)
------------
NET ASSETS - 100.0%.................................. $437,945,315
============
----------------------
+ Unfunded loan commitments. See footnote 2 for description.
* Aggregated costs for federal tax purposes.
See Notes to Financial Statements.
F-4
STATEMENT OF ASSETS AND LIABILITIES
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2004
ASSETS:
Investments, at value (See portfolio of investment) (a):
Securities.................................................. $101,805,781
Repurchase Agreement........................................ 439,000,000
------------
Total investments............................................... 540,805,781
Cash............................................................ 246,598
Interest receivable............................................. 48,790
------------
Total Assets................................................ 541,101,169
------------
LIABILITIES
Payable for investment securities purchased..................... 102,285,872
Offering costs payable.......................................... 766,590
Investment advisory fee payable................................. 44,925
Payable to administrator........................................ 3,336
Accrued expenses and other payables............................. 55,131
------------
Total Liabilities........................................... 103,155,854
------------
NET ASSETS...................................................... $437,945,315
============
================================================================
(a) Investments, at cost........................................ $541,285,872
------------
NET ASSETS consist of:
Net unrealized depreciation of investments...................... $(408,091)
Par value....................................................... 230,052
Paid-in capital................................................. 438,195,354
------------
Total Net Assets............................................ $437,945,315
============
NET ASSET VALUE, per Common Share (par value $0.01 per
per Common Share)......................................... $19.04
============
Number of Common Shares outstanding............................. 23,005,236
============
See Notes fo Financial Statements.
F-5
STATEMENT OF OPERATIONS
First Trust/Four Corners Senior Floating Rate Income Fund II
for the Period Ended May 31, 2004*
INVESTMENT INCOME:
Interest............................................................ $48,790
---------
Total investment income......................................... 48,790
---------
EXPENSES:
Investment advisory fee............................................. 44,925
Trustees' fees and expenses......................................... 16,000
Printing fees....................................................... 12,500
Audit fees.......................................................... 10,000
Legal fees.......................................................... 6,250
Transfer agent fees................................................. 5,500
Administration fee.................................................. 3,336
Custodian fees...................................................... 950
Other............................................................... 3,931
---------
Net expenses.................................................... 103,392
---------
NET INVESTMENT LOSS................................................. (54,602)
---------
NET UNREALIZED LOSS ON INVESTMENTS:
Net change in unrealized appreciations/(depreciation)
of investments during the period.............................. (480,091)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $(534,693)
=========
--------------------
* The Fund's inception date was May 18, 2004.
See Notes to Financial Statements.
F-6
STATEMENT OF CHANGES IN NET ASSETS
First Trust/Four Corners Senior Floating Rate Income Fund II
for the Period Ended May 31, 2004*
PERIOD
ENDED
5/31/2004*
Net investment loss............................................... $(54,602)
Net change in unrealized appreciation/(depreciation) of
investments during the period............................... (480,091)
------------
Net decrease in net assets resulting from operations.............. (534,693)
CAPITAL TRANSACTIONS:
Net proceeds from sale of 23,005,236 shares of Common Shares...... 438,480,008
------------
Net increase in net assets........................................ 437,945,315
NET ASSETS:
Beginning of period............................................... --
------------
End of period..................................................... $437,945,315
============
--------------------
* The Fund's inception date was May 18, 2004.
See Notes to Financial Statements.
F-7
STATEMENT OF CASH FLOWS
First Trust/Four Corners Senior Floating Rate Income Fund II
For the Period Ended May 31, 2004*
Cash flows from operating activities: $(439,000,000)
-------------
Net purchases of short-term investments.............................
Cash used by operating activities....................................... $(439,000,000)
Cash flows from financing activities:
Proceeds from shares sold........................................... 439,246,598
-------------
Cash provided by financing activities................................... 439,246,598
-------------
Increase in cash.................................................... 246,598
Cash at beginning of period......................................... --
Cash at end of period............................................... $246,598
=============
RECONCILIATION OF NET DECREASE IN NET ASSETS FROM OPERATIONS
TO CASH USED BY OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations.................... $(534,693)
Increase in investments**........................................... $(540,805,781)
Increase in interest receivable..................................... (48,790)
Increase in payable for investments purchased....................... 102,285,872
Increase in accrued expenses........................................ 103,392
-------------
Cash used by operating activities....................................... $(439,000,000)
=============
--------------------
* The Fund's inception date was May 18, 2004.
** Includes unrealized depreciation of $(480,091).
See Notes to Financial Statements.
F-8
FINANCIAL HIGHLIGHTS
First Trust/Four Corners Senior Floating Rate Income Fund II
For a Common Share outstanding throughout the period.
PERIOD
ENDED
5/31/2004*
Net asset value, beginning of period.............................. $19.10
--------
Income from investment operation:
Net investment loss............................................... (0.00)#
Net unrealized loss on investments................................ (0.02)
--------
Total from investment operations.................................. (0.02)
--------
Common share offering cost charged to paid-in-capital............. (0.04)
--------
Net asset value, end of period.................................... $19.04
========
Market value, end of period....................................... $20.01
========
Total return based on net asset value(a)+......................... (0.31)%
========
Total return based on market value(b)+............................ 0.05%
========
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's).............................. $437,945
Ratio of operation expenses to average net assets................. 1.44%**
Ratio of net investment loss to average net assets................ (0.76)%**
Portfolio turnover rate........................................... 0.00%
--------------------
* The Fund's inception date was May 18, 2004.
** Annualized
(a) Total return on net asset value is the combinationof reinvested dividend
income and reinvestment capital gains distributions, at prices obtained
by the Dividend Reinvestment Plan, if any, and changes in net asset value
per share.
(b) Total return on market value is the combination of reinvested dividend
income and reinvested capital gains distributions, at prices obtained by
the Dividend Reinvestment Plan, if any, and changes in stock price per
share, all based on market price per share.
+ Total return is not annualized for periods less than one year and does not
reflect sales load.
# Amount represents less than $0.01 per share.
See Notes to Financial Statements.
F-9
NOTES TO FINANCIAL STATEMENTS
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2004
1. FUND DESCRIPTION
First Trust/Four Corners Senior Floating Rate Income Fund II (the
"Fund") is a diversified, closed-end management investment company organized as
a Massachusetts business trust on March 25, 2004 and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act").
The Fund's primary investment objective is to seek a high level of
current income. As a secondary objective, the Fund will attempt to preserve
capital. The Fund will pursue these objectives through investment in a portfolio
of senior secured floating rate corporate loans ("Senior Loans"). There can be
no assurance that the Fund will achieve its investment objectives. Investment in
Senior Loans involves credit risk and, during periods of generally declining
credit quality, it may be particularly difficult for the Fund to achieve its
secondary investment objective. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Portfolio Valuation:
The net asset value ("NAV") of the Common Shares of the Fund is
computed based upon the value of the Fund's portfolio and other assets. The NAV
is determined as of the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for
trading. Domestic debt securities and foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
The NAV is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of shares
outstanding.
The Fund's investments are valued daily at market value, or in the
absence of market value with respect to any portfolio securities, at fair value
in accordance with valuation procedures adopted by the Board of Trustees. A
majority of the Fund's assets are valued using market information supplied by
third parties. In the event that market quotations are not readily available,
the pricing service does not provide a valuation for a particular asset, or the
valuations are deemed unreliable, or if events occurring after the close of the
principal markets for particular securities (e.g., domestic debt and foreign
F-10
securities), but before the Fund values its assets, would materially affect net
asset value, First Trust Advisors L.P. ("First Trust") may use a fair value
method in good faith to value the Fund's securities and investments. The use of
fair value pricing by the Fund is governed by valuation procedures adopted by
the Fund's Board of Trustees, and in accordance with the provisions of the 1940
Act.
Portfolio securities listed on any exchange other than the NASDAQ
National Market ("NASDAQ") are valued at the last sale price on the business day
of which such value is being determined. If there has been no sale on such day,
the securities are valued at the mean of the most recent bid and asked prices on
such day. Securities trading on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on the NASDAQ, are
valued at the closing bid prices. Short-term investments that mature in 60 days
or less are valued at amortized cost.
The Senior Loans in which the Fund invests are not listed on any
securities exchange or board of trade. Senior Loans are typically bought and
sold by institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while having
substantially grown in the past several years, generally has fewer trades and
less liquidity than the secondary market for other types of securities. Some
Senior Loans have few or no trades, or trade infrequently, and information
regarding a specific Senior Loan may not be widely available or may be
incomplete. Accordingly, determinations of the market value of Senior Loans may
be based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically Senior
Loans are valued using information provided by an independent third party
pricing service. If the pricing service cannot or does not provide a valuation
for a particular Senior Loan or such valuation is deemed unreliable, First Trust
may value such Senior Loan at a fair value as determined in good faith under
procedures adopted by the Fund's Board of Trustees, and in accordance with the
provisions of the 1940 Act.
Repurchase Agreement:
The Fund engages in repurchase agreement transactions. Under the terms
of a typical repurchase agreement, the Fund takes possession of an underlying
debt obligation subject to an obligation of the seller to repurchase, and the
Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the collateral is at all times at least
equal to the total amount of the repurchase obligations, including interest. In
the event of counterparty default, the Fund has the right to use the collateral
to offset losses incurred. There is potential loss to the Fund in the event the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while the Fund seeks to assert its
rights. The Fund reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
F-11
Cash Flow Information:
The Fund issues its shares, invests in securities, and distributes
dividends from net investment income (which are either paid in cash or
reinvested at the discretion of shareholders). These activities are reported in
the Statement of Changes in Net Assets. Information on cash payments is
presented in the Statement of Cash Flows. Accounting practices that do not
affect reporting activities on a cash basis include unrealized gain or loss on
investment securities, and accretion/amortization of discount/premium recognized
on investment securities.
Securities Transactions and Investment Income:
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities transactions are recorded on the identified
cost basis. Interest income is recorded on the accrual basis. Market premiums
and discounts are amortized over the expected life of each respective borrowing.
Securities purchased or sold on a when-issued or delayed-delivery basis
may be settled a month or more after the trade date; interest income is not
accrued until settlement date. The Fund instructs the custodian to segregate
assets of the Fund with a current value at least equal to the amount of its
when-issued purchase commitments.
Unfunded Loan Commitments:
The Fund may enter into certain credit agreements, all or a portion of
which may be unfunded. The Fund is obligated to fund these loan commitments at
the borrower's discretion. These commitments are disclosed in the accompanying
Portfolio of Investments and Statement of Assets and Liabilities.
Dividends and Distributions to Shareholders:
The Fund will distribute to holders of its Common Shares monthly
dividends of all or a portion of its net income after the payment of interest
and dividends in connection with the leverage. If the Fund recognizes a
long-term capital gain, it will be required to allocate such gain between the
Common Shares and preferred shares, if any, issued by the Fund in proportion to
the total dividends paid for the year. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in
accordance with income tax regulations, which may differ from accounting
principles generally accepted in the United States of America. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. Permanent differences
incurred during the period ended May 31, 2004, resulting in book and tax
accounting have been reclassified at year end to reflect an increase to
accumulated net investment loss by $54,602 and a decrease to paid-in capital by
$54,602. Net assets were not affected by this reclassification.
F-12
As of May 31, 2004, the components of distributable earnings on a tax
basis were as follows:
Undistributed Ordinary Income.................. $ --
Accumulated Net Capital Gains.................. --
Unrealized Depreciation........................ (480,091)
Income Taxes:
The Fund intends to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, and by distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal or state income taxes.
Expenses:
The Fund will pay all expenses directly related to its operations.
Common Share Organizational and Offering Costs:
Organization costs consist of costs incurred to establish the Fund and
enable it to legally do business. These costs include incorporation fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial seed capital statement,
among other fees. Offering costs consist of legal fees pertaining to the Fund's
shares offered for sale, registration fees, underwriting fees, and printing of
initial prospectus, among other fees. First Trust and Four Corners Capital
Management, LLC ("Four Corners") have paid all organizational expenses and all
offering costs of the Fund (other than sales load) that exceed $0.04 per Common
Share. The Fund's share of Common Share offering costs, $920,000, were recorded
as a reduction of the proceeds from the sale of Common Shares.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger Corporation. First
Trust serves as investment advisor to the Fund pursuant to an Investment
Management Agreement. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
certain administrative services necessary for the management of the Fund. For
its investment advisory services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.75% of the Fund's Managed Assets, the average
daily gross asset value of the Fund minus the sum of the Fund's accrued and
unpaid dividends on any outstanding Preferred Shares and accrued liabilities.
Four Corners serves as the Fund's sub-adviser and manages the Fund's
portfolio subject to First Trust's supervision. Four Corners receives a
portfolio management fee of 0.38% of Managed Assets that is paid monthly by
First Trust out of the First Trust management fee.
F-13
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC
Financial Services Group Inc., serves as the Fund's Administrator and Transfer
Agent in accordance with certain fee arrangements. PFPC Trust Company, an
indirect, majority-owned subsidiary of The PNC Financial Services Group Inc.,
serves as the Fund's Custodian in accordance with certain fee arrangements.
No officer or employee of First Trust received any compensation from
the Fund for serving as an officer or Trustee of the Fund. The Fund pays each
Trustee who is not an officer or employee of First Trust or any of their
affiliates $10,000 per annum plus $1,000 per regularly scheduled meeting
attended, $500 per committee meeting attended and reimbursement for travel and
out-of-pocket expenses.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, for the period ended May 31, 2004, aggregated
amounts were $102,285,872 and $0, respectively.
As of May 31, 2004, the aggregate gross unrealized appreciation for all
securities, in which there was an excess of value over tax cost, was $3,126 and
the aggregate gross unrealized depreciation for all securities, in which there
was an excess of tax cost over value, was $483,217.
5. COMMON STOCK
As of May 31, 2004, 23,005,236 of $0.01 par value Common Shares were
issued. An unlimited number of Common Shares has been authorized under the
Fund's Dividend Reinvestment Plan.
6. PREFERRED SHARES OF BENEFICIAL INTEREST
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares of beneficial interest, par value $0.01 per share
(the "Preferred Shares"), in one or more classes or series, with rights as
determined by the Board of Trustees without the approval of Common Shareholders.
On May 31, 2004, no Preferred Shares had been issued; however, management
intends to recommend that the Board of Trustees of the Fund approve an issuance
of Preferred Shares at the July 26, 2004 meeting.
7. SENIOR LOANS
Senior Loans in the Fund's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions and
because there may be significant economic incentives for a Borrower to prepay,
prepayments of Senior Loans in the Fund's portfolio may occur. As a result, the
actual remaining maturity of Senior Loans held in the Fund's portfolio may be
substantially less than the stated maturities shown. Senior Loans generally have
maturities that range from five to eight years; however, the Fund estimates that
F-14
refinancings and prepayments result in an average maturity of the Senior Loans
held in its portfolio is generally between 18-36 months.
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 (i) the lending rate offered by
one or more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more major United States banks
or (iii) the certificate of deposit rate. Senior Loans are generally considered
to be restricted in that the Fund ordinarily is contractually obligated to
receive approval from the Agent Bank and/or Borrower prior to the disposition of
a Senior Loan.
8. REVOLVING SECURITIZATION FACILITY
Management of the Fund intends to recommend to the Board of Trustees at its July
26, 2004 meeting, that the Fund enter into a revolving securitization facility
among the Fund and certain primary and secondary lenders, which would provide
for a revolving credit facility to be used as leverage for the Fund. The credit
facility would provide for a secured line of credit for the Fund where Fund
assets are pledged against advances made to the Fund. Under the requirements of
the 1940 Act, the Fund, immediately after any such borrowings, must have an
"asset coverage" of at least 300% (33-1/3% of the Fund's total assets after
borrowings). The total commitment under the facility is expected to be up to
$175,000,000. There are no borrowings outstanding under a revolving
securitization facility as of May 31, 2004.
F-15
APPENDIX A
STATEMENT
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES
OF AUCTION MARKET PREFERRED SHARES
First Trust/Four Corners Senior Floating Rate Income Fund II (the
"Fund"), a Massachusetts business trust, certifies that:
FIRST, pursuant to the authority expressly vested in the Board of the
Fund by Article IV of the Fund's Declaration of Trust (which, as hereafter
restated or amended from time to time, is together with this Statement herein
called the "Declaration"), the Board of Trustees has, by resolution, authorized
the issuance of a class of Preferred Shares of beneficial interest, $.01 par
value ("Preferred Shares"), classified as "Auction Market Preferred Shares" or
"AMPS," with a liquidation preference of $25,000 per share;
SECOND, the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the AMPS are as follows:
DESIGNATION
Series A AMPS: 2,000 Preferred Shares, liquidation preference $25,000
per share, are designated "Series A AMPS." The initial Rate Period for the
Series A AMPS shall be the period from and including the Date of Original Issue
thereof to but excluding __________, 2004. The Series A AMPS shall have an
Applicable Rate for its initial Rate Period equal to ____% per annum and an
initial Dividend Payment Date of __________, 2004 and shall 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 Fund, as are set forth in Part I and Part II of this
Statement. The Series A AMPS shall constitute a separate series of Preferred
Shares of the Fund.
Series B AMPS: 2,000 Preferred Shares, liquidation preference $25,000
per share, are designated "Series B AMPS." The initial Rate Period for the
Series B AMPS shall be the period from and including the Date of Original Issue
thereof to but excluding __________, 2004. The Series B AMPS shall have an
Applicable Rate for its initial Rate Period equal to ____% per annum and an
initial Dividend Payment Date of __________, 2004 and shall 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 Fund, as are set forth in Part I and Part II of this
Statement. The Series B AMPS shall constitute a separate series of Preferred
Shares of the Fund.
A-1
Subject to the provisions of Section 11(c) of Part I hereof, the Board
of Trustees of the Fund may, in the future, authorize the issuance of additional
series of AMPS with the same preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption and other terms herein described, except that the Applicable Rate for
the initial Rate Period, the initial Dividend Payment Date and any other changes
in the terms herein set forth shall be as set forth in an amendment to this
Statement.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 17 of Part I.
PART I: AUCTION MARKET PREFERRED STOCK TERMS
1. Number of Shares; Ranking. (a) The initial number of authorized
shares constituting the Series A AMPS is 2,000 shares. The initial number of
authorized shares constituting the Series B AMPS is 2,000 shares. No fractional
shares of AMPS shall be issued.
(b) Shares of each Series, which at any time have been redeemed or
purchased by the Fund shall, after 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 AMPS) as to the payment of
dividends to which the shares are entitled and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund.
(d) No Holder of shares of any Series shall have, solely by reason of
being a Holder, any preemptive right, or, unless otherwise determined by the
Trustees other right to acquire, purchase or subscribe for any AMPS, Common
Shares of the Fund or other securities of the Fund 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 of Trustees, 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 the
Series issued on the Date of Original Issue shall accumulate from the Date of
Original Issue.
(b) (i) Dividends shall be payable when, as and if declared by the
Board of Trustees following the initial Dividend Payment Date, subject to
subparagraph (b)(ii) of this Section 2, on the shares of the Series, with
respect to any Rate Period on the first Business Day following the last day of
the Rate Period; provided, however, if the Rate Period is greater than 91 days
then on a monthly basis on the first Business Day of each month within the Rate
Period and on the Business Day following the last day of the Rate Period.
A-2
(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 that falls prior to such day for payment of
dividends.
(iii) The Fund 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 such shares on such Dividend Payment Date. The Fund 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, upon request and to the extent permitted by law, be
repaid to the Fund 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 that Series as their names appear on the share
ledger or share records of the Fund on the Business Day next preceding such
Dividend Payment Date. Dividends in arrears for any past Rate Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the share ledger or share records
of the Fund on such date, not exceeding 15 days preceding the payment date
thereof, as may be fixed by the Board of Trustees. 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 Rate Period therefor shall be equal to the rate per annum set
forth under "Designation" above. For each subsequent Rate Period with respect to
each Series thereafter, the dividend rate shall be equal to the rate per annum
that results from an Auction; provided, however, that if Sufficient Clearing
Bids have not been made in an Auction (other than as a result of any Series
being the subject of Submitted Hold Orders), then the dividend rate on the
shares of that Series for any such Rate 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 Rate Period when the dividend rate shall be the
Maximum Rate at the close of business on the last day of such Default Period).
If the Fund has declared a Special Rate Period and there are not
Sufficient Clearing Bids, the dividend rate for the next rate period will be the
same as during the current rate period. If as a result of an unforeseeable
disruption of the financial markets, an Auction cannot be held for a period of
more than three business days, the dividend rate for the subsequent Rate Period
will be the same as the dividend rate for the current Rate Period.
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(ii) Subject to the cure provisions below, a "Default Period" with
respect to a particular Series will commence on any date the Fund 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, hereinafter referred to as "Default"). Subject
to the cure provisions of Section 2(c)(iii) below, 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 trust in same-day
funds with the Paying Agent. In the case of a Dividend Default, the Applicable
Rate for each Rate Period commencing during a Default Period will be equal to
the Default Rate, and each subsequent Rate Period commencing after the beginning
of a Default Period shall be a Standard Rate Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Rate Period. No Auction shall be held during a Default Period applicable to
that Series.
(iii) 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 for each Series. 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 Rate Period (or in respect of dividends on another
date in connection with a redemption during such Rate Period) shall be computed
by multiplying the Applicable Rate (or the Default Rate) for such Rate Period
(or a portion thereof) by a fraction, the numerator of which will be the number
of days in such Rate 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 for the Series, 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 Shares.
(e) For so long as any AMPS are Outstanding, except as contemplated by
Part I of this Statement, 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 of beneficial interest, if any,
ranking junior to the AMPS as to dividends or upon liquidation) in respect to
Common Shares or any other shares of the Fund ranking junior to or on a parity
with the AMPS as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Fund ranking junior to the AMPS as to dividends and upon liquidation) or any
such parity shares (except by conversion into or exchange for shares of the Fund
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ranking junior to or on a parity with the AMPS 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) full cumulative and unpaid dividends on
the AMPS due on or prior to the date of the transaction have been declared and
paid in full and (iii) the Fund has redeemed the full number of shares of
Preferred Stock required to be redeemed by any provision for mandatory
redemption contained in Section 3(a)(ii) of this Statement.
(f) For so long as any AMPS are Outstanding, except as set forth in the
next sentence, the Fund will not declare, pay or set apart for payment any
dividend on any series of stock of the Fund ranking, as to the payment of
dividends, on a parity with the AMPS for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on each Series
through their most recent Dividend Payment Date. When dividends are not paid in
full upon the AMPS through their most recent Dividend Payment Dates or upon any
other series of stock ranking on a parity as to the payment of dividends with
AMPS through their most recent respective Dividend Payment Dates, all dividends
declared upon the AMPS and any other such series of stock ranking on a parity as
to the payment of dividends with the AMPS will be declared pro rata so that the
amount of dividends declared per share on the AMPS and such other series of
preferred stock ranking on a parity therewith will in all cases bear to each
other the same ratio that accumulated dividends per share on the AMPS and such
other series of preferred stock ranking on a parity therewith bear to each
other.
3. Redemption. (a) (i) After the initial Rate Period, subject to the
provisions of this Section 3 and to the extent permitted under the 1940 Act and
Massachusetts law, the Fund 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 Rate Period of one year or less, on the Business Day after the last
day of such Rate Period by delivering a notice of redemption to the Auction
Agent not less than 15 calendar days and not more than 40 calendar days prior to
the date fixed for such redemption, 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 date fixed for redemption
("Redemption Price"), or (B) having a Rate Period of more than one year, on any
Business Day prior to the end of the relevant Rate Period by delivering a notice
of redemption to the Auction Agent not less than 15 calendar days and not more
than 40 calendar days prior to the date fixed for such redemption, at the
Redemption Price, plus 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 at the time of the designation of such
Rate Period as set forth in Section 4 of this Statement; provided, however, that
during a Rate Period of more than one year, no shares of the Series will be
subject to optional redemption except in accordance with any Specific Redemption
Provisions approved by the Board of Trustees after consultation with the
Broker-Dealers at the time of the designation of such Rate Period.
Notwithstanding the foregoing, the Fund shall not give a notice of or effect any
redemption pursuant to this Section 3(a)(i) unless, on the date on which the
Fund intends to give such notice and on the date of redemption (a) the Fund has
available certain Deposit Securities with maturity or tender dates not later
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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 each
Series by reason of the redemption of each Series on such date fixed for the
redemption and (b) the Fund 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 Fund makes
the deposit and takes the other action required thereby.
(ii) If the Fund fails to maintain, as of any Valuation Date, Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount 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 such Valuation Date in the case of a failure to maintain
the Preferred Shares Basic Maintenance Amount or on the last Business Day of the
following month in the case of a failure to maintain the 1940 Act Preferred
Shares Asset Coverage as of such last Business Day (each an "Asset Coverage Cure
Date"), the AMPS will be subject to mandatory redemption out of funds legally
available therefor. The number of AMPS to be redeemed in such circumstances will
be equal to the lesser of (A) the minimum number of AMPS 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 having
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount, or sufficient to satisfy 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 AMPS then
Outstanding will be redeemed), and (B) the maximum number of AMPS 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)(iii) of this Section 3.
(iii) In determining the AMPS required to be redeemed in accordance with
the foregoing Section 3(a)(ii), the Fund shall 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 Holders of AMPS in proportion to the number of shares they hold and
shares of other Preferred Shares subject to mandatory redemption provisions
similar to those contained in this Section 3, subject to the further provisions
of this subparagraph (iii). The Fund shall effect any required mandatory
redemption pursuant to subparagraph (a)(ii) of this Section 3 no later than 30
days after the Fund last satisfied the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage (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, the number of
AMPS which would be required to be redeemed by the Fund under clause (A) of
subparagraph (a)(ii) of this Section 3 if sufficient funds were available,
together with shares of other Preferred Shares which are subject to mandatory
redemption under provisions similar to those contained in this Section 3, or the
Fund otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Fund shall redeem those AMPS, and shares of other Preferred
Shares which it was unable to redeem, on the earliest practicable date on which
the Fund will have such funds available, upon notice pursuant to Section 3(b) to
record owners of the AMPS to be redeemed and the Paying Agent. The Fund will
deposit with the Paying Agent funds sufficient to redeem the specified number of
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AMPS with respect to a redemption required under subparagraph (a)(ii) of this
Section 3, by 1:00 p.m., New York City time, on the Business Day immediately
preceding the Mandatory Redemption Date. If fewer than all of the Outstanding
AMPS are to be redeemed pursuant to this Section 3(a)(iii), 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 Fund 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 Rate 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 Section 3(a), the Fund
will file a notice of its intention to redeem with 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 Fund 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 subparagraph (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 subparagraph
(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 notice to
each Holder of shares of a Series called for redemption by electronic or other
reasonable means 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 Fund). The
Auction Agent shall confirm such 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 a Series at their addresses appearing on the share records
of the Fund. Such Notice of Redemption will set forth (i) the date fixed for
redemption, (ii) the number and identity of shares of a 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 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,
but subject to Section 7(f), no preferred stock, including the AMPS may be
redeemed unless all dividends in arrears on the Outstanding AMPS and all shares
of beneficial interest of the Fund ranking on a parity with the AMPS with
respect to payment of dividends or upon liquidation, 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 all Outstanding AMPS
pursuant to the successful completion of an otherwise lawful purchase or
A-7
exchange offer made on the same terms to, and accepted by, Holders of all
Outstanding AMPS.
(d) Upon the deposit of funds on the date fixed for redemption
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 Fund has maintained the
requisite Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage), and all rights of the Holder 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. Upon written request, 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 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 Fund upon its written request, after which time the Holders
of shares of any Series so called for redemption may look only to the Fund for
payment of the redemption price and all other amounts, if any, to which they may
be entitled.
(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. 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 Fund 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 Fund may not have redeemed shares of any Series for which a
Notice of Redemption has been given, dividends may be declared and paid on 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 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 Statement limits any right of the Fund to purchase or otherwise acquire any
shares of each Series outside of an Auction at any price, whether higher or
A-8
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 each Series 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 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 shares of any Series
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.
(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, Sections 2(e), 6(f) and 11 of Part I hereof, the Board of Trustees
may authorize, create or issue any class or series of shares of beneficial
interest, including other series of AMPS, ranking prior to or on a parity with
the AMPS with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Fund, to the
extent permitted by the 1940 Act, as amended, if, upon issuance, the net
proceeds from the sale of such stock (or such portion thereof needed to redeem
or repurchase the Outstanding AMPS) are deposited with the Paying Agent in
accordance with Section 3(d) of Part I of this Statement, a Notice of Redemption
as contemplated by Section 3(b) of Part I of this Statement has been delivered
prior thereto or is sent promptly thereafter, and such proceeds are used to
redeem all Outstanding AMPS.
4. Designation of Rate Period. (a) The initial Rate Period for each
series is as set forth under "Designation" above. The Fund will designate the
duration of subsequent Rate Periods of each series; provided, however, that no
such designation is necessary for a Standard Rate Period and, provided further,
that any designation of a Special Rate 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, AMPS shall have been cured as provided above, (iii)
Sufficient Clearing Bids shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Rate Period,
(iv) if the Fund shall have mailed a Notice of Redemption with respect to any
shares, the redemption price with respect to such shares shall have been
deposited with the Paying Agent, (v) in the case of the designation of a Special
Rate Period, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or any
successor Broker-Dealer designated by the Fund, shall have notified the Fund in
writing that it does not object to the designation of such Special Rate Period
and (vi) each Rating Agency will have confirmed in writing to the Fund that such
designation will not adversely affect their respective then-current ratings of
the AMPS.
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(b) If the Fund proposes to designate any Special Rate Period, not
fewer than seven (or two Business Days in the event the duration of the Rate
Period prior to such Special Rate Period is fewer than eight days) nor more than
30 Business Days prior to the first day of such Special Rate Period, notice
shall be (i) made by press release and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and each Broker-Dealer 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 Rate
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 Rate 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 Rate Period, subject to the
terms of any Specific Redemption Provisions, or (y) its determination not to
proceed with such Special Rate Period, in which latter event the succeeding Rate
Period shall be a Standard Rate 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 Rate 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 Rate Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to
exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate 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 Rate Period, the Fund shall be
deemed to have delivered a notice to the Auction Agent with respect to such Rate
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Rate 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 Fund 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,
herein 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 each Series held on
each matter submitted to a vote of shareholders of the Fund, and (ii) the
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Holders of Outstanding Preferred Shares, including the AMPS, 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 Fund held for
the election of Trustees, the holders of Outstanding Preferred Shares, including
the AMPS, 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 Fund, to elect two Trustees of the Fund,
each Preferred Share, including each of the AMPS, entitling the holder thereof
to one vote. The identity of the nominees of such Trustees may be fixed by the
Board of Trustees. Subject to paragraph (b) of this Section 6, the holders of
Outstanding Common Shares and Preferred Shares, including the AMPS, voting
together as a single class, shall elect the balance of the Trustees.
(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 of Trustees shall be
automatically increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of Preferred Shares, including the
AMPS, would constitute a majority of the Board of Trustees as so increased by
such smallest number; and the holders of Preferred Shares, including the AMPS,
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 the
Fund), 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 equal to at least two full years' dividends shall be due and
unpaid; or
(ii) if at any time holders of any Preferred Shares are
entitled under the 1940 Act to elect a majority of the Trustees of the
Fund.
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 shares of Preferred Shares,
including the AMPS, 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 each Series, to elect additional Trustees
as described in paragraph (b) of this Section 6, the Fund shall notify the
Auction Agent, and the Auction Agent shall instruct the Trustee to call a
special meeting of such holders, and mail a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 30 days
after the date of mailing of such notice. If the Fund fails to send such notice
to the Auction Agent or if a special meeting is not called, it may be called by
any such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting of holders of Preferred
Shares, including the AMPS, held during a Voting Period at which Trustees are to
be elected, such holders, voting together as a class (to the exclusion of the
A-11
holders of all other securities and classes of capital stock of the Fund), 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 terms of office of all persons who are Trustees of the Fund at
the time of a special meeting of holders of the AMPS and holders of other
Preferred Shares to elect Trustees shall continue, notwithstanding the election
at such meeting by the holders and such other holders of the number of Trustees
that they are entitled to elect, and the persons so elected by 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
Fund.
(e) Simultaneously with the termination of a Voting Period, the terms
of office of the additional directors elected by the Holders of the AMPS 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
Fund 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.
(f) So long as any of the shares of Preferred Shares, including the
AMPS, are Outstanding, the Fund will not, without the affirmative vote of the
holders of a majority of the Outstanding Preferred Shares determined with
reference to a "majority of outstanding voting securities" as that term is
defined in Section 2(a)(42) of the 1940 Act, voting as a separate class, (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 as
defined in Section 6(h) below; (ii) increase the authorized number of shares of
Preferred Shares; (iii) create, authorize or issue shares of any class of shares
of beneficial interest ranking senior to or on a parity with the Preferred
Shares with respect to the payment of dividends or the distribution of assets,
or any securities convertible into, or warrants, options or similar rights to
purchase, acquire or receive, such shares of beneficial interest ranking senior
to or on a parity with the Preferred Shares or reclassify any authorized shares
of beneficial interest of the Fund into any shares ranking senior to or on a
parity with the Preferred Shares (except that, notwithstanding the foregoing,
but subject to the provisions of either Section 3(j) or 11, as applicable, the
Board of Trustees, without the vote or consent of the holders of the Preferred
Shares, including the AMPS, may from time to time authorize, create and
classify, and the Fund may from time to time issue, shares or series of
Preferred Shares, including other series of AMPS or additional shares of
existing series of AMPS, ranking on a parity with the AMPS with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up to the affairs of the Fund, and may authorize,
reclassify and/or issue any additional AMPS, including shares previously
purchased or redeemed by the Fund, subject to continuing compliance by the Fund
with 1940 Act Preferred Shares Asset Coverage and Preferred Shares Basic
Maintenance Amount requirements); (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
A-12
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 futures contracts or options thereon, interest rate swap
or cap transactions, forward rate transactions, put or call options, short sales
of securities or other similar transactions; (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 custodian 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.
(g) The affirmative vote of the holders of a majority of the
Outstanding Preferred Shares, including the AMPS, 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 Fund under Section 13(a) of the 1940 Act. For the
purposes of the foregoing, a "majority of the Outstanding Preferred Shares"
means (i) 67% or more of such shares present at a meeting, if the holders of
more than 50% of such shares are present or represented by proxy, or (ii) more
than 50% of such shares, whichever is less. In the event a vote of holders of
shares of Preferred Shares 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 Moody's (if Moody's is then
rating the Series of AMPS), S&P (if S&P is then rating the Series of AMPS) and
any Other Rating Agency which is then rating the Series of AMPS and which so
requires 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 Moody's, S&P and any such
Other Rating Agency, as applicable, of the results of such vote.
(h) The affirmative vote of the holders of a majority of the
Outstanding shares of any series of Preferred Shares, including the AMPS, 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 of classes of the Fund's
shares of beneficial interest. For the purposes of the foregoing, a "majority of
the Outstanding Preferred Shares" means (i) 67% or more such shares present at a
meeting, if the holders of more than 50% of such shares are present or
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represented by proxy, or (ii) more than 50% of such shares, whichever is less.
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 shares described in this Section 6(h) 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.
(i) The Board of Trustees without the vote or consent of any holder of
Preferred Shares, including the AMPS, or any other shareholder of the Fund, may
from time to time adopt, amend, alter or repeal any or all of the definitions of
the terms listed below, or any provision of this Statement viewed by S&P as a
predicate for any such definition, and any such amendment, alteration or repeal
will not be deemed to affect the preferences, rights or powers of any Series of
AMPS or the Holders thereof; provided, however, that the Board of Trustees
receives written confirmation from S&P (such confirmation being required to be
obtained only in the event S&P is rating the Series of AMPS and in no event
being required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value and Receivables for Obligations Sold as such terms
apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P Eligible Asset,
S&P Exposure Period and S&P Volatility Factor) that any such amendment,
alteration or repeal would not impair the ratings then assigned by S&P, as the
case may be, to the Series of AMPS:
Deposit Securities Preferred Shares Basic Maintenance Amount
Discounted Value Preferred Shares Basic Maintenance Report
Escrowed Bonds Receivables for Obligations Sold
Market Value S&P Eligible Assets
S&P Discount Factor S&P Volatility Factor
S&P Exposure Period Valuation Date
Asset Coverage Cure Date Volatility Factor
1940 Act Preferred Shares Asset Coverage
In addition, subject to compliance with applicable law, the Board of
Trustees 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 the Preferred
Shares, including the AMPS, or any other shareholder of the Fund, and without
receiving any confirmation from any rating agency 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.
A-14
(j) Unless otherwise required by law, Holders of AMPS shall not have
any relative rights or preferences or other special rights other than those
specifically set forth herein. The Holders of AMPS shall have no rights to
cumulative voting. If the Fund fails to pay any dividends on the AMPS, the
exclusive remedy of the Holders shall be the right to vote for Trustees pursuant
to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with respect to the
AMPS 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) Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of shares of Preferred Stock, including each Series, then Outstanding,
together with holders of shares of any class of shares ranking on a parity with
each Series upon dissolution, liquidation or winding up, shall be entitled to
receive and to be paid out of the assets of the Fund (or the proceeds thereof)
available for distribution to its shareholders after satisfaction of claims of
creditors of the Fund an amount equal to the liquidation preference with respect
to such shares. The liquidation preference for the AMPS shall be $25,000 per
share, plus an amount equal to all accumulated dividends thereon (whether or not
earned or declared but without interest) to the date payment of such
distribution is made in full or a sum sufficient for the payment thereof is set
apart with the Paying Agent. No redemption premium shall be paid upon any
liquidation even if such redemption premium would be paid upon optional or
mandatory redemption of the relevant shares.
(b) If, upon any liquidation, dissolution or winding up of the affairs
of the Fund, whether voluntary or involuntary, the assets of the Fund available
for distribution among the holders of all outstanding Preferred Shares,
including the AMPS, shall be insufficient to permit the payment in full to
holders of the amounts to which they are entitled, then the available assets
shall be distributed among the holders of all outstanding Preferred Shares,
including the AMPS, ratably in any distribution of assets according to the
respective amounts which would be payable on all the shares if all amounts
thereon were paid in full.
(c) Upon the dissolution, liquidation or winding up of the affairs of
the Fund, whether voluntary or involuntary, until payment in full is made to the
holders of the AMPS of the liquidation distribution to which they are entitled,
no dividend or other distribution shall be made to the holders of Common Shares
or any other class of shares of beneficial interest of the Fund ranking junior
to the AMPS upon dissolution, liquidation or winding up and no purchase,
redemption or other acquisition for any consideration by the Fund shall be made
in respect of the Common Shares or any other class of shares of beneficial
interest of the Fund ranking junior to the AMPS upon dissolution, liquidation or
winding up.
(d) A consolidation, reorganization or merger of the Fund with or into
any other trust or company, or a sale, lease or exchange of all or substantially
all of the assets of the Fund in consideration for the issuance of equity
securities of another trust or company shall not be deemed to be a liquidation,
dissolution or winding up, whether voluntary or involuntary, for the purposes of
this Section 7.
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(e) After the payment to the holders of Preferred Shares, including
AMPS, of the full preferential amounts provided for in this Section 7, the
holders of Preferred Shares, including AMPS, as such shall have no right or
claim to any of the remaining assets of the Fund.
(f) If the assets of the Fund or proceeds thereof available for
distribution to the Holders of AMPS, upon any dissolution, liquidation or
winding up of the affairs of the Fund, 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 class or series of Preferred Shares
ranking on a parity with the AMPS unless proportionate distributive amounts
shall be paid on account of the AMPS, ratably, in proportion to the full
distributable amounts to which holders of all such parity shares are entitled
upon such dissolution, liquidation or winding up.
(g) Subject to the rights of the holders of shares of any series or
class or classes of stock ranking on a parity with the AMPS with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, after payment shall have been made in full to the holders
of the AMPS as provided in paragraph (a) of this Section 7, but not prior
thereto, any other series or class or classes of stock ranking junior to the
AMPS with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund 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 AMPS shall not be
entitled to share therein.
8. Auction Agent. For so long as any AMPS are Outstanding, the Auction
Agent, duly appointed by the Fund to so act, shall be in each case a commercial
bank, trust company or other financial institution independent of the Fund and
its Affiliates (which, however, may engage or have engaged in business
transactions with the Fund or its Affiliates) and at no time shall the Fund 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 AMPS are Outstanding, the Fund 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 Fund shall maintain,
as of the last Business Day of each month in which any shares of the AMPS are
Outstanding, asset coverage with respect to the AMPS which is equal to or
greater than the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) shall be the sole remedy if the Fund fails to do so.
10. Preferred Shares Basic Maintenance Amount. So long as the AMPS are
Outstanding and Moody's, S&P or any Other Rating Agency which so requires is
then rating the shares of the AMPS, the Fund shall maintain, as of each
Valuation Date, Moody's Eligible Assets (if Moody's is then rating the AMPS),
S&P Eligible Assets (if S&P is then rating the AMPS) and (if applicable) Other
Rating Agency Eligible Assets 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 Fund fails to do
so.
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11. Additional Restrictions Applicable Only When AMPS are Rated by S&P
and/or Moody's. Except as otherwise permitted by the then-current guidelines of
S&P (if S&P is then rating the AMPS) and/or Moody's (if Moody's is then rating
the AMPS), for so long as any AMPS are outstanding and S&P and/or Moody's are
rating such shares, the Fund will not, unless it has received written
confirmation from S&P and/or Moody's that any such action would not impair the
rating then assigned by such rating agency to such shares, engage in any one or
more of the following transactions:
(a) buy or sell futures or write put or call options, except
as permitted by S&P Hedging Transactions;
(b) borrow money, except that the Fund may, without obtaining
the written confirmation described above, borrow money for the purpose
of clearing securities transactions if (i) the Preferred Shares Basic
Maintenance Amount would continue to be satisfied after giving effect
to such borrowing and (ii) such borrowing (A) is privately arranged
with a bank or other person and is evidenced by a promissory note or
other evidence of indebtedness that is not intended to be publicly
distributed or (B) is for "temporary purposes," is evidenced by a
promissory note or other evidence of indebtedness and is in an amount
not exceeding 5 per centum of the value of the total assets of the Fund
at the time of the borrowing; for purposes of the foregoing, "temporary
purpose" means that the borrowing is to be repaid within sixty days and
is not to be extended or renewed;
(c) issue additional AMPS or any class or series of shares
ranking prior to or on a parity with AMPS with respect to the payment
of dividends or the distribution of assets upon dissolutions,
liquidation or winding up of the Fund, or reissue any AMPS previously
purchased or redeemed by the Fund;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the applicable Pricing Service; or
(h) enter into reverse repurchase agreements.
For so long as AMPS are rated by Moody's: (A) the Fund will not engage
in options transactions for leveraging or speculative purposes; (B) the Fund
will not write or sell any anticipatory contracts pursuant to which the Fund
hedges the anticipated purchase of an asset prior to completion of such
purchase; (C) the Fund will not enter into an option transaction with respect to
portfolio securities unless, after giving effect thereto, the Fund would
continue to have Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount; (D) the Fund will
not enter into an option transaction with respect to portfolio securities unless
after giving effect to such transaction the Fund would continue to be in
A-17
compliance with the provisions relating to the Preferred Shares Basic
Maintenance Amount; (E) for purposes of the Preferred Shares Basic Maintenance
Amount assets in margin accounts are not Eligible Assets; (F) the Fund shall
write only exchange-traded options on exchanges approved by Moody's; (G) where
delivery may be made to the Fund with any of a class of securities, the Fund
shall assume for purposes of the Preferred Shares Basic Maintenance Amount that
it takes delivery of that security which yields it the least value; (H) the Fund
will not engage in forward contracts; and (I) there shall be quarterly audit
made of the Fund's options transactions by the Funds' independent accountants to
confirm that the Fund is in compliance with these standards.
For purposes of valuation of Moody's Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of AMPS, at the lower of the Discounted
Value of the underlying security of the option and the exercise price of the
option or (2) otherwise, it has no value; (B) if the Fund writes a put option,
the underlying asset will be valued as follows: the lesser of (1) exercise price
and (2) the Discounted Value of the underlying security; and (C) call or put
option contracts which the Fund buys have no value.
12. Compliance Procedures for Asset Maintenance Tests. For so long as
any AMPS are Outstanding and Moody's, S&P or any Other Rating Agency which so
requires is then rating such shares:
(a) As of each Valuation Date, the Fund shall determine in
accordance with the procedures specified herein the assets of the Fund,
the Market Value and the Discounted Value thereof (seriatim and in
aggregate), the Preferred Shares Basic Maintenance Amount, total price,
NAV, and total return.
(b) Upon any failure to maintain the required Preferred
Shares Basic Maintenance Amount or 1940 Act Preferred Shares Asset
Coverage on any Valuation Date, the Fund 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), subject to the fiduciary obligations of the
Board of Trustees, to reattain (or certify in the case of a failure to
file on a timely basis, as the case may be) the required Preferred
Shares Basic Maintenance Amount or 1940 Act Preferred Shares Asset
Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the Preferred Shares Basic Maintenance
Amount and 1940 Act Preferred Shares Asset Coverage tests shall be
determined with reference to those Preferred Shares which are deemed to
be Outstanding hereunder.
(d) The Fund shall deliver to Moody's (if Moody's is then
rating the AMPS), S&P (if S&P is then rating the AMPS) and any Other
Rating Agency which is then rating the AMPS and when so requires a
certificate signed by the President, or Chief Financial Officer of the
Fund which sets forth, as of the related Valuation Date, the assets of
the Fund, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), the Preferred Shares Basic Maintenance Amount, trade
A-18
price, NAV, and total return (a "Preferred Shares Basic Maintenance
Report"). Such Preferred Shares Basic Maintenance Report shall be
delivered on or before the fifth Business Day following the Date of
Original Issue and on or before the third Business Day after a
valuation date on which the Fund failed to satisfy the Preferred Shares
Basic Maintenance Amount. It shall also be delivered to S&P (if S&P is
rating AMPS): (i) as of the last valuation date of each month; (ii)
when the S&P Eligible Assets have a discounted value less than or equal
to 110% of the Preferred Shares Basic Maintenance Amount; (iii) upon
any redemptions; and (iv) when requested by S&P. The Fund shall deliver
the Preferred Shares Basic Maintenance Report to the Auction Agent as
of the dates referenced in this Section 12(d) in the event action would
be required to be taken, or may be taken, by the Auction Agent in
connection therewith.
(e) The Fund shall deliver to the Auction Agent, Moody's (if
Moody's is then rating the AMPS), S&P (if S&P is then rating the AMPS)
and any Other Rating Agency which is then rating the AMPS and which so
requires, a certificate with respect to the calculation of the 1940 Act
Preferred Shares Asset Coverage and the value of the portfolio holdings
of the Fund ("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 quarter thereafter, and (B) as of the Business
Day on or before the Asset Coverage Cure Date relating to the failure
to satisfy 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 or before the fifth Business Day following the
Date of Original Issue and in the case of clause (ii) on or before the
third Business Day after a valuation on date on which the Fund failed
to satisfy the Preferred Shares Basic Maintenance Amount. The
certificates of (d) and (e) of this Section 12 may be combined into a
single certificate.
(f) Within fifteen Business Days of the Date of Original
Issue, the Fund shall deliver to the Auction Agent, Moody's (if Moody's
is then rating the AMPS), S&P (if S&P is then rating the AMPS) and any
Other Rating Agency which is then rating the AMPS and which so
requires, a letter prepared by the Fund's independent accountants (an
"Accountant's Certificate") regarding the accuracy of the calculations
made by the Fund in the Preferred Shares Basic Maintenance Report and
the 1940 Act Preferred Shares Asset Coverage Certificate required to be
delivered by the Fund as of the Date of Original Issue. Within ten
Business Days after the last Valuation Date of each fiscal year of the
Fund on which a Preferred Shares Basic Maintenance Report is required
to be delivered, the Fund will deliver to the Auction Agent, Moody's
(if Moody's is then rating the AMPS), S&P (if S&P is then rating the
AMPS) and any Other Rating Agency which is then rating the AMPS and
which so requires, an Accountant's Certificate regarding the accuracy
of the calculations made by the Fund in such Preferred Shares Basic
Maintenance Report and in any other Preferred Shares Basic Maintenance
Report randomly selected by the Fund's independent accountants during
such fiscal year. Within ten Business Days after the last Valuation
Date of each fiscal year of the Fund on which a 1940 Act Preferred
Shares Asset Coverage Certificate is required to be delivered, the Fund
will deliver to the Auction Agent, Moody's (if Moody's is then rating
the AMPS), S&P (if S&P is then rating the AMPS) and any Other Rating
A-19
Agency which is then rating the AMPS and which so requires, an
Accountant's Certificate regarding the accuracy of the calculations
made by the Fund in such 1940 Act Preferred Shares Asset Coverage
Certificate. In addition, the Fund will deliver to the relevant persons
specified in the preceding sentence an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund on each
Preferred Shares Basic Maintenance Report and 1940 Act Preferred Shares
Asset Coverage Certificate delivered pursuant to paragraph (d) or
clause (ii)(B) of paragraph (e) of this Section 12, as the case may be,
within ten days after the relevant Asset Coverage Cure Date. If an
Accountant's Certificate delivered with respect to an Asset Coverage
Cure Date shows an error was made in the Fund's report with respect to
such Asset Coverage Cure Date, the calculation or determination made by
the Fund's independent accountants will be conclusive and binding on
the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the
calculation or determination made by the Fund's independent accountants
will be conclusive and binding on the Fund; provided, however, any
errors shown in the Accountant's Certificate filed on a yearly basis
shall not be deemed to be a failure to maintain the Preferred Shares
Basic Maintenance Amount on any prior Valuation Dates.
(g) The Accountant's Certificates referred to in paragraph
(f) will confirm, based upon the independent accountant's review, (i)
the mathematical accuracy of the calculations reflected in the related
Preferred Shares Basic Maintenance Amount and 1940 Act Preferred Shares
Asset Coverage Certificates, as the case may be, and (ii) that the Fund
determined whether the Fund had, at such Valuation Date, Eligible
Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount in accordance with the
Declaration.
(h) In the event that a Preferred Shares Basic Maintenance
Report 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 12, the Fund shall be deemed to
have failed to maintain the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, on
such Valuation Date for purposes of Section 12(b). If a Preferred
Shares Basic Maintenance Report or 1940 Act Preferred Shares Asset
Coverage Certificate or the applicable Accountant's Certificates with
respect to an applicable Asset Coverage Cure Date are not delivered
within the time periods specified herein, the Fund shall be deemed to
have failed to have Eligible Assets with an aggregate Discounted Value
at least equal to the Preferred Shares Basic Maintenance Amount or the
1940 Preferred Shares Asset Coverage, as the case may be, as of the
related Valuation Date, and such failure shall be deemed not to have
been cured as of such Asset Coverage Cure Date for purposes of the
mandatory redemption provisions.
12A. Compliance Procedures for S&P. The Fund agrees to provide S&P with
no less than 30 days' notification of: (i) any material changes to the Fund's
organizational documents and material contracts, (ii) any Redemptions, or (iii)
any failed Auctions. The Fund further agrees to provide to S&P an audited
financial statement for its fiscal year.
A-20
13. Notice. All notices or communications hereunder, unless otherwise
specified in this Statement, shall be sufficiently given if in writing and
delivered in person, by telecopier, by electronic means or mailed by first-class
mail, postage prepaid. Notices delivered pursuant to this Section 13 shall be
deemed given on the earlier of the date received or the date five days after
which such notice is mailed.
14. Waiver. Holders of a majority of the Outstanding Preferred Shares,
including the AMPS, acting collectively or voting separately from any other
series, may by affirmative vote 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 of Trustees. For the purposes of the foregoing, a
"majority of the Outstanding Preferred Shares" means (i) 67% or more such shares
present at a meeting, if the holders of more than 50% of such shares are present
or represented by proxy, or (ii) more than 50% of such shares, whichever is
less.
15. Termination. If 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 Fund under this Statement, shall
terminate.
16. Amendment. Subject to the provisions of this Statement, the Board
of Trustees may, by resolution duly adopted, without shareholder approval
(except as otherwise provided by this Statement or required by applicable law),
amend this Statement to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of Preferred Shares or
additional shares of a series of Preferred Shares (and terms relating thereto)
to the series and Preferred Shares theretofore described thereon. All such
additional shares shall be governed by the terms of this Statement, except as
set forth in such amendment with respect to such additional shares. To the
extent permitted by applicable law, the Board of Trustees may interpret, amend
or adjust the provisions of this Statement to resolve any inconsistency or
ambiguity or to remedy any defect.
17. Definitions. As used in Part I and Part II of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
(a) "Accountant's Certificate" has the meaning set forth in
Section 12(f) of this Part I.
(b) "Affiliate" means any person controlled by, in control of
or under common control with the Fund; provided that no Broker-Dealer
controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any
person controlled by, in control of or under common control with such
corporation, one of the trustees, directors or executive officers of
which is also a Trustee of the Fund be deemed to be an Affiliate solely
because such Trustee, director or executive officer is also a Trustee
of the Fund.
(c) "Agent Member" means a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
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(d) "Applicable Percentage" means the percentage determined
based on the credit rating assigned to the series of AMPS on such date
by Moody's (if Moody's is then rating the AMPS) and S&P (if S&P is then
rating the AMPS) as follows:
Credit Ratings for Preferred Shares
----------------------------------- Applicable
Moody's S&P Percentage
--------- --------- ----------
"Aaa" "AAA" 125%
"Aa3" to "Aa1" "AA-" to "AA+" 150%
"A3 to "A1" "A-" to "A+" 200%
"Baa3" to "Baa1" "BBB-" to "BBB+" 250%
"Ba1" and below "BB+" and below 300%
In the case of a special rate period, the Applicable
Percentage is determined on the day that a notice of a special rate
period is delivered if the notice specifies a Maximum Rate for a
special rate period. The Applicable Percentage will be determined based
on the lower of the credit rating or ratings assigned to the AMPS by
Moody's and S&P. If Moody's or S&P or both shall not make such ratings
available, the rate shall be determined by reference to equivalent
ratings issued by a substitute rating agency.
The Applicable Percentage as so determined will be further
subject to upward but not downward adjustment in the discretion of the
Board of Trustees after consultation with the Broker-Dealers, provided
that that immediately following any such increase the Fund would be in
compliance with the Preferred Shares Basic Maintenance Amount. The Fund
will take all reasonable action necessary to enable either Moody's or
S&P to provide a rating for each series of AMPS. If neither Moody's nor
S&P will make such a rating available, the Fund will select another
Rating Agency to act as a substitute Rating Agency.
(e) "Applicable Rate" means, with respect to each Series for
each Rate 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, and (iii) in the case of any Rate Period if all the
shares of a Series are the subject of Submitted Hold Orders for the
Auction in respect thereof, 90% of the Reference Rate corresponding to
that Series.
(f) "Applicable Spread" means the spread determined based on
the credit rating assigned to the series of Preferred Shares on such
date by Moody's (if Moody's is then rating the AMPS) and S&P (if S&P is
then rating the AMPS) as follows:
A-22
Credit Ratings for Preferred Shares
----------------------------------- Applicable
Moody's S&P Spread:
--------- --------- ----------
"Aaa" "AAA" 125 bps
"Aa3" to "Aa1" "AA-" to "AA+" 150 bps
"A3" to "A1" "A-" to "A+" 200 bps
"Baa3" to "Baa1" "BBB-" to "BBB+" 250 bps
"Ba1" and below "BB+" and below 300 bps
In the case of a special rate period, the Applicable Spread is
determined on the day that a notice of a special rate period is
delivered if the notice specifies a Maximum Rate for a special rate
period. The Applicable Spread will be determined based on the lower of
the credit rating or ratings assigned to the AMPS by Moody's and S&P.
If Moody's or S&P or both shall not make such ratings available, the
rate shall be determined by reference to equivalent ratings issued by a
substitute rating agency.
The Applicable Spread as so determined will be further 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. The Fund will take
all reasonable action necessary to enable either Moody's or S&P to
provide a rating for each series of AMPS. If neither Moody's nor S&P
will make such a rating available, the Fund will select another Rating
Agency to act as a substitute Rating Agency.
(g) "Asset Coverage Cure Date" has the meaning set forth in
Section 3(a)(ii).
(h) "Auction" means each periodic operation of the procedures
set forth under "Auction Procedures."
(i) "Auction Agent" means Deutsche Bank Trust Company
Americas, unless and until another commercial bank, trust company, or
other financial institution appointed by a resolution of the Board of
Trustees enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate.
(j) "Auction Date" means the first Business Day next
preceding the first day of a Rate Period.
(k) "Auction Procedures" means the procedures for conducting
Auctions set forth in Part II hereof.
(l) "Bank Loans" means direct purchases of, assignments of,
participations in and other interests in (a) any bank loan including
term loans, the funded and unfunded portions of revolving credit lines
or (b) any loan made by an investment bank, investment fund or other
financial institution, denominated in U.S. dollars, provided that the
A-23
loan under clause (b) is similar to those typically made, syndicated,
purchased or participated by a commercial bank or institutional loan
investor in the ordinary course of business.
(m) "Beneficial Owner," with respect to AMPS, 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 the series.
(n) "Bid" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(o) "Bidder" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be permitted to be a
Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Fund may be a Bidder in an Auction, but only if the
Orders placed by such Broker-Dealer are not for its own account.
(p) "Board of Trustees" or "Board" means the Board of
Trustees of the Fund or any duly authorized committee thereof as
permitted by applicable law.
(q) "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 Fund and has entered into a Broker-Dealer
Agreement that remains effective.
(r) "Broker-Dealer Agreement" means an agreement among the
Auction Agent and a Broker-Dealer, pursuant to which the Broker-Dealer
agrees to follow the Auction Procedures.
(s) "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.
(t) "Code" means the Internal Revenue Code of 1986, as
amended.
(u) "Commission" means the Securities and Exchange
Commission.
(v) "Common Share" means the shares of beneficial interest,
par value $.01 per share, of the Fund.
(w) "Date of Original Issue" means, with respect to the AMPS,
____________, 2004.
(x) "Default" has the meaning set forth in Section 2(c)(ii)
of this Part I.
(y) "Default Period" has the meaning set forth in Section
2(c)(ii) of this Part I.
A-24
(z) "Default Rate" means the Reference Rate multiplied by
three (3).
(aa) "Deposit Securities" means cash and any obligations or
securities, including Short Term Money Market Instruments that are
Eligible Assets, rated at least "AAA", "A-1", "A-2" or "SP-1" by S&P,
except that, for purposes of section 3(a)(i) of this Part I, such
obligations or securities shall be considered "Deposit Securities" only
if they are also rated at least "P-2" by Moody's.
(bb) "Discount Factor" means the S&P Discount Factor and
Moody's Discount Factor.
(cc) "Discounted Value" means the quotient of the Market Value
of an Eligible Asset divided by the applicable Discount Factor,
provided that with respect to an Eligible Asset that is currently
callable, Discounted Value will be equal to the quotient as calculated
above or the call price, whichever is lower, and that with respect to
an Eligible Asset that is prepayable, Discounted Value will be equal to
the quotient as calculated above or the par value, whichever is lower.
(dd) "Dividend Default" has the meaning set forth in Section
2(c)(ii) of this Part I.
(ee) "Dividend Payment Date" with respect to the AMPS means
any date on which dividends are payable pursuant to Section 2(b) of
this Part I.
(gg) "Eligible Assets" means S&P's Eligible Assets or Moody's
Eligible Assets and/or Other Rating Agency Eligible Assets if any Other
Rating Agency is then rating the AMPS, whichever is applicable.
(hh) "Existing Holder," with respect to shares of a series of
AMPS, means a Broker-Dealer (or any such other Person as may be
permitted by the Fund) that is listed on the records of the Auction
Agent as a holder of shares of such series.
(ii) "Fitch" means Fitch Ratings and its successors at law.
(jj) "Holder" means, with respect to the AMPS, the registered
holder of shares of each Series as the same appears on the share ledger
or share records of the Fund.
(kk) "Hold Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(ll) "LIBOR" means the London Inter-Bank Offered Rate.
(mm) "LIBOR Dealers" means 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.
A-25
(nn) "LIBOR Rate," on any Auction Date, means (i) the rate for
deposits in U.S. dollars for the designated Rate Period, which 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 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 the Auction Date (the
"LIBOR Determination Date"), or (ii) if such rate does not appear on
Telerate Page 3750 or such other page as may replace such Telerate Page
3750, (A) the LIBOR Dealer will 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
Rate 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
will equal such arithmetic mean of such quotations, (C) if only one or
none of the Reference Banks provide such quotations, LIBOR Rate will 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 quoting on the relevant LIBOR
Determination Date for deposits in U.S. dollars for the designated Rate
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 will be LIBOR Rate as determined on the
previous Auction Date. If the number of Rate Period days will be (i)
seven or more but fewer than 21 days, such rate will be the seven-day
LIBOR rate; (ii) more than 21 but fewer than 49 days, such rate will be
the one-month LIBOR rate; (iii) 49 or more but fewer than 77 days, such
rate will be the two-month LIBOR rate; (iv) 77 or more but fewer than
112 days, such rate will be the three-month LIBOR rate; (v) 112 or more
but fewer than 140 days, such rate will be the four-month LIBOR rate;
(vi) 140 or more but fewer than 168 days, such rate will be the
five-month LIBOR rate; (vii) 168 or more but fewer than 189 days, such
rate will be the six-month LIBOR rate; (viii) 189 or more but fewer
than 217 days, such rate will be the seven-month LIBOR rate; (ix) 217
or more but fewer than 252 days, such rate will be the eight-month
LIBOR rate; (x) 252 or more but fewer than 287 days, such rate will be
the nine-month LIBOR rate; (xi) 287 or more but fewer than 315 days,
such rate will be the ten-month LIBOR rate; (xii) 315 or more but fewer
than 343 days, such rate will be the eleven-month LIBOR rate; and
(xiii) 343 or more but fewer than 365 days, such rate will be the
twelve-month LIBOR rate.
(oo) "Liquidation Preference" means $25,000 per share of AMPS.
A-26
(pp) "London Business Day" means any day on which commercial
banks are generally open for business in London.
(qq) "Mandatory Redemption Date" has the meaning set forth in
Section 3(a)(iii) of this Part I.
(rr) "Mandatory Redemption Price" has the meaning set forth in
Section 3(a)(iii) of this Part I.
(ss) "Market Value" of any asset shall include any interest
accrued thereon and means the price of an Eligible Asset which is the
price obtained from the Pricing Service. The Pricing Service shall
value portfolio securities at the quoted bid prices or the mean between
the quoted bid and asked price or the yield equivalent when quotations
are not readily available. Securities for which quotations are not
readily available shall be valued at fair value as determined by the
Pricing Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue, coupon,
maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data
processing techniques and/or a matrix system to determine valuations.
In the event the Pricing Service is unable to value a security, the
security shall be valued at the lower of two dealer bids obtained by
the Fund from dealers who are members of the National Association of
Securities Dealers, Inc. and who make a market in the security, at
least one of which shall be in writing. Futures contracts and options
are valued at closing prices for such instruments established by the
exchange or board of trade on which they are traded, or if market
quotations are not readily available, are valued at fair value on a
consistent basis using methods determined in good faith by the Board of
Trustees.
Readily marketable portfolio securities listed on the New
York Stock Exchange are valued, except as indicated below, at the last
sale price reflected on the consolidated tape at the close of the New
York Stock Exchange on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are
valued at the mean of the closing bid and asked prices on such day. If
no bid or asked prices are quoted on such day, then the security is
valued by such method as the Board of Trustees shall determine in good
faith to reflect its fair market value. Readily marketable securities
not listed on the New York Stock Exchange but listed on other domestic
or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ")
National List are valued in a like manner. Portfolio securities traded
on more than one securities exchange are valued at the last sale price
on the business day as of which such value is being determined as
reflected on the tape at the close of the exchange representing the
principal market for such securities. Where securities are traded on
more than one exchange and also over-the-counter, the securities will
generally be valued using the quotations the Board of Trustees believes
reflect most closely the value of such securities.
(tt) "Maximum Rate," for shares of a series of AMPS on any
Auction Date for shares of such series, will mean for any rate period,
the greater of the Applicable Percentage of the Reference Rate or the
A-27
Applicable Spread plus the Reference Rate. The Auction Agent will round
each applicable Maximum Rate to the nearest one-thousandth (0.001) of
one percent per annum, with any such number ending in five
ten-thousandths of one percent being rounded upwards to the nearest
one-thousandth (0.001) of one percent.
(uu) "Moody's" means Moody's Investors Service, Inc. or its
successors.
(vv) "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) Convertible securities: (including convertible preferred)
(a) Equity--the convertibles in this group would have
a delta that ranges between 1-.8. For investment grade bonds the
discount factor would be 195% and for below investment grade securities
the discount factor would be 229%.
(b) Total Return--the convertibles in this group
would have a delta that ranges between .8-.4. For investment grade
bonds the discount factor would be 192% and for below investment grade
securities the discount factor would be 226%.
(c) Yield Alternative--the convertibles in this group
would have a delta that ranges between .4-0. For this category the
discount factors used are based on Moody's rating for corporate debt
securities table.
Any unrated convertible bonds would receive a discount factor of 250%.
Upon conversion to common stock, the Discount Factors applicable to
common stock will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
Seven week 170% 264% 241%
exposure period
(ii) Corporate debt securities (non-convertible): 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.
MOODY'S RATING CATEGORY
TERM TO MATURITY OF BELOW "B" AND
CORPORATE DEBT SECURITY "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
A-28
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 applicable Fund assets can be
derived from other sources as well as combined with a number of sources as
presented by the Fund to Moody's, securities rated below "B" by Moody's
and, unrated fixed-income and convertible securities (which are securities
that are not rated by any of Moody's, S&P or Fitch) are limited to 10% of
Moody's Eligible Assets for purposes of calculations related to the
Preferred Shares Basic Maintenance Amount. If a corporate debt security is
not rated by any of Moody's, S&P or Fitch, the Fund will use the applicable
percentage set forth under the column entitled "Below "B" and Unrated" in
the table above. Ratings assigned by S&P and/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 ratings by S&P
and/or Fitch do not seem to approximate a Moody's rating equivalent.
Split-rated securities assigned by S&P and Fitch (i.e., these Rating
Agencies assign different rating categories to the security) will be
accepted at the lower of the two ratings.
The Moody's Discount Factors presented in the immediately
preceding table will also apply to Moody's Eligible Assets
that are FHLB, FNMA and FFCB Debentures and to rated TRACERs
and TRAINs, whereby the ratings in the table will be applied
to the underlying securities and the Market Value of each
underlying security will be its proportionate amount of the
Market Value of the TRACER or TRAIN, provided that (i) the
Moody's Discount Factor for any TRAIN or TRACER rated by
Moody's will be the percentage determined, based on the
Moody's rating of the TRAIN or TRACER, in accordance with the
table set forth above and (ii) the Moody's Discount Factors
determined from the table shall be multiplied by a factor of
120% for purposes of calculating the Discounted Value of
TRAINs. The Moody's Discount Factors presented in the
immediately preceding table will also apply to corporate debt
securities that do not pay interest in U.S. dollars or euros.
The Fund will consult with Moody's to determine incremental
discount factors for non-U.S. dollar and non-euro denominated
bonds.
(iii) Preferred stock (other than convertible preferred
stock, which is subject to paragraph (i) above): The Moody's
Discount Factor for preferred stock shall be (A) for preferred
stocks issued by a utility, 155%; (B) for preferred stocks of
industrial and financial issuers, 209%; and (C) for auction
rate preferred stocks, 350%.
(iv) Short-term instruments: The Moody's Discount Factor
applied to short-term portfolio securities, including without
limitation short-term corporate debt securities, Short Term
Money Market Instruments and short-term municipal debt
A-29
obligations, will be (A) 100%, so long as such portfolio
securities mature or have a demand feature at par exercisable
within the Moody's Exposure Period; (B) 115%, so long as such
portfolio securities do not mature within the Moody's Exposure
Period, or have a demand feature at par not exercisable within
the Moody's Exposure Period; and (C) 125%, if such securities
are not rated by Moody's, so long as such portfolio securities
are rated at least "A-1+"/"AA" or "SP-1+"/"AA" by S&P or Fitch
and mature or have a demand feature at par exercisable within
the Moody's Exposure Period. A Moody's Discount Factor of 100%
will be applied to cash.
(v) U.S. Government Securities and U.S. Treasury Strips:
The percentage determined by reference to the remaining term
to maturity of such asset, in accordance with the table set
forth below.
U.S. GOVERNMENT U.S. TREASURY
SECURITIES STRIPS
DISCOUNT DISCOUNT
REMAINING TERM TO MATURITY FACTOR FACTOR
1 year or less................................... 109% 112%
2 years or less (but longer than 1 year)......... 115 118
3 years or less (but longer than 2 years)........ 120 123
4 years or less (but longer than 3 years)........ 126 129
5 years or less (but longer than 4 years)........ 132 135
7 years or less (but longer than 5 years)........ 139 143
10 years or less (but longer than 7 years)....... 145 150
15 years or less (but longer than 10 years)...... 150 155
20 years or less (but longer than 15 years)...... 150 155
30 years or less (but longer than 20 years)...... 150 155
(vi) Rule 144A Securities: The Moody's Discount Factor
applied to Rule 144A Securities for Rule 144A Securities whose
terms include rights to registration under the Securities Act
within one year and Rule 144A Securities which do not have
registration rights within one year will be 120% and 130%,
respectively, of the Moody's Discount Factor which would apply
were the securities registered under the Securities Act.
(vii) Bank Loans: The Moody's Discount Factor applied to
senior Bank Loans ("Senior Loans") shall be the percentage
specified in accordance with the table set forth below (or
such lower percentage as Moody's may approve in writing from
time to time):
MOODY'S RATING CATEGORY
"Baa" "Caa" AND BELOW
AND (INCLUDING DISTRESSED
TYPE OF LOAN "Aaa"-"A" "Ba"(1) "B"(1) AND UNRATED)(1)
------------ --------- ------- ------ ---------------------
Senior Loans greater
than $250 mm 118% 136% 149% 250%
Non-Senior Loans
greater than $250 mm 128% 146% 159% 260%
A-30
Loans less than
$250 mm 138% 156% 169% 270%
________________
(1) If a Senior Loan is not rated by any of Moody's, S&P or Fitch, the
Fund will use the applicable percentage set forth under the column
entitled "'Caa' and below (including distressed and unrated)" in
the table above. Ratings assigned by S&P and/or Fitch are
generally accepted by Moody's at face value. However, adjustments
to face value may be made to particular categories of securities
for which the ratings by S&P and/or Fitch do not seem to
approximate a Moody's rating equivalent. Split-rated securities
assigned by S&P and Fitch (i.e., these Rating Agencies assign
different rating categories to the security) will be accepted at
the lower of the two ratings; provided however, that, in a
situation where a security is rated "B" (or equivalent) by a given
Rating Agency and rated "Caa" (or equivalent) by another Rating
Agency, the Fund will use the applicable percentage set forth
under the column entitled "B" in the table above.
(viii) Asset-backed and mortgage-backed securities: The
Moody's Discount Factor applied to asset-backed securities
shall be 131%. The Moody's Discount Factor applied to
collateralized mortgage obligations, planned amortization
class bonds and targeted amortization class bonds shall be
determined by reference to the weighted average life of the
security and whether cash flow is retained (i.e., controlled
by a trustee) or excluded (i.e., not controlled by a trustee),
in accordance with the table set forth below.
CASH FLOW CASH FLOW
REMAINING TERM TO MATURITY RETAINED EXCLUDED
-------------------------- --------- ---------
3 years or less 133% 141%
7 years or less (but longer than 3 years) 142 151
10 years or less (but longer than 7 years) 158 168
20 years or less (but longer than 10 years) 185 174
The Moody's Discount Factor applied to residential
mortgage pass-throughs (including private-placement mortgage
pass-throughs) shall be determined by reference to the coupon
paid by such security and whether cash flow is retained (i.e.,
controlled by a trustee) or excluded (i.e., not controlled by
a trustee), in accordance with the table set forth below.
COUPON CASH FLOW RETAINED CASH FLOW EXCLUDED
------ ------------------ ------------------
5% 166% 173%
6 162 169
7 158 165
8 154 161
9 151 157
10 148 154
11 144 154
12 142 151
13 139 148
adjustable 165 172
The Moody's Discount Factor applied to fixed-rate
pass-throughs that are not rated by Moody's and are serviced
by a servicer approved by Moody's shall be determined by
A-31
reference to the table in the following paragraph (relating to
whole loans).
The Moody's Discount Factor applied to whole loans shall
be determined by reference to the coupon paid by such security
and whether cash flow is retained (i.e., controlled by a
trustee) or excluded (i.e., not controlled by a trustee), in
accordance with the table set forth below.
COUPON CASH FLOW RETAINED CASH FLOW EXCLUDED
------ ------------------ ------------------
5% 172% 179%
6 167 174
7 163 170
8 159 165
9 155 161
10 151 158
11 148 157
12 145 154
13 142 151
adjustable 170 177
(ix) Municipal debt obligations: The Moody's Discount
Factor applied to municipal debt obligations shall be the
percentage determined by reference to the rating on such asset
and the shortest Exposure Period set forth opposite such
rating that is the same length as or is longer than the
Moody's Exposure Period, in accordance with the table set
forth below (provided that, except as provided in the
following table, any municipal obligation:
A-32
EXPOSURE PERIOD "AAA" "AA" "A" "BAA" OTHER "(V)MIG-1"(1) "SP-1+"(2) UNRATED(3)
7 weeks 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than seven weeks 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight weeks 158 163 170 177 192 138 150 240
________________
(1) Municipal debt obligations not rated by Moody's but rated
equivalent to "MIG-1", "(V)MIG-1" or "P-1" by S&P and Fitch that
have a maturity less than or equal to 49 days.
(2) Municipal debt obligations not rated by Moody's but rated
equivalent to "MIG-1", "(V)MIG-1" or "P-1" by S&P and Fitch that
have a maturity greater than 49 days.
(3) Unless conclusions regarding liquidity risk as well as estimates
of both the probability and severity of default for the
corporation's or municipal issuer's assets can be derived from
other sources as well as combined with a number of sources as
presented by the Fund to Moody's 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 municipal debt security is unrated by
Moody's, S&P or Fitch, the Fund will use the percentage set forth
under "Other" in the Municipal Debt Table. Ratings assigned by S&P
or Fitch are generally accepted by Moody's at face value (e.g.,
treating a rating of "AAA" by S&P or Fitch as "Aaa" for purposes
of the table above and a rating of "AA" by S&P or Fitch as "Aa"
for purposes of the table above. However, adjustments to face
value may be made to particular categories of credits for which
the ratings by S&P and/or Fitch Rating do not seem to approximate
a Moody's rating equivalent. Split-rated securities assigned by
S&P and Fitch (i.e., these Rating Agencies assign different rating
categories to the security) will be accepted at the lower of the
two ratings.
(x) Structured Notes: The Moody's Discount Factor applied
to Structured Notes will be (A) in the case of a corporate
issuer, the Moody's Discount Factor determined in accordance
with paragraph (ii) under this definition, whereby the rating
on the issuer of the Structured Note will be the rating on the
Structured Note for purposes of determining the Moody's
Discount Factor in the table in paragraph (ii); and (B) in the
case of an issuer that is the U.S. government or an agency or
instrumentality thereof, the Moody's Discount Factor
determined in accordance with paragraph (v) under this
definition.
The Moody's Discount Factor for any Moody's Eligible Asset
other than the securities set forth above will be the
percentage provided in writing by Moody's. Additionally, in
order to merit consideration as a Moody's Eligible Asset,
securities should be issued by entities which: (a) have not
filed for bankruptcy within the past three years, (b) are
current on all principal and interest in their fixed income
obligations, (c) are current on all preferred stock dividends,
and (d) possess a current, unqualified auditor's report
without qualified, explanatory language.
A-33
(ww) "Moody's Eligible Assets" means:
(i) Cash (including interest and dividends due on assets
rated (A) "Baa3" or higher by Moody's if the payment date is
within five Business Days of the Valuation Date, (B) "A2" or
higher if the payment date is within thirty days of the
Valuation Date, and (C) "A1" or higher if the payment date is
within the Moody's Exposure Period) and receivables for
Moody's Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades
which generated such receivables are (A) settled through
clearing house firms or (B) (1) with counterparties having a
Moody's long-term debt rating of at least "Baa3" or (2) with
counterparties having a Moody's Short Term Money Market
Instrument rating of at least "P-1";
(ii) Short-Term Money Market Instruments so long as (A)
such securities are rated at least "P-1", (B) in the case of
demand deposits, time deposits and overnight funds, the
supporting entity is rated at least "A2", or (C) in all other
cases, the supporting entity (1) is rated "A2" and the
security matures within one month, (2) is rated "A1" and the
security matures within three months or (3) is rated at least
"Aa3" and the security matures within six months; provided,
however, that for purposes of this definition, such
instruments (other than commercial paper rated by S&P or Fitch
and not rated by Moody's) need not meet any otherwise
applicable rating criteria of S&P or Fitch;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Senior Loans and other Bank Loans approved by Moody's;
(vi) Corporate debt securities (including convertible and
convertible preferred) if (A) such securities are rated "Caa"
or higher by Moody's; (B) such securities provide for the
periodic payment of interest in cash in U.S. dollars or euros,
except that such securities that do not pay interest in U.S.
dollars or euros shall be considered Moody's Eligible Assets
if they are rated by Moody's, S&P or Fitch; (C) for securities
which provide for conversion or exchange into equity capital
at some time over their lives, the issuer must be rated at
least "B3" by Moody's and the discount factor will be 250%;
(D) for debt securities rated "Ba1" and below, no more than
10% of the original amount of such issue may constitute
Moody's Eligible Assets; (E) 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 Fund's investment manager or portfolio
manager acting pursuant to procedures approved by the Board of
Trustees, except that such securities that are not subject to
U.S. federal securities laws shall be considered Moody's
Eligible Assets if they are publicly traded; and (F) such
securities are not subject to extended settlement.
A-34
Notwithstanding the foregoing limitations, (x) corporate
debt securities not rated at least "Caa" by Moody's or not
rated by Moody's shall be considered to be Moody's Eligible
Assets only to the extent the Market Value of such corporate
debt securities does not exceed 10% of the aggregate Market
Value of all Moody's Eligible Assets; provided, however, that
if the Market Value of such corporate debt securities exceeds
10% of the aggregate Market Value of all Moody's Eligible
Assets, a portion of such corporate debt securities (selected
by the Fund) shall not be considered Moody's Eligible Assets,
so that the Market Value of such corporate debt securities
(excluding such portion) does not exceed 10% of the aggregate
Market Value of all Moody's Eligible Assets; and (y) corporate
debt securities rated by none of Moody's, S&P, or Fitch shall
be considered to be Moody's Eligible Assets only to the extent
such securities are issued by entities which (i) have not
filed for bankruptcy within the past three years, (ii) are
current on all principal and interest in their fixed income
obligations, (iii) are current on all preferred stock
dividends and (iv) possess a current, unqualified auditor's
report without qualified, explanatory language.
(vii) Preferred stocks if (A) dividends on such preferred
stock are cumulative, (B) 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, (C) the issuer of such a preferred stock has
common stock listed on either the New York Stock Exchange, the
American Stock Exchange or the NASDAQ, (D) the issuer of such
a preferred stock has a senior debt rating from Moody's of
"Baa1" or higher or a preferred stock rating from Moody's of
"Baa3" or higher and (E) such preferred stock has paid
consistent cash dividends in U.S. dollars or euros over the
last three years or has a minimum rating of "A1" (if the
issuer of such preferred stock has other preferred issues
outstanding that have been paying dividends consistently for
the last three years, then a preferred stock without such a
dividend history would also be eligible); provided, however,
that convertible preferred stock shall be treated as
convertible securities in accordance with paragraph (vi)
above. In addition, the preferred stocks must have the
following diversification requirements: (X) the preferred
stock issue must be greater than $50 million and (Y) the
minimum holding by the Fund of each issue of preferred stock
is $500,000 and the maximum holding of preferred stock of each
issue is $5 million. In addition, preferred stocks issued by
transportation companies will not be considered Moody's
Eligible Assets;
(viii) Asset-backed and mortgage-backed securities:
(A) Asset-backed securities if (1) such
securities are rated at least "Aa3" by Moody's or at
least "AA" by S&P or Fitch, (2) the securities are
part of an issue that is $250 million or greater, or
the issuer of such securities has a total of $500
million or greater of asset-backed securities
A-35
outstanding at the time of purchase of the securities
by the Fund and (3) the expected average life of the
securities is not greater than 4 years;
(B) Collateralized mortgage obligations ("CMOs"),
including CMOs with interest rates that float at a
multiple of the change in the underlying index
according to a pre-set formula, provided that any CMO
held by the Fund (1) has been rated "Aaa" by Moody's
or "AAA" by S&P or Fitch, (2) does not have a coupon
which floats inversely, (3) is not portioned as an
interest-only or principal-only strip and (4) is part
of an issuance that had an original issue size of at
least $100 million;
(C) Planned amortization class bonds ("PACs") and
targeted amortization class bonds ("TACs") provided
that such PACs or TACs are (1) backed by certificates
of either the Federal National Mortgage Association
("FNMA"), the Government National Mortgage
Association ("GNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") representing ownership
in single-family first lien mortgage loans with
original terms of 30 years, (2) part of an issuance
that had an original issue size of at least $10
million, (3) part of PAC or TAC classes that have
payment priority over other PAC or TAC classes, (4)
if TACs, TACs that do not support PAC classes, and
(5) if TACs, not considered reverse TACs (i.e., do
not protect against extension risk);
(D) Consolidated senior debt obligations of
Federal Home Loan Banks ("FHLBs"), senior long-term
debt of the FNMA, and consolidated systemwide bonds
and FCS Financial Assistance Corporation Bonds of
Federal Farm Credit Banks ("FFCBs") (collectively,
"FHLB, FNMA and FFCB Debentures"), provided that such
FHLB, FNMA and FFCB Debentures are (1) direct
issuance corporate debt rated "Aaa" by Moody's, (2)
senior debt obligations backed by the FHLBs, FFCBs or
FNMA, (3) part of an issue entirely denominated in
U.S. dollars and (4) not callable or exchangeable
debt issues;
(E) Mortgage pass-throughs rated at least "Aa" by
Moody's and pass-throughs issued prior to 1987 (if
rated "AA" by S&P or Fitch and based on fixed-rate
mortgage loans) by Travelers Mortgage Services,
Citicorp Homeowners, Citibank, N.A., Sears Mortgage
Security or RFC - Salomon Brothers Mortgage
Securities, Inc., provided that (1) certificates must
evidence a proportional, undivided interest in
specified pools of fixed or adjustable rate mortgage
loans, secured by a valid first lien, on one- to
four-family residential properties and (2) the
securities are publicly registered (not issued by
FNMA, GNMA or FHLMC);
(F) Private-placement mortgage pass-throughs
provided that (1) certificates represent a
proportional undivided interest in specified pools of
fixed-rate mortgage loans, secured by a valid first
lien, on one- to four-family residential properties,
A-36
(2) documentation is held by a trustee or independent
custodian, (3) pools of mortgage loans are serviced
by servicers that have been approved by FNMA or FHLMC
and funds shall be advanced to meet deficiencies to
the extent provided in the pooling and servicing
agreements creating such certificates, and (4) pools
have been rated "Aa" or better by Moody's; and
(G) Whole loans (e.g., direct investments in
mortgages) provided that (1) at least 65% of such
loans (a) have seasoning of no less than six months,
(b) are secured by single-family detached residences,
(c) are owner-occupied primary residences, (d) are
secured by a first-lien, fully-documented mortgage,
(e) are neither currently delinquent (30 days or
more) nor delinquent during the preceding year, (f)
have loan-to-value ratios of 80% or below, (g) carry
normal hazard insurance and title insurance, as well
as special hazard insurance, if applicable, (h) have
original terms to maturity not greater than 30 years,
with at least one year remaining to maturity, (i)
have a minimum of $10,000 remaining principal
balance, (j) for loans underwritten after January 1,
1978, FNMA and/or FHLMC forms are used for fixed-rate
loans, and (k) are whole loans and not
participations; (2) for loans that do not satisfy the
requirements set forth in the foregoing clause (1),
(a) non-owner occupied properties represent no
greater than 15% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool, (b)
multi-family properties (those with five or more
units) represent no greater than 15% of the aggregate
of either the adjustable-rate pool or the fixed-rate
pool, (c) condominiums represent no greater than 10%
of the aggregate of either the adjustable-rate pool
or the fixed-rate pool, and any condominium project
must be 80% occupied at the time the loan is
originated, (d) properties with loan-to-value ratios
exceeding 80% represent no greater than 25% of the
aggregate of either the adjustable-rate pool or the
fixed-rate pool and that the portion of the mortgage
on any such property that exceeds a loan-to-value
ratio of 80% is insured with Primary Mortgage
Insurance from an insurer rated at least "Baa3" by
Moody's and (e) loan balances in excess of the
current FHLMC limit plus $75,000 represent no greater
than 25% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool, loan
balances in excess of $350,000 represent no greater
than 10% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool, and loan
balances in excess of $1,000,000 represent no greater
than 5% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool; (3) no
greater than 5% of the pool of loans is concentrated
in any one zip code; (4) the pool of loans contains
at least 100 loans or $2 million in loans per
servicer; (5) for adjustable-rate mortgages ("ARMs"),
(a) any ARM is indexed to the National Cost of Funds
index, the 11th District Cost of Funds index, the
1-year Treasury or the 6-month Treasury, (b) the
margin over the given index is between .15% and .25%
for either cost-of-funds index and between .175% and
.325% for Treasuries, (c) the maximum yearly interest
A-37
rate increase is 2%, (d) the maximum life-time
interest rate increase is 6.25% and (e) ARMs may
include Federal Housing Administration and Department
of Veterans Affairs loans; and (6) for "teaser"
loans, (a) the initial discount from the current ARM
market rate is no greater than 2%, (b) the loan is
underwritten at the market rate for ARMs, not the
"teaser" rate, and (c) the loan is seasoned six
months beyond the "teaser" period.
(ix) Any municipal debt obligation that (A) pays interest
in cash, (B) does not have a Moody's rating, as applicable,
suspended by Moody's, and (C) is part of an issue of municipal
debt obligations of at least $5,000,000, except for municipal
debt obligations rated below "A" by Moody's, in which case the
minimum issue size is $10,000,000;
(x) Structured Notes, rated TRACERs and TRAINs;
(xi) Financial contracts, as such term is defined in
Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided
for in this definition but only upon receipt by the Fund of a
letter from Moody's specifying any conditions on including
such financial contract in Moody's Eligible Assets and
assuring the Fund that including such financial contract in
the manner so specified would not affect the credit rating
assigned by Moody's to the AMPS; and
(xii) Common stock, preferred stock or any debt security
of REITs or real estate companies.
In addition, portfolio holdings as described below must be
within the following diversification and issue size
requirements in order to be included in Moody's Eligible
Assets:
MAXIMUM MAXIMUM MINIMUM
SINGLE SINGLE ISSUE SIZE
RATINGS(1) ISSUER(2,3) INDUSTRY(3,4) ($ IN MILLION)(5)
---------- ----------- ------------- -----------------
"Aaa" 100% 100% $100
"Aa" 20 60 100
"A" 10 40 100
"Baa" 6 20 100
"Ba" 4 12 50(6)
"B1"-"B2" 3 8 50(6)
"B3" or below 2 8 50(6)
_________________
(1) Refers to the preferred stock and senior debt rating of the
portfolio holding.
(2) Companies subject to common ownership of 25% or more are considered
as one issuer.
(3) Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
(4) Industries are determined according to Moody's Industry Classifications,
as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50 million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Fund's total assets.
A-38
Where the Fund sells an asset and agrees to repurchase
such asset in the future, the Discounted Value of such asset
will constitute a Moody's Eligible Asset and the amount the
Fund is required to pay upon repurchase of such asset will
count as a liability for the purposes of the Preferred Shares
Basic Maintenance Amount. Where the Fund purchases an asset
and agrees to sell it to a third party in the future, cash
receivable by the Fund thereby will constitute a Moody's
Eligible Asset if the long-term debt of such other party is
rated at least "A2" by Moody's and such agreement has a term
of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Moody's Eligible Asset. For
the purposes of calculation of Moody's Eligible Assets,
portfolio securities which have been called for redemption by
the issuer thereof shall be valued at the lower of Market
Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be
considered a Moody's Eligible Asset to the extent that it (i)
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 Moody's has
indicated to the Fund will not affect the status of such asset
as a Moody's Eligible Asset, (B) Liens for taxes that are not
then due and payable or that can be paid thereafter without
penalty, (C) Liens to secure payment for services rendered or
cash advanced to the Fund by its investment manager or
portfolio manager, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (D) Liens arising by virtue
of any repurchase agreement, or (ii) has been segregated
against obligations of the Fund in connection with an
outstanding derivative transaction.
(xx) "Moody's Industry Classification" means, for the purposes
of determining Moody's Eligible Assets, each of the following industry
classifications:
1. Aerospace and Defense: Major Contractor,
Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automobile Equipment,
Auto-Manufacturing, Auto Parts Manufacturing, Personal Use
Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans,
Consumer Credit, Small Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale,
Distillers, Wines and Liquors, Distributors, Soft Drink Syrup,
Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners,
Dairy Products, Meat Products, Poultry Products, Snacks,
Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen
Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
A-39
5. Buildings and Real Estate: Brick, Cement,
Climate Controls, Contracting, Engineering, Construction,
Hardware, Forest Products (building-related only), Plumbing,
Roofing, Wallboard, Real Estate, Real Estate Development,
REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals
(non-agriculture), Industrial Gases, Sulphur, Plastics,
Plastic Products, Abrasives, Coatings, Paints, Varnish,
Fabricating
7. Containers, Packaging and Glass: Glass,
Fiberglass, Containers made of: Glass, Metal, Paper, Plastic,
Wood or Fiberglass
8. Personal and Non-Durable Consumer Products
(Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries,
Cleaning Supplies, School Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals
and Minerals: Fabricating, Distribution, Mining and Sales
12. Ecological: Pollution Control, Waste Removal,
Waste Treatment and Waste Disposal
13. Electronics: Computer Hardware, Electric
Equipment, Components, Controllers, Motors, Household
Appliances, Information Service Communicating Systems, Radios,
TVS, Tape Machines, Speakers, Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing,
Syndication, Securities
15. Farming and Agriculture: Livestock, Grains,
Produce, Agriculture Chemicals, Agricultural Equipment,
Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical
Drugs, Proprietary Drugs, Research, Health Care Centers,
Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical
Equipment
18. Home and Office Furnishings, Housewares, and
Durable Consumer Products: Carpets, Floor Coverings,
Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
A-40
20. Insurance: Life, Property and Casualty, Broker,
Agent, Surety
21. Leisure, Amusement, Entertainment: Boating,
Bowling, Billiards, Musical Instruments, Fishing, Photo
Equipment, Records, Tapes, Sports, Outdoor Equipment
(Camping), Tourism, Resorts, Games, Toy Manufacturing
22. Machinery (Non-Agriculture, Non-Construction,
Non-Electronic): Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals:
Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel,
Integrated Steel, Ore Production, Refractories, Steel Mill
Machinery, Mini-Mills, Fabricating, Distribution and Sales
24. Oil and Gas: Crude Producer, Retailer, Well
Supply, Service and Drilling
25. Personal, Food and Miscellaneous Services
26. Printing and Publishing: Graphic Arts, Paper,
Paper Products, Business Forms, Magazines, Books, Periodicals,
Newspapers, Textbooks
27. Cargo Transport: Rail, Shipping, Railroads,
Rail-car Builders, Ship Builders, Containers, Container
Builders, Parts, Overnight Mail, Trucking, Truck
Manufacturing, Trailer Manufacturing, Air Cargo, Transport
28. Retail Stores
29. Telecommunications
30. Textiles and Leather
31. Personal Transportation
32. Utilities
33. Broadcasting and Entertainment
(yy) "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.
(zz) "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 Fund which are stock, including all Outstanding AMPS (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
A-41
stock 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 next preceding the time of such
determination.
(aaa) "1940 Act Preferred Shares Asset Coverage Certificate"
means the certificate required to be delivered by the Fund pursuant to
Section 12(e) of this Part I.
(bbb) "Notice of Redemption" means any notice with respect to
the redemption of AMPS pursuant to Section 3.
(ccc) "Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(ddd) "Other Rating Agency" means any rating agency other than
S&P or Moody's then providing a rating for the AMPS pursuant to the
request of the Fund.
(eee) "Other Rating Agency Eligible Assets" means assets of the
Fund designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Fund's assets in connection
with such Other Rating Agency's rating of AMPS.
(fff) "Outstanding" or "outstanding" means, as of any date,
AMPS theretofore issued by the Fund except, without duplication, (i)
any AMPS theretofore canceled, redeemed or repurchased by the Fund, or
delivered to the Auction Agent for cancellation or with respect to
which the Fund has given notice of redemption and irrevocably deposited
with the Paying Agent sufficient funds to redeem such AMPS and (ii) any
AMPS represented by any certificate in lieu of which a new certificate
has been executed and delivered by the Fund. Notwithstanding the
foregoing, (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum),
any of the AMPS to which the Fund or any Affiliate of the Fund shall be
the Existing Holder shall be disregarded and not deemed Outstanding;
(B) in connection with any Auction, any AMPS as to which the Fund or
any person known to the Auction Agent to be an Affiliate of the Fund
shall be the Existing Holder thereof shall be disregarded and deemed
not to be Outstanding; and (C) for purposes of determining the
Preferred Shares Basic Maintenance Amount, AMPS held by the Fund shall
be disregarded and not deemed Outstanding but shares held by any
Affiliate of the Fund shall be deemed Outstanding.
(ggg) "Paying Agent" means Deutsche Bank Trust Company
Americas, unless and until another entity appointed by a resolution of
the Board of Trustees enters into an agreement with the Fund to serve
as paying agent.
(hhh) "Performing" means with respect to any asset, the issuer
of such investment is not in default of any payment obligations in
respect thereof.
A-42
(iii) "Person" or "person" means and includes an individual, a
partnership, a trust, a Fund, an unincorporated association, a joint
venture or other entity or a government or any agency or political
subdivision thereof.
(jjj) "Potential Beneficial Owner," with respect to shares of a
series of AMPS, means a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase
shares of such series, or that is a Beneficial Owner of shares of such
series that wishes to purchase additional shares of such series.
(kkk) "Preferred Shares" means the preferred shares of
beneficial interest, par value $.01 per share, including the AMPS, of
the Fund from time to time.
(lll) "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 AMPS Outstanding
on such date multiplied by $25,000, plus any redemption premium
applicable to the AMPS then subject to redemption;
(B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates to (but not including)
the first respective Dividend Payment dates for the AMPS Outstanding
that follow such Valuation Date;
(C) the aggregate amount of cash dividends that would
accumulate on the AMPS Outstanding from such first respective Dividend
Payment Date therefor through the 30th day after such Valuation Date,
at the Maximum Rate for a 28-Day Rate Period to commence on such
Dividend Payment Date, multiplied by the Volatility Factor;
(D) the amount of anticipated expenses of the Fund
for the 90 days subsequent to such Valuation Date;
(E) the amount of any indebtedness or obligations of
the Fund senior in right of payment to the AMPS; and
(F) any current liabilities as of such Valuation Date
to the extent not reflected in any of (i)(A) through (i)(E) (including,
without limitation, any payables for securities purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less
(ii) either (A) the Discounted Value of any of the
Fund's assets, or (B) the face value of any of the Fund's assets if
such assets mature prior to or on the date of redemption of AMPS or
payment of a liability and are either securities issued or guaranteed
by the United States Government or Deposit Securities, in both cases
irrevocably deposited by the Fund for the payment of the amount needed
to redeem AMPS subject to redemption or to satisfy any of (i)(B)
through (i)(F).
A-43
(mmm) "Preferred Shares Basic Maintenance Report" has the
meaning set forth in Section 12(d) of this Part I.
(nnn) "Pricing Service" means Loan Pricing Corporation or any
other pricing service designated by the Board of Trustees of the Fund
and approved in writing by S&P or Moody's, as applicable, for purposes
of determining whether the Fund has Eligible Assets with an aggregate
Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount.
(ooo) "Rate Period" means, with respect to the AMPS, 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 Rate Period for such series and ending on the day
established for such series by the Fund.
(ppp) "Rating Agency" means S&P and Moody's as long as such
rating agency is then rating the AMPS.
(qqq) "Redemption Default" has the meaning set forth in Section
2(c)(ii) of this Part I.
(rrr) "Redemption Price" has the meaning set forth in Section
3(a)(i) of this Part I.
(sss) "Reference Rate" means the applicable LIBOR Rate (for a
Rate Period of fewer than 365 days) or the applicable Treasury Index
Rate (for a Rate Period of 365 days or more).
(ttt) "Rule 144A Securities" means securities which 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 Fund's investment manager or portfolio manager acting pursuant
to procedures approved by the Board of Trustees of the Fund.
(uuu) "S&P" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., or its successors.
(vvv) "S&P Discount Factor" means:
25 B-d
Type of S&P Eligible Asset "AAA" Rating
-------------------------- ------------
Public Equity Common Stocks...................................................................... 170.97%
DRD Eligible Preferred Stock with a senior or preferred stock rating of at least "BBB"........... 245.00%
Non-DRD Eligible Preferred Stock with a senior or preferred stock rating of at least "BBB"....... 164.00%
DRD Eligible Preferred Stock with a senior or preferred stock rating below "BBB"................. 250.78%
Non-DRD Eligible Preferred Stock with a senior or preferred stock rating below "BBB-"............ 169.68%
Un-rated DRD Eligible Preferred Stock............................................................ 255.78%
Un-rated Non-DRD Eligible Preferred Stock........................................................ 174.68%
Convertible bonds rated "AAA" to "AAA-".......................................................... 150.90%
Convertible bonds rated "AA+" to "AA-"........................................................... 157.58%
A-44
Convertible bonds rated "A+" to "A-"............................................................. 164.25%
Convertible bonds rated "BBB+" to "BBB-"......................................................... 170.92%
Convertible bonds rated "BB+" to "BB-"........................................................... 177.60%
Convertible bonds rated "B+" to "B".............................................................. 184.27%
Convertible bonds rated "B-"..................................................................... 184.27%
Convertible bonds rated "CCC+"................................................................... 190.94%
Convertible bonds rated "CCC".................................................................... 205%
U.S. Short-Term Money Market Investments with maturities of 180 days or less..................... 104.5%
U.S. Short-Term Money Market Investments with maturities of between 181 and 360 days............. 114.2%
U.S. Government Obligations (52 week Treasury Bills)............................................. 102.23%
U.S. Government Obligations (Two-Year Treasury Notes)............................................ 104.23%
U.S. Government Obligations (Five-Year Treasury Notes)........................................... 110.27%
U.S. Government Obligations (Ten-Year Treasury Notes)............................................ 117.23%
U.S. Government Obligations (Thirty-Year Treasury Bonds)......................................... 130.38%
Agency Mortgage Collateral (Fixed 15-Year)....................................................... 132.2%
Agency Mortgage Collateral (Fixed 30-Year)....................................................... 134.9%
Agency Mortgage Collateral (ARM 1/1)............................................................. 124.2%
Agency Mortgage Collateral (ARM 3/1)............................................................. 124.7%
Agency Mortgage Collateral (ARM 5/1)............................................................. 125.2%
Agency Mortgage Collateral (ARM 10/1)............................................................ 125.4%
Bank Loans (S&P Loan Category A)................................................................. 117.79%
Bank Loans (S&P Loan Category B)................................................................. 125.47%
Bank Loans (S&P Loan Category C)................................................................. 154.08%
Bank Loans (S&P Loan Category D)................................................................. 178.25%
Corporate Bonds rated at least "AAA"............................................................. 110%
Corporate Bonds rated at least "AA+"............................................................. 111%
Corporate Bonds rated at least "AA".............................................................. 113%
Corporate Bonds rated at least "AA-"............................................................. 115%
Corporate Bonds rated at least "A+".............................................................. 116%
Corporate Bonds rated at least "A"............................................................... 117%
Corporate Bonds rated at least "A-".............................................................. 118%
Corporate Bonds rated at least "BBB+"............................................................ 120%
Corporate Bonds rated at least "BBB"............................................................. 122%
Corporate Bonds rated at least "BBB-"............................................................ 124%
Corporate Bonds rated at least "BB+"............................................................. 129%
Corporate Bonds rated at least "BB".............................................................. 135%
Corporate Bonds rated at least "BB-"............................................................. 142%
Corporate Bonds rated at least "B+".............................................................. 156%
Corporate Bonds rated at least "B"............................................................... 169%
Corporate Bonds rated at least "B-".............................................................. 184%
Corporate Bonds rated at least "CCC+"............................................................ 202%
Corporate Bonds rated at least "CCC"............................................................. 252%
Corporate Bonds rated at least "CCC-"............................................................ 350%
Cash and Cash Equivalents........................................................................ 100%
Municipal Bonds rated "AAA"...................................................................... 143.4%
Municipal Bonds rated "AA"....................................................................... 146.4%
Municipal Bonds rated "A"........................................................................ 149.4%
Municipal Bonds rated "BBB"...................................................................... 152.4%
Municipal Bonds rated "BB"....................................................................... 175.1%
Municipal Bonds rated "B"........................................................................ 195.1%
Municipal Bonds rated "CCC"...................................................................... 215.1%
Unrated Municipal Bonds.......................................................................... 220.0%
Common Stock of REITs and other real estate companies............................................ 149.51%
Mortgage Pass-Through Certificates 15-yr......................................................... 134.2%
Mortgage Pass-Through Certificates 30-yr......................................................... 136.9%
Mortgage Pass-Through Certificates 1/1........................................................... 128.1%
Mortgage Pass-Through Certificates 3/1........................................................... 128.5%
A-45
Mortgage Pass-Through Certificates 5/1........................................................... 129.0%
Mortgage Pass-Through Certificates 10/1.......................................................... 129.3%
Conventional/FHA/VA Mortgages and Whole Loans 15-year............................................ 136.4%
Conventional/FHA/VA Mortgages and Whole Loans 30-year............................................ 139.1%
Conventional/FHA/VA Mortgages and Whole Loans 1/1................................................ 132.3%
Conventional/FHA/VA Mortgages and Whole Loans 3/1................................................ 133.5%
Conventional/FHA/VA Mortgages and Whole Loans 5/1................................................ 133.3%
Conventional/FHA/VA Mortgages and Whole Loans 10/1............................................... 133.5%
Collateralized Mortgage Obligations (WAL less than 5-years)...................................... 135%
Collateralized Mortgage Obligations (WAL more than 5-years and more than 10-years)............... 145%
FHA-Insured Multifamily Loans.................................................................... 190%
ABS (Automobile loans and fixed-rate credit card receivables with WAL less than 5-years)......... 130%
ABS (Automobile loans and fixed-rate credit card receivables with WAL more
than 5-yr and less than 10-years) ............................................................... 140%
ABS (Floating-rate credit cards) ................................................................ 114.2%
Notwithstanding the foregoing, the S&P Discount Factor for short-term
Municipal Obligations will be 115% so long as such Municipal Obligations are
rated "A-1+" or "SP-1+" by S&P and mature or have a demand feature exercisable
within 30 days or less, or 123% so long as such Municipal Obligations are rated
"A-1" or "SP-1" by S&P and mature or have a demand feature exercisable in 30
days or less, or 125% if such Municipal Obligations are not rated by S&P but are
rated equivalent to "A-1+" or "SP-1" by another nationally recognized
statistical rating organization, on a case by case basis; provided, however,
that any such non-S&P rated short-term Municipal Obligations which have demand
features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least "A-l+" from S & P; and further
provided that such non-S&P rated short-term Municipal Obligations may comprise
no more than 50% of short-term Municipal Obligations that qualify as S&P
Eligible Assets; provided, however, that Municipal Obligations not rated by S&P
but rated equivalent to "BBB" or lower by another nationally recognized
statistical rating organization, rated "BB+" or lower by S&P or non-rated (such
Municipal Obligations are hereinafter referred to as "High Yield Securities")
may comprise no more than 20% of the short-term Municipal Obligations that
qualify as S&P Eligible Assets; (ii) the S&P Discount Factor for Receivables for
Municipal Obligations Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the Municipal
Obligations sold; (iii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold if such receivables are due within
five Business Days of such Valuation Date; and (iv) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date. The Fund may adopt S&P
Discount Factors for Municipal Obligations other than Municipal Obligations
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated "SP-1+" or, if not rated by S&P, equivalent
to "A-l+" or "SP-1+" by another nationally recognized statistical rating
organization, on a case by case basis, which do not mature or have a demand
A-46
feature at par exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Obligations.
The S&P Discount Factor applied to cash, cash equivalents and demand
deposits in an "A-l+" rated institution will be 100%. "A-1+" rated commercial
paper, with maturities no greater then 30 calendar days and held instead of cash
until maturity is valued at 100%. Securities with next-day maturities invested
in "A-1+" rated institutions are considered cash equivalents and are valued at
100%. Securities maturing in 181 to 360 calendar days are valued at 114.2%.
The S&P Discount Factor for shares of unrated affiliated Money Market
Funds used as "sweep" vehicles will be 110%. Money Market Funds rated "AAAm"
will be discounted at the appropriate level as dictated by the exposure period.
No S&P Discount Factor will be applied to Money Market Funds rated "AAAm" by S&P
with effective next day maturities.
Receivables due within five business days of a valuation will be
treated as cash and are valued at 100%.
Receivables that are due in more than five business days of a valuation
date qualify as a S&P's-eligible asset at a value no greater than the settlement
price discounted at the applicable credit rating and/or exposure period discount
factor.
For purposes of determining the discount factors applicable to
collateral not rated by S&P, the collateral will carry an S&P rating one full
rating category lower than the equivalent S&P rating.
(www) "S&P Eligible Assets" means:
(i) Deposit Securities;
(ii) U.S. Government Obligations and U.S. Government
Agencies;
(iii) Corporate Indebtedness. Evidences of
indebtedness other than Deposit Securities, U.S. Government
Obligations and Municipal Obligations that are not convertible
into or exchangeable or exercisable for stock of a corporation
(except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ("Other Debt") and that
satisfy all of the following conditions:
(A) no more than 10% of the Other Debt may
be unrated;
(B) the remaining term to maturity of such
Other Debt shall not exceed thirty (30) years;
(C) and such Other Debt must provide for
periodic interest payments in cash over the life of
the security;
A-47
(D) the issuer of such evidences of
indebtedness files periodic financial statements with
the Commission;
provided, however, non-rated evidences of such indebtedness or issuers
of Other Debt may not constitute more than 10% of the Fund's Other
Debt;
(iv) Convertible Corporate Indebtedness. Evidences of
indebtedness other than Deposit Securities, U.S. Government
Obligations and Municipal Obligations that are convertible
into or exchangeable or exercisable for stock of a corporation
and that satisfy all of the following conditions:
(A) such evidence of indebtedness is rated
at least "CCC" by S & P; and
(B) if such evidence of indebtedness is
rated "BBB" or lower by S&P, the market
capitalization of the issuer of such evidence of
indebtedness is at least $100 million;
(v) Agency Mortgage Collateral. Certificates
guaranteed by U.S. Government Agencies (as defined below)
(e.g., FNMA, GNMA and FHLMC) for timely payment of interest
and full and ultimate payment of principal. Agency Mortgage
Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully
amortizing loans that are secured by first liens on one- to
four-family residences residential properties (or in the case
of Plan B FHLMC certificates, five or more units primarily
designed for residential use) ("Agency Mortgage Collateral").
Agency Mortgage Collateral the following conditions apply:
(A) For GNMA certificates backed by pools
of graduated payment mortgages, levels are 20 points
above established levels;
(B) Qualifying "large pool" FNMA
mortgage-backed securities and FHLMC participation
certificates are acceptable as eligible collateral.
The eligible fixed-rate programs include FNMA
MegaPools, FNMA Majors, FHLMC Multilender Swaps, and
FHLMC Giant certificates. Eligible adjustable rate
mortgage ("ARMs") programs include nonconvertible
FNMA ARM MegaPools and FHLMC weighted average coupon
ARM certificates. Eligible FHLMC Giant programs
exclude interest-only and principal only stripped
securities;
(C) FNMA certificates backed by multifamily
ARMs pegged to the 11th District Cost of Funds Index
are acceptable as eligible collateral at 5 points
above established levels; and
A-48
(D) Multiclass REMICs issued by FNMA and
FHLMC are acceptable as eligible collateral at the
collateral levels established for CMOs.
(vi) Mortgage Pass-Through Certificates. Publicly
issued instruments maintaining at least a "AA-" ratings by
S&P. Certificates evidence proportional, undivided interests
in pools of whole residential mortgage loans. Pass-through
certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels
established for pass-through certificates backed by fixed or
non-convertible ARM pools.
(vii) Mortgage-backed securities.
(A) Mortgage Pass-through Certificates are
publicly issued instruments rated at least "AA-" by
S&P. Pass-throughs backed by pools of convertible
adjustable-rate mortgages (ARMs) are discounted at an
additional five percentage points above the levels
established for pass-throughs backed by fixed or
nonconventional ARM pools.
(B) Fixed-Rate and Adjustable-rate mortgage
collateral (conventional/FHA/VA and Whole Loans) Pool
must consist of at least 100 loans each secured by
single-family, one-unit, detached primary residence.
25% of the total pool may have an LTV greater than
80% but less than or equal to 90%. 10% may have an
original LTV of no greater than 95%. Loans with LTV
greater than 80% must have a "AA" rated primary
mortgage insurance. 25% may have balances between
$400,000 and $600,000, provided the maximum size of
any loan is appropriate with respect to the market
area of the originator. 10% of the pool may represent
condominiums that are four stories or less. High
LTVs, high loan balance, and condominiums, in
aggregate, should not exceed 35% of the pool.
(C) FHAA-Insured Multifamily Loans must
have a minimum principal balance of $100,000 and have
at least a one-year remaining maturity. The aggregate
market value of any one loan may not exceed 5% of the
aggregate market value of the portfolio. Such loans
should be initially included in minimum blocks of $5
million. Project loans must have at least a 90%
occupancy rate at the time the loan is pledged. After
90 days defaulted mortgage loans must be valued at
zero. A loan in default should be liquidated or
substituted within a 90-day period.
(D) Collateralized Mortgage Obligations
tranches are publicly issued instruments rated "AAA"
by S&P. No more than 25% of the total market value of
collateral may be from one private sector issuer.
(viii) Rule 144A Securities;
A-49
(ix) Senior Loans, provided, however, that the
initial issue amount (facility size) is at least $100 million.
The minimum accepted holding size (notional amount at purchase
prior to amortization) of any given loan not rated by S&P,
Moody's or other nationally recognized rating agency is at
least $1 million, provided, that participation loans are
limited to not more than 10% of the aggregate value of the S&P
Eligible Asset. For loans rated by S&P, Moody's or other
nationally recognized rating agency, there is no minimum
accepted holding size. If the holding size is less than $1
million (notional amount at purchase prior to amortization),
then the loan must be rated "B-" (or its equivalent by another
rating agency) or higher by S&P. Loans not rated by S&P shall
be considered S&P Eligible Assets only to the extent the
Market Value of such obligation does not exceed 50% of the
aggregate Market Value of S&P Eligible Assets; and in the case
of any loan that is not rated by S&P but is rated by another
nationally recognized statistical rating organization, such
loan will be deemed to have an S&P rating one full rating
category lower than the S&P rating category that is the
equivalent of the rating category in which such loan is placed
by such other nationally recognized statistical rating
organization. Senior Loan Participations and non-Senior Loans
will qualify as S&P Eligible Assets only up to an aggregate
maximum of 15% of the Fund's total assets. These levels apply
to U.S. loans only; any international loans are excluded.
"Senior Loan" means any secured Bank Loan that is not
subordinated by its terms to any other indebtedness of the
borrower.
"Senior Loan Participations" means participations by the Fund
in a lender's portion of a Bank Loan where the Fund has a
contractual relationship with such lender and not the
borrower.
(x) Preferred stocks that satisfy all of the
following conditions:
1. The preferred stock issue has a senior
rating from S&P, or the preferred issue must be
rated. In the case of Yankee preferred stock, the
issuer should have an S&P senior rating of at least
"BBB-", or the preferred issue must be rated at least
"BBB-".
2. The issuer--or if the issuer is a
special purpose corporation, its parent--is listed on
either the New York Stock Exchange, the American
Stock Exchange or NASDAQ if the traded par amount is
less than $1,000. If the traded par amount is $1,000
or more exchange listing is not required.
3. The collateral pays cash dividends
denominated in U.S. dollars.
4. Private placements under Rule 144A with
registration rights are eligible assets.
A-50
5. The minimum market capitalization of
eligible issuers is $100 million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to preferred
stock with a Rate Period of less than or equal to 49
days, except for a new issue, where the first Rate
Period may be up to 64 days.
2. The floating-rate preferred stock may
not have been subject to a failed auction.
Restrictions for adjustable- or auction-rate preferred stock:
1. The total fair market value of
adjustable-rate preferred stock held in the portfolio
may not exceed 10% of eligible assets.
Concentration Limits:
1. Total issuer exposure in preferred
stock of any one issuer is limited to 10% of the fair
market value of eligible assets.
2. Preferred stock rated below "B-"
(including non-rated preferred stock) are limited to
no more than 15% of the fair market value of the
eligible assets.
3. Add 5 points to over-collateralization
level for issuers with a senior rating or preferred
stock rating of less than "BBB-".
4. Add 10 point to over-collateralization
level of issuers with no senior rating, preferred
stock rating or dividend history.
(xi) Common Stocks. Common stocks that satisfy all of
the following conditions:
1. The issuer can hold no more than the
average monthly trading volume over the past year.
2. Each stock must have a minimum market
capitalization of at least $100 million.
3. Master limited partnerships or limited
liability partnerships are ineligible.
A-51
4. Restricted stocks (144A securities) or
any pink sheet stocks (generally, stocks that are not
carried in daily over-the-counter newspaper listings)
are ineligible.
5. The issuer may not hold any equity
unless it has been listed on an exchange or traded
for more than one year and one quarter, or 15 months
(eligible stock exchanges are the New York Stock
Exchange, American Stock Exchange, Philadelphia Stock
Exchange, Boston Stock Exchange, Washington Stock
Exchange, Midwest Stock Exchange, NASDAQ, and
National Market Quotations). (Add 20 percentage
points to the overcollateralization level for common
stock that do not meet this requirement.)
6. The collateral is owned by the fund, or
the trustee or collateral agent has a first perfected
priority security interest in the collateral. (For
S&P's perfection of Security Interest Criteria, see
Legal Criteria For Structured Finance Transactions,
April 2002).
(xii) Municipal Obligations. A Municipal Obligation
owned by the Fund that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect
to principal and interest in U.S. Dollars; (iii) has an
original issuance size of $10 million or greater and any
securities with an issuance size of under $10 million must be
rated "AA" or better by S & P; or, if not rated by S&P but
rated "AAA" by another nationally recognized statistical
rating organization, on a case by case basis; (iv) except for
Inverse Floaters, is not part of a private placement of
Municipal Obligations; (v) is issued by any of the 50 states
of the U.S., its territories, and their subdivisions,
counties, cities, towns, villages, and school districts; by
agencies such as authorities and special districts created by
the states; and by certain federally sponsored agencies such
as local housing authorities. Payments made on these bonds are
exempt from federal income taxes and are generally exempt from
state and local taxes in the state of issuance; and (vi) Fifty
percent of the aggregate fair market value of the pledged pool
may be rated by a nationally recognized statistical rating
organization other than S&P. Notwithstanding the foregoing
limitations:
(A) Municipal Obligations (excluding
Escrowed Bonds) of any one issuer or guarantor
(excluding bond insurers) rated at least "BBB" by S&P
or "A" by another NRSRO shall be considered S&P
Eligible Assets only to the extent the Market Value
of such Municipal Obligations (including short-term
Municipal Obligations) does not exceed 10% of the
aggregate Market Value of S&P Eligible Assets,
provided that either (i) 2% is added to the S&P
Discount Factor for every 1% by which the Market
Value for any issuer exceeds 5%, up to a maximum of
10% or (ii) 10% is added to the S&P Discount Factor
for any issuer that exceeds 5% of the aggregate S&P
Eligible Assets. High Yield Securities (as defined
below) of any one issuer shall be considered S&P
A-52
Eligible Assets only to the extent the Market Value
of such Municipal Obligations does not exceed 5% of
the aggregate Market Value of S&P Eligible Assets;
(B) Municipal Obligations not rated by S&P
shall be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Obligations
does not exceed 50% of the aggregate Market Value of
S&P Eligible Assets; provided, however, that High
Yield Securities shall be considered S&P Eligible
Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets; and
(C) Municipal Obligations issued by issuers
in any one state or territory will be considered S&P
Eligible Assets only to the extent the Market Value
of such Municipal Obligations does not exceed 25% of
the aggregate Market Value of S&P Eligible Assets; or
(xiii) Asset Backed Securities. Receivables-backed
tranches are publicly issued with a rating of "AA" or higher
by S&P, tranches are current interest-bearing, fixed- or
floating-rate, and are backed by automobile loans or credit
card (fixed-rate only) receivables with an original issuance
size of at least $200 million. No more than 25% of the total
market value of the collateral can be from one private sector
issuer. With respect to floating-rate credit card receivables,
not more than 25% of the collateral may be from one
investment-grade private sector issuer. No more than 10% of
the market value of the collateral may be from one
noninvestment-grade private sector issuer.
Escrow Bonds may comprise 100% of the Fund's S&P
Eligible Assets. Bonds that are legally defeased and secured
by direct U.S. government obligations are not required to meet
any minimum issuance size requirement. Bonds that are
economically defeased or secured by other U.S. agency paper
must meet the minimum issuance size requirement for the Fund
described above. Bonds initially rated or rerated as an escrow
bond by another NRSRO are limited to 50% of the Fund's S&P
Eligible Assets, and carry one full rating lower than the
equivalent S&P rating for purposes of determining the
applicable discount factors. Bonds economically defeased and
either initially rated or rerated by S&P or another NRSRO are
assigned that same rating level as its debt issuer, and will
remain in its original industry category.
The Fund's portfolio must consist of no less than 20
issues representing no less than 10 industries as determined
by the S&P Global Industry Classification System.
(xxx) "S&P Exposure Period" means the sum of (i) that number of
days from the last Valuation Date on which the Fund's Discounted Value
of S&P Eligible Assets were greater than the Preferred Shares Basic
Maintenance Amount to the Valuation Date on which the Fund's Discounted
Value of S&P Eligible Assets failed to exceed the Preferred Shares
A-53
Basic Maintenance Amount, (ii) the maximum number of days following a
Valuation Date that the Fund has under this Statement to cure any
failure to maintain a Discounted Value of S&P Eligible Assets at least
equal to the Preferred Shares Basic Maintenance Amount, and (iii) the
maximum number of days the Fund has to effect a mandatory redemption
under this Statement.
(yyy) "S&P Hedging Transactions" means the purchases or sales
of futures contracts based on the Municipal Index or Treasury Bonds,
the writings, purchases or sales of put and call options on such
contracts, purchases of interest rate locks, interest rate caps,
interest rate floors, interest rate collars, and entering into interest
rate swaps. For so long as any AMPS are rated by S&P, the Fund will not
purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or
call options (except covered call options) on portfolio securities
unless it receives written confirmation from S&P that engaging in such
transactions will not impair the ratings then assigned to the AMPS by
S&P except that the Fund may engage in S&P Hedging Transactions,
subject to the following limitations.
(i) the Fund will not engage in any S&P Hedging
Transaction based on the Municipal Index (other than Closing
Transactions), which would cause the Fund at the time of such
transaction to own or have sold the least of (A) more than
1,000 outstanding futures contracts based on the Municipal
Index, (B) outstanding futures contracts based on the
Municipal Index exceeding in number 50% of the quotient of the
Market Value of the Fund's total assets divided by $1,000 or
(C) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded
futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as reported
by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging
Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of such
transaction to own or have sold the lesser of (A) outstanding
futures contracts based on Treasury Bonds and on the Municipal
Index exceeding in number 50% of the quotient of the Market
Value of the Fund's total assets divided by $100,000 ($200,000
in the case of the two-year United States Treasury Note) or
(B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded
futures contracts based on Treasury Bonds in the 30 days
preceding the time of effecting such transaction as reported
by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to
close out any outstanding futures contract which the Fund owns
or has sold or any outstanding option thereon owned by the
Fund in the event (A) the Fund does not have S&P Eligible
Assets with an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Fund is required to
pay variation margin on the second such Valuation Date;
A-54
(iv) the Fund will engage in a Closing Transaction to
close out any outstanding futures contract or option thereon
in the month prior to the delivery month under the terms of
such futures contract or option thereon unless the Fund holds
the securities deliverable under such terms; and
(v) when the Fund writes a futures contract or
option thereon, it will either (A) maintain an amount of cash,
cash equivalents or high grade (rated "A" or better by S&P),
fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the
amount of initial margin and variation margin held in the
account of or on behalf of the Fund's broker with respect to
such futures contract or option equals the Market Value of the
futures contract or option, or, (B) in the event the Fund
writes a futures contract or option thereon which requires
delivery of an underlying security, hold such underlying
security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of initial margin or variation margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked-to-market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund, plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
The Fund will only enter into interest rate swaps subject to the
following conditions:
1. The counterparty to the swap transaction has a
short-term rating of "A-l" or equivalent by S&P, or, if the
counterparty does not have a short-term rating, the
counterparty's senior unsecured long-term debt rating is "A+,"
or equivalent by S&P, or higher.
2. The original aggregate notional amount of the
interest rate swap transaction or transactions is not to be
greater than the liquidation preference of the AMPS.
3. The interest rate swap transaction will be
marked-to-market weekly by the swap counterparty.
4. If the Fund fails to maintain an aggregate
discounted value at least equal to the Preferred Shares Basic
Maintenance Amount on two consecutive valuation dates then the
agreement shall terminate immediately.
5. For the purpose of calculating the Preferred
Shares Basic Maintenance Amount: (i) 90% of any positive
mark-to-market valuation of the Fund's rights will be S&P
Eligible Assets and (ii) 100% of any negative mark-to-market
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valuation of the Fund's rights will be included in the
calculation of the basic maintenance amount.
6. The Fund must maintain liquid assets with an
aggregate value at least equal to the net amount of the
excess, if any, of the Fund's obligations over its entitlement
with respect to each swap. For caps/floors, the Fund must
maintain liquid assets with an aggregate a value at least
equal to the Fund's obligations with respect to such caps or
floors.
(zzz) "S&P Industry Classification" means, for the purpose of
determining S&P Eligible Assets, each of the following industry
classifications (as defined by the S&P Global Industry Classification
System):
Aerospace & Defense Industrial Conglomerates
Air Freight and Logistics Airlines Insurance
Automobiles Internet & Catalog Retail
Automobile Components Internet Software & Services
Beverages IT Services
Biotechnology Leisure Equipment & Products
Building Products Machinery
Cable Marine
Capital Markets Media
Computers & Peripherals Metals & Mining
Commercial Banks Office Electronics
Commercial Services & Supplies Oil & Gas
Communications Equipment Packaging and Containers
Construction & Engineering Paper & Forest Products
Consumer Finance Personal Products
Containing & Packaging Pharmaceuticals
Distributors Real Estate
Diversified Financial Services Retail
Diversified Telecommunication Services Road & Rail
Electric Utilities Software
Electrical Equipment Specialty Retail
Electronic Equipment & Instrument Semiconductors and Semiconductor
Energy Equipment & Services Equipment
Food & Staples Retailing Textiles, Apparel and Luxury Goods
Food Products Thrift & Mortgage Finance
Gas Utilities Tobacco
Healthcare Equipment & Supplies Trading Companies & Distributors
Healthcare Providers & Services Transportation and Infrastructure
Hotels, Restaurants & Leisure Transportation Utilities
Household Durables Water Utilities
Household Products Wireless Telecommunication Services
The Fund will use its discretion in determining which industry
classification is applicable to a particular investment in consultation
with its independent auditors and S&P, to the extent the Fund considers
necessary.
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(aaaa) "S&P Real Estate Industry/Property Sector Classification"
means, for the purposes of determining S&P Eligible Assets, each of the
following industry classifications (as defined by NAREIT):
Office Shopping Centers
Industrial Regional Malls
Mixed Free Standing
Apartments Home Financing
Manufactured Homes Commercial Financing
Diversified Self Storage
Lodging/Resorts Specialty
Health Care
The Fund will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment, and,
will consult with the independent auditor and/or S&P, as necessary.
(bbbb) "S&P Loan Category" means the following four categories
(and, for purposes of this categorization, the Market Value of an S&P
Eligible Asset trading at par is equal to $1.00):
(i) "S&P Loan Category A" means Performing Senior
Loans which have a Market Value greater than $.90;
(ii) "S&P Loan Category B" means Performing Senior
Loans which have a Market Value greater than $.85 but equal to
or less than $.90;
(iii) "S&P Loan Category C" means non-Performing
Senior Loans which have a Market Value greater than $.85;
(iv) "S&P Loan Category D" means (1) Performing
Senior Loans which have a Market Value less than $.85 and (2)
Non-Performing Senior Loans which have a Market Value less
than or equal to $.85.
(cccc) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(dddd) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any successor securities
depository selected by the Fund that agrees to follow the procedures
required to be followed by such securities depository in connection
with the shares of AMPS.
(eeee) "Sell Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
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(ffff) "Senior Loans" has the meaning set forth under the
definition of "Moody's Discount Factor."
(gggg) "Series A AMPS" means 2,000 Auction Market Preferred
Shares, liquidation preference $25,000 per share.
(hhhh) "Series B AMPS" means 2,000 Auction Market Preferred
Shares, liquidation preference $25,000 per share.
(iiii) "Short-Term Money Market Instrument" means the following
types of instruments if, on the date of purchase or other acquisition
thereof by the Fund, the remaining term to maturity thereof is not in
excess of 180 days:
(i) commercial paper rated "A-1" if such commercial
paper matures in 30 days or A-1+ if such commercial paper
matures in over 30 days;
(ii) demand or time deposits in, and banker's
acceptances and certificates of deposit of (A) a depository
institution or trust company incorporated under the laws of
the United States of America or any state thereof or the
District of Columbia or (B) a United States branch office or
agency of a foreign depository institution (provided that such
branch office or agency is subject to banking regulation under
the laws of the United States, any state thereof or the
District of Columbia);
(iii) overnight funds;
(iv) U.S. Government Securities; and
(v) Eurodollar demand or time deposits in, or
certificates of deposit of, the head office or the London
branch office of a depository institution or trust company if
the certificates of deposit, if any, and the long-term
unsecured debt obligations (other than such obligations the
ratings of which are based on the credit of a person or entity
other than such depository institution or trust company) of
such depository institution or Fund company that have (1)
credit ratings on such Valuation Date of at least "P-1" from
Moody's and either "F1+" from Fitch or "A-1+" from S&P, in the
case of commercial paper or certificates of deposit, and (2)
credit ratings on each Valuation Date of at least "Aa3" from
Moody's and either "AA-" from Fitch or "AA-" from S&P, in the
case of long-term unsecured debt obligations; provided,
however, that in the case of any such investment that matures
in no more than one Business Day from the date of purchase or
other acquisition by the Fund, all of the foregoing
requirements shall be applicable except that the required
long-term unsecured debt credit rating of such depository
institution or trust company from Moody's, Fitch and S&P shall
be at least "A2", "A" and "A", respectively; and provided
further, however, that the foregoing credit rating
requirements shall be deemed to be met with respect to a
depository institution or trust company if (1) such depository
institution or trust company is the principal depository
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institution in a holding company system, (2) the certificates
of deposit, if any, of such depository institution or Fund
company are not rated on any Valuation Date below "P-1" by
Moody's, "F1+" by Fitch or "A-1+" by S&P and there is no
long-term rating, and (3) the holding company shall meet all
of the foregoing credit rating requirements (including the
preceding proviso in the case of investments that mature in no
more than one Business Day from the date of purchase or other
acquisition by the Fund); and provided further, that the
interest receivable by the Fund shall not be subject to any
withholding or similar taxes.
(jjjj) "Special Rate Period" means a Rate Period that is not a
Standard Rate Period.
(kkkk) "Specific Redemption Provisions" means, with respect to
any Special Rate Period of more than one year, either, or any
combination of (i) a period (a "Non-Call Period") determined by the
Board of Trustees after consultation with the Broker-Dealers, during
which the shares subject to such Special Rate Period are not subject to
redemption at the option of the Fund pursuant to Section 3(a)(ii) and
(ii) a period (a "Premium Call Period"), consisting of a number of
whole years as determined by the Board of Trustees after consultation
with the Broker-Dealers, during each year of which the shares subject
to such Special Rate Period shall be redeemable at the Fund's option
pursuant to Section 3(a)(i) and/or in connection with any mandatory
redemption pursuant to Section 3(a)(ii) at a price per share equal to
$25,000 plus accumulated but unpaid dividends plus a premium expressed
as a percentage or percentages of $25,000 or expressed as a formula
using specified variables as determined by the Board of Trustees after
consultation with the Broker-Dealers.
(llll) "Standard Rate Period" means a Rate Period of seven days
in the case of Series A AMPS and 28 days in the case of Series B AMPS.
(mmmm) "Submission Deadline" means 1:00 P.M., Eastern Standard
time, on any Auction Date or such other time on any Auction Date by
which Broker-Dealers are required to submit Orders to the Auction Agent
as specified by the Auction Agent from time to time.
(nnnn) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(oooo) "Submitted Hold Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(pppp) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(qqqq) "Submitted Sell Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
A-59
(rrrr) "Substitute LIBOR Dealer" means LIBOR Dealers appointed
by the Fund from time to time to act as substitute LIBOR Dealers.
(ssss) "Substitute U.S. Government Securities Dealer" means U.S.
Government Securities Dealers appointed by the Fund from time to time
to act as substitute U.S. Government Securities Dealers.
(tttt) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(uuuu) "Transfer Agent" means means Deutsche Bank Trust Company
Americas, unless and until another entity appointed by a resolution of
the Board of Trustees enters into an agreement with the Fund to serve
as transfer agent.
(vvvv) "Treasury Index Rate," means the average yield to
maturity for actively traded, marketable U.S. Treasury fixed interest
rate securities having the same number of 30-day periods to maturity as
the length of the applicable Rate Period, determined, to the extent
necessary, by linear interpolation based upon the yield for such
securities having the next shorter and next longer number of 30-day
periods to maturity treating all Rate Periods with a length greater
than the longest maturity for such securities as having a length equal
to such longest maturity, in all cases based upon data set forth in the
most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519));
provided, however, if the most recent such statistical release shall
not have been published during the 15 days preceding the date of
computation, the foregoing computations shall be based upon the average
of comparable data as quoted to the Fund by at least three U.S.
Government Securities Dealers selected by the Fund; provided further,
however, that if one of the U.S. Government Securities Dealers does not
quote a rate required to determine the Treasury Index Rate, the
Treasury Index Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers selected by the
Fund to provide such rate or rates not being supplied by the U.S.
Government Securities Dealer; provided further, that if the U.S.
Government Securities Dealer and Substitute U.S. Government Securities
Dealers are required but unable to determine a rate in accordance with
at least one of the procedures provided above, the Treasury Index Rate
shall be the Treasury Index Rate as determined on the previous Auction
Date.
(wwww) "U.S. Government Securities" mean securities that are
direct obligations of, and obligations the timely payment of principal
and interest on which is fully guaranteed by, the United States of
America or any agency or instrumentality of the United States of
America, the obligations of which are backed by the full faith and
credit of the United States of America and in the form of conventional
bills, bonds and notes.
(xxxx) "U.S. Government Securities Dealer" means any recognized
dealer in U.S. Government Securities selected by the Fund as to which
Moody's (if Moody's is then rating the AMPS) or S&P (if S&P is then
rating the AMPS) shall not have objected, and in each case their
A-60
respective affiliates or successors, if such entity is a recognized
dealer in U.S. Government Securities.
(yyyy) "U.S. Treasury Securities" means direct obligations of
the United States Treasury that are entitled to the full faith and
credit of the United States.
(zzzz) "U.S. Treasury Strips" means securities based on U.S.
Treasury Securities created through the Separate Trading of Registered
Interest and Principal of Securities program.
(aaaaa) "Valuation Date" means every Friday, or, if such day is
not a Business Day, the next preceding Business Day; provided, however,
that the first Valuation Date may occur on any other date established
by the Fund; provided, further, however, that such date shall be not
more than one week from the date on which its AMPS initially are
issued.
(bbbbb) "Winning Bid Rate" has the meaning set forth in Section
3(a)(iii) of Part II of this Statement.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
A-61
PART II: AUCTION PROCEDURES
1. Orders. (a) Prior to the Submission Deadline on each Auction Date
for a series of AMPS, each Beneficial Owner may submit Orders with respect to
shares of the series to that Broker-Dealer as follows:
(i) each Beneficial Owner of shares of the series may submit
to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
desires to continue to hold without regard to the Applicable
Rate for shares of the series for the next succeeding Rate
Period of the shares;
(B) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
offers to sell if the Applicable Rate for shares of the series
for the next succeeding Rate Period of shares of the series
shall be less than the rate per annum specified by the
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
offers to sell without regard to the Applicable Rate for
shares of the series for the next succeeding Rate Period of
shares of the series; and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of that series which each Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares
of that Series for the next succeeding Rate Period of shares of that
series shall not be less than the rate per annum specified by the
Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
A-62
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of the series specified
in the Bid if the Applicable Rate for shares of the series determined
on the Auction Date shall be less than the rate specified therein;
(B) the number or a lesser number of Outstanding shares of
the series to be determined as set forth in clause (iv) of paragraph
(a) of Section 4 of this Part II if the Applicable Rate for shares of
the series determined on the Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding shares of the series specified
in the Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of the series, or the number or a lesser number
of Outstanding shares of the series to be determined as set forth in
clause (iii) of paragraph (b) of Section 4 of this Part II if the rate
specified therein shall be higher than the Maximum Rate for shares of
the series and Sufficient Clearing Bids for shares of the series do not
exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares
of a series of AMPS subject to an Auction on any Auction Date shall constitute
an irrevocable offer to sell:
(A) the number of Outstanding shares of the series specified
in the Sell Order; or
(B) the number or a lesser number of Outstanding shares of
the series as set forth in clause (iii) of paragraph (b) of Section 4
of this Part II if Sufficient Clearing Bids for shares of the series do
not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of AMPS shall not be liable to any Person for failing to
sell the shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) the shares were transferred by the
Beneficial Owner thereof without compliance by the Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to the Broker-Dealer's records, the Broker-Dealer believes it is
not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of AMPS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of the series specified
in the Bid if the Applicable Rate for shares of the series determined
on the Auction Date shall be higher than the rate specified therein; or
A-63
(B) the number or a lesser number of Outstanding shares of
the series as set forth in clause (v) of paragraph (a) of Section 4 of
this Part II if the Applicable Rate for shares of the series determined
on the Auction Date shall be equal to the rate specified therein.
(C) No Order for any number of AMPS other than whole shares
shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders for AMPS of a series subject
to an Auction on the Auction Date, designating itself (unless otherwise
permitted by the Fund) as an Existing Holder in respect of shares subject to
Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order for
the shares:
(i) the name of the Bidder placing the Order (which shall be
the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of the series that are the
subject of the Order;
(iii) to the extent that the Bidder is an Existing Holder of
shares of the series:
(A) the number of shares, if any, of the series
subject to any Hold Order of the Existing Holder;
(B) the number of shares, if any, of the series
subject to any Bid of the Existing Holder and the rate
specified in the Bid; and
(C) the number of shares, if any, of the series
subject to any Sell Order of the Existing Holder; and
(iv) to the extent the Bidder is a Potential Holder of shares
of the series, the rate and number of shares of the series specified in
the Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round the rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding AMPS of a
series held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order to have
been submitted by or on behalf of the Existing Holder covering the number of
Outstanding shares of the series held by the Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of the series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Rate Period consisting of more than 91
A-64
days, the Auction Agent shall deem a Sell Order to have been submitted by or on
behalf of the Existing Holder covering the number of outstanding shares of the
series held by the Existing Holder and not subject to Orders submitted to the
Auction Agent.
(d) If one or more Orders of an Existing Holder are submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding AMPS
of a series subject to an Auction held by the Existing Holder, the Orders shall
be considered valid in the following order of priority:
(i) all Hold Orders for shares of the series shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding shares of the series held by such Existing
Holder, and if the number of shares of the series subject to Hold
Orders exceeds the number of Outstanding shares of the series held by
such Existing Holder, the number of shares subject to each Hold Order
shall be reduced pro rata to cover the number of Outstanding shares of
the series held by such Existing Holder;
(ii)(A) any Bid for shares of the series shall be considered
valid up to and including the excess of the number of Outstanding
shares of the series held by the Existing Holder over the number of
shares of the series subject to any Hold Orders referred to in clause
(i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of the series is submitted to the Auction
Agent with the same rate and the number of Outstanding shares of the
series subject to Bids is greater than such excess, the Bids shall be
considered valid up to and including the amount of the excess, and the
number of shares of the series subject to each Bid with the same rate
shall be reduced pro rata to cover the number of shares of the series
equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid
of an Existing Holder for shares of the series is submitted to the
Auction Agent with different rates, the Bids shall be considered valid
in the ascending order of their respective rates up to and including
the amount of the excess; and
(D) in any such event, the number, if any, of Outstanding
shares of the series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as
the subject of a Bid for shares of the series by or on behalf of a
Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of the series shall be
considered valid up to and including the excess of the number of
Outstanding shares of the series held by the Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
A-65
(e) If more than one Bid for one or more shares of a series of AMPS is
submitted to the Auction Agent by or on behalf of any Potential Holder, each Bid
submitted shall be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of AMPS, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of the series (each Order as submitted or deemed submitted by a Broker-Dealer
being hereinafter referred to individually as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine for the series:
(i) the excess of the number of Outstanding shares of the
series over the number of Outstanding shares of the series subject to
Submitted Hold Orders (the excess being hereinafter referred to as the
"Available AMPS" of such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of the series
subject to Submitted Bids of Potential Holders specifying one
or more rates equal to or lower than the Maximum Rate (for all
Rate Periods) for shares of the series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of the series
subject to Submitted Bids of Existing Holders specifying one
or more rates higher than the Maximum Rate (for all Rate
Periods) for shares of the series; and
(C) the number of Outstanding shares of the series
subject to Submitted Sell Orders
(in the event the excess or the equality exists (other than because
the number of shares of the series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of the series are subject
to Submitted Hold Orders), the Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of the series); and
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(iii) if Sufficient Clearing Bids for shares of the series
exist, the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A)(I) each Submitted Bid of Existing Holders
specifying the lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling the Existing Holders to continue to hold the
shares of the series that are subject to the Submitted Bids;
and
(B)(I) each Submitted Bid of Potential Holders
specifying the lowest rate and (II) all other the Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of the
series which, when added to the number of Outstanding shares of the
series to be purchased by the Potential Holders described in subclause
(B) above, would equal not less than the Available AMPS of the series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Fund of the Maximum Rate for shares of the series of AMPS for which an Auction
is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of the series for the next succeeding Rate Period
thereof as follows:
(i) if Sufficient Clearing Bids for shares of the series
exist, that the Applicable Rate for all shares of the series for the
next succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for shares of the series so determined;
(ii) if Sufficient Clearing Bids for shares of the series do
not exist (other than because all of the Outstanding shares of the
series are subject to Submitted Hold Orders), that the Applicable Rate
for all shares of the series for the next succeeding Rate Period
thereof shall be equal to the Maximum Rate for shares of the series; or
(iii) if all of the Outstanding shares of the series are
subject to Submitted Hold Orders, that the Applicable Rate for all
shares of the series for the next succeeding Rate Period thereof shall
be 90% of the Reference Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Existing Holders shall continue to hold the
AMPS that are subject to Submitted Hold Orders, and, based on the determinations
made pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids
and Submitted Sell Orders shall be accepted or rejected by the Auction Agent and
the Auction Agent shall take such other action as set forth below:
A-67
(a) If Sufficient Clearing Bids for shares of a series of
AMPS have been made, all Submitted Sell Orders with respect to shares
of the series shall be accepted and, subject to the provisions of
paragraphs (d) and (e) of this Section 4, Submitted Bids with respect
to shares of the series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with respect
to shares of the series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
the series specifying any rate that is higher than the Winning
Bid Rate for shares of the series shall be accepted, thus
requiring each Existing Holder to sell the AMPS subject to the
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of
the series specifying any rate that is lower than the Winning
Bid Rate for shares of the series shall be rejected, thus
entitling each Existing Holder to continue to hold the AMPS
subject to the Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
the series specifying any rate that is lower than the Winning
Bid Rate for shares of the series shall be accepted;
(iv) Each Existing Holder's Submitted Bid for shares
of the series specifying a rate that is equal to the Winning
Bid Rate for shares of the series shall be rejected, thus
entitling the Existing Holder to continue to hold the AMPS
subject to the Submitted Bid, unless the number of Outstanding
AMPS subject to all Submitted Bids shall be greater than the
number of AMPS ("remaining shares") in the excess of the
Available AMPS of the series over the number of AMPS subject
to Submitted Bids described in clauses (ii) and (iii) of this
paragraph (a), in which event the Submitted Bid of the
Existing Holder shall be rejected in part, and the Existing
Holder shall be entitled to continue to hold AMPS subject to
the Submitted Bid, but only in an amount equal to the number
of AMPS of the series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall
be the number of Outstanding AMPS held by the Existing Holder
subject to the Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding AMPS subject to
the Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate for shares of
the series; and
(v) Each Potential Holder's Submitted Bid for shares
of the series specifying a rate that is equal to the Winning
Bid Rate for shares of the series shall be accepted but only
in an amount equal to the number of shares of the series
obtained by multiplying the number of shares in the excess of
the Available AMPS of the series over the number of AMPS
subject to Submitted Bids described in clauses (ii) through
(iv) of this paragraph (a) by a fraction, the numerator of
which shall be the number of Outstanding AMPS subject to the
Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding AMPS subject to Submitted Bids
A-68
made by all such Potential Holders that specified a rate equal
to the Winning Bid Rate for shares of the series.
(b) If Sufficient Clearing Bids for shares of a series of
AMPS have not been made (other than because all of the Outstanding
shares of the series are subject to Submitted Hold Orders), subject to
the provisions of paragraph (d) of this Section 4, Submitted Orders for
shares of the series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for shares of
the series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
the series specifying any rate that is equal to or lower than
the Maximum Rate for shares of the series shall be rejected,
thus entitling Existing Holders to continue to hold the AMPS
subject to the Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
the series specifying any rate that is equal to or lower than
the Maximum Rate for shares of the series shall be accepted;
and
(iii) Each Existing Holder's Submitted Bid for shares
of the series specifying any rate that is higher than the
Maximum Rate for shares of the series and the Submitted Sell
Orders for shares of the series of each Existing Holder shall
be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any Submitted Bid
or Submitted Sell Order to sell the shares of the series
subject to the Submitted Bid or Submitted Sell Order, but in
both cases only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares of
the series subject to Submitted Bids described in clause (ii)
of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of the series held
by the Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the
aggregate number of Outstanding shares of such series subject
to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of AMPS are
subject to Submitted Hold Orders, all Submitted Bids for shares of the
series shall be rejected.
(d) If, as a result of the procedures described in clause
(iv) or (v) of paragraph (a) or clause (iii) of paragraph (b) of this
Section 4, any Existing Holder would be entitled or required to sell,
or any Potential Holder would be entitled or required to purchase, a
fraction of a share of a series of AMPS on any Auction Date, the
Auction Agent shall, in the manner as it shall determine in its sole
discretion, round up or down the number of AMPS of the series to be
purchased or sold by any Existing Holder or Potential Holder on the
Auction Date as a result of the procedures so that the number of shares
so purchased or sold by each Existing Holder or Potential Holder on the
Auction Date shall be whole shares of AMPS.
A-69
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 4, any Potential Holder would be
entitled or required to purchase less than a whole share of a series of
AMPS on any Auction Date, the Auction Agent shall, in the manner as it
shall determine in its sole discretion, allocate AMPS of the series or
purchase among Potential Holders so that only whole shares of AMPS of
the series are purchased on the Auction Date as a result of such
procedures by any Potential Holder, even if the allocation results in
one or more Potential Holders not purchasing AMPS of the series on the
Auction Date.
(f) Based on the results of each Auction for shares of a
series of AMPS, the Auction Agent shall determine the aggregate number
of shares of the series to be purchased and the aggregate number of
shares of the series to be sold by Potential Holders and Existing
Holders and, with respect to each Potential Holder and Existing Holder,
to the extent that the aggregate number of shares to be purchased and
the aggregate number of shares to be sold differ, determine to which
other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing Holder(s) they shall
receive, as the case may be, AMPS of the series. Notwithstanding any
provision of the Auction Procedures or in any settlement procedures to
the contrary, in the event an Existing Holder or Beneficial Owner of
shares of a series of AMPS with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for the shares that was accepted
in whole or in part, or submitted or is deemed to have submitted a Sell
Order for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver the shares against payment
therefore, partial deliveries of shares of AMPS that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted
Bids for shares of the series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and
Potential Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial
Owner, a Potential Beneficial Owner or its respective Agent Member to
deliver AMPS of any series or to pay for AMPS of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
5. Transfer of AMPS. Unless otherwise permitted by the Fund, a
Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of AMPS only in whole shares and only pursuant to a Bid or Sell Order placed
with the Auction Agent in accordance with the procedures described in this Part
II or to a Broker-Dealer; provided, however, that (a) a sale, transfer or other
disposition of AMPS 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 will not be deemed to be a sale,
transfer or other disposition for purposes of this Section 6 if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other Person, if permitted by the Fund) to whom such transfer is made will
advise the Auction Agent of such transfer.
A-70
6. Force Majeure. If a dividend payment date is not a Business Day
because the NYSE is closed for business for more than three consecutive business
days due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the dividend payable on such date can
not be paid for any such reason, then:
(a) the Dividend Payment Date for the affected Rate Period
will be the next Business Day on which the Fund and its paying agent,
if any, are able to cause the dividend to by paid using their
reasonable best efforts;
(b) the affected Rate Period will end on the day it would
have ended had such event not occurred and the Dividend Payment Date
had remained the scheduled date; and
(c) the next Rate Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the
Dividend Payment Date remained the scheduled date.
[Signature Page Follows]
A-71
IN WITNESS WHEREOF, FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE
INCOME FUND II has caused these presents to be signed as of _____________, 2004
in its name and on its behalf by its Secretary and attested by its President.
The Fund's Declaration of Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and the said officers of the Fund have executed
this Statement as officers and not individually, and the obligations and rights
set forth in this Statement are not binding upon any such officers, or the
Trustees or shareholders of the Fund, individually, but are binding only upon
the assets and property of the Fund.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND II
By
-------------------------------------
W. Scott Jardine
Secretary
ATTEST:
By
-----------------------------------
James A. Bowen
President
A-72
APPENDIX B
DESCRIPTION OF RATINGS
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P") rating symbols and their meanings (as published
by S&P) follows:
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. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. 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
credit 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 rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
Nature of and provisions of the obligation; and
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.
B-1
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.
"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 obligations 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
on the obligation.
"BB", "B", "CCC", "CC", and "C"
Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations 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 nonpayment 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 nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
B-2
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 nonpayment 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.
"CC"
An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C"
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.
"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.
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.
"c"
The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p"
The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
B-3
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
"*"
Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
"r"
The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
"N.R."
Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories ("AAA", "A", "A", "BBB",
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
Short-Term Issue Credit Ratings
Notes. A Standard & Poor's note ratings reflects the liquidity factors
and market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
B-4
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1"
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus ("+")
designation.
"SP-2"
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
"SP-3"
Speculative capacity to pay principal and interest.
Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
"A-1"
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 its 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
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
B-5
"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 nonpayment
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 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.
Moody's Investors Service, Inc. -- A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their
meanings (as published by Moody's) follows:
Municipal Ratings are opinions of the investment quality of issuers and
issues in the US municipal and tax-exempt markets. As such, these ratings
incorporate Moody's assessment of the default probability and loss severity of
these issuers and issues. The default and loss content for Moody's municipal
long-term rating scale differs from Moody's general long-term rating scale.
Municipal Ratings are based upon the analysis of four primary factors
relating to municipal finance: economy, debt, finances, and
administration/management strategies. Each of the factors is evaluated
individually and for its effect on the other factors in the context of the
municipality's ability to repay its debt.
Municipal Long-Term Rating Definitions
"Aaa"
Issuers or issues rated "Aaa" demonstrate the strongest
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
B-6
"Aa"
Issuers or issues rated "Aa" demonstrate very strong creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"A"
Issuers or issues rated "A" present above-average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Baa"
Issuers or issues rated "Baa" represent average creditworthiness
relative to other US municipal or tax- exempt issuers or issues.
"Ba"
Issuers or issues rated "Ba" demonstrate below-average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"B"
Issuers or issues rated "B" demonstrate weak creditworthiness relative
to other US municipal or tax- exempt issuers or issues.
"Caa"
Issuers or issues rated "Caa" demonstrate very weak creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Ca"
Issuers or issues rated "Ca" demonstrate extremely weak
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"C"
Issuers or issues rated "C" demonstrate the weakest creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
Note: Moody's appends numerical modifiers "1", "2", and "3" to each generic
rating category from "Aa" through "Caa". The modifier "1" indicates that the
issuer or obligation ranks in the higher end of its generic rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates a
ranking in the lower end of that generic rating category.
B-7
Short-Term Debt Ratings
There are three rating categories for short-term municipal obligations
that are considered investment grade. These ratings are designated as Municipal
Investment Grade ("MIG") and are divided into three levels -- "MIG 1" through
"MIG 3". In addition, those short-term obligations that are of speculative
quality are designated "SG", or speculative grade. "MIG" ratings expire at the
maturity of the obligation.
"MIG 1"
This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
"MIG 2"
This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
"MIG 3"
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
"SG"
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
Demand Obligation Ratings
In the case of variable rate demand obligations ("VRDOs"), a
two-component rating is assigned; a long or short-term debt rating and a demand
obligation rating. The first element represents Moody's evaluation of the degree
of risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
ability to receive purchase price upon demand ("demand feature"), using a
variation of the "MIG" rating scale, the Variable Municipal Investment Grade or
"VMIG" rating. When either the long- or short-term aspect of a "VRDO" is not
rated, that piece is designated NR, e.g., "Aaa/NR" or "NR/VMIG 1". "VMIG" rating
expirations are a function of each issue's specific structural or credit
features.
B-8
"VMIG 1"
This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
"VMIG 2"
This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
"VMIG 3"
This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
"SG"
This designation denotes speculative-grade credit quality. Demand
features rated in this category may supported by a liquidity provider that does
not have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
Commercial Paper
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.
Moody's employs the following designations to indicate the relative
repayment ability of rated issuers:
"P-1"
Issuers (or supporting institutions) rated "Prime-1" have a superior
ability to repay short-term debt obligations.
"P-2"
Issuers (or supporting institutions) rated "Prime-2" have a strong
ability to repay short-term debt obligations.
B-9
"P-3"
Issuers (or supporting institutions) rated "Prime-3" have an acceptable
ability to repay short-term obligations.
"NP"
Issuers (or supporting institutions) rated "Not Prime" do not fall
within any of the Prime rating categories.
Note: Canadian issuers rated "P-1" or "P-2" have their short-term ratings
enhanced by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
Fitch Ratings -- A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
International Long-Term Credit Ratings are more commonly referred to as
simply "Long-Term Ratings." The following scale applies to foreign currency and
local currency ratings.
International credit ratings assess the capacity to meet foreign or
local currency commitments. Both foreign and local currency ratings are
internationally comparable assessments. The local currency rating measures the
probability of payment only within the sovereign state's currency and
jurisdiction.
"AAA"
Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA"
Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A"
High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
B-10
"BBB"
Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"BB"
Speculative. "BB" ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
"B"
Highly speculative. "B" ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
"CCC", "CC", "C"
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A "CC" rating indicates that default of some kind appears
probable. "C" ratings signal imminent default.
"DDD", "DD", "D"
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50%-90% and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect of repaying all obligations.
B-11
Short-Term Credit Ratings
International Short-Term Credit Ratings are more commonly referred to
as simply "Short-Term Ratings." The following scale applies to foreign currency
and local currency ratings.
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
International credit ratings assess the capacity to meet foreign or
local currency commitments. Both foreign and local currency ratings are
internationally comparable assessments. The local currency rating measures the
probability of payment only within the sovereign state's currency and
jurisdiction.
"F1"
Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2"
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
"F3"
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B"
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C"
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
"D"
Default. Denotes actual or imminent payment default.
B-12
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1."
"NR" indicates that Fitch does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for a potential downgrade, or "Evolving," if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are "stable" could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch may be unable to identify the
fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
B-13
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Statement of Assets and Liabilities, as of May 31, 2004 (audited)
Statement of Operations, as of May 31, 2004 (audited)
Statement of Changes in Net Assets, for the Period Ended May 31, 2004
(audited)
Portfolio of Investments, as of May 31, 2004 (audited)
2. Exhibits:
a.1 Declaration of Trust dated March 25, 2004.***
a.2 Form of Statement Establishing and Fixing the Rights and Preferences
of Auction Market Preferred Shares. Filed herewith as Appendix A to the
Statement of Additional Information contained herein.
b. By-Laws of Registrant.***
c. None.
d. Form of Global Certificate.*
e. Terms and Conditions of the Dividend Reinvestment Plan.**
f. None.
g.1 Investment Management Agreement between Registrant and First Trust
Advisors L.P. dated May 25, 2004.*
g.2 Sub-Advisory Agreement between First Trust Advisors L.P. and Four
Corners Capital Management, LLC dated May 25, 2004.*
h.1 Form of Purchase Agreement.*
i. None.
j. Custodian Services Agreement between Registrant and PFPC Trust
Company dated May 26, 2004.*
k.1 Transfer Agency Services Agreement between Registrant and PFPC Inc.
dated May 26, 2004.*
k.2 Administration and Accounting Services Agreement between Registrant
and PFPC, Inc. dated May 26, 2004.*
k.3 Form of Auction Agency Agreement.*
k.4 Form of Broker-Dealer Agreement.*
k.5 Form of Blanket Letter of Representations.*
l.1 Opinion and consent of Chapman and Cutler LLP.*
l.2 Opinion and consent of Bingham McCutchen LLP.*
m. None.
n. Independent Auditors' Consent.*
o. None.
p. None.
q. None.
r.1 Code of Ethics of Registrant.**
r.2 Code of Ethics of First Trust Portfolios L.P.**
r.3 Code of Ethics of First Trust Advisors L.P.**
r.4 Code of Ethics of Four Corners Capital Management, LLC.**
s. Powers of Attorney of Messrs. Bowen, Erickson, Kadlec, Nielson and
Oster.***
--------------------
* Filed herewith.
** Filed on May 25, 2004 as an Exhibit to Pre-Effective Amendement No. 3 to
Registrant's Registration Statement on Form N-2 (File No. 333-113978) and
incorporated herein by reference.
*** Filed on April 29, 2004 as an Exhibit to Registrant's Registration
Statement on Form N-2 (File No. 333-113978) and incorporated herein
by reference.
Item 25: Marketing Arrangements
Reference is made to the Form of Purchase Agreement among the
Registrant, First Trust Advisors L.P., Four Corners Capital Management,
LLC and the Underwriters for the Registrant's common shares of
beneficial interest as filed herewith as Exhibit h.1.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fee.......................$ 12,670
Underwriting fee............................................. 1,000,000
Legal fees................................................... 75,000
Audit fees................................................... 10,500
Rating Agency fees........................................... 60,000
Printing fees................................................ 15,000
Other........................................................ 0
----------
Total...............................................$1,173,170
==========
Item 27: Persons Controlled By or Under Common Control With Registrant
Not applicable.
Item 28: Number of Holders of Securities
At July 31, 2004:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Shares, $0.01 par value 14
Item 29: Indemnification
Section 5.3 of the Registrant's Declaration of Trust provides as
follows:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is or has been a Trustee or officer of
the Trust (hereinafter referred to as a "Covered
Person") shall be indemnified by the Trust against all
liability and against all expenses reasonably incurred
or paid by him or her in connection with any claim,
action, suit or proceeding in which that individual
becomes involved as a party or otherwise by virtue of
being or having been a Trustee or officer and against
amounts paid or incurred by that individual in the
settlement thereof; and
(ii) the words "claim," "action," "suit" or "proceeding"
shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts
paid in settlement or compromise, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) against any liability to the Trust or the Shareholders
by reason of a final adjudication by the court or other
body before which the proceeding was brought that the
Covered Person engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's
office;
(ii) with respect to any matter as to which the Covered
Person shall have been finally adjudicated not to have
acted in good faith in the reasonable belief that that
individual's action was in the best interest of the
Trust; or
(iii) in the event of a settlement involving a payment by a
Trustee, Trustee Emeritus or officer or other
disposition not involving a final adjudication as
provided in paragraph (b)(i) or (b)(ii) above resulting
in a payment by a Covered Person, unless there has been
either a determination that such Covered Person did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved
in the conduct of that individual's office by the court
or other body approving the settlement or other
disposition or by a reasonable determination, based
upon a review of readily available facts (as opposed to
a full trial-type inquiry) that that individual did not
engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees (as defined below) acting on the matter
(provided that a majority of the Disinterested
Trustees then in office act on the matter); or
(B) by written opinion of (i) the then-current legal
counsel to the Trustees who are not Interested
Persons of the Trust or (ii) other legal counsel
chosen by a majority of the Disinterested Trustees
(or if there are no Disinterested Trustees with
respect to the matter in question, by a majority
of the Trustees who are not Interested Persons of
the Trust) and determined by them in their
reasonable judgment to be independent.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be a Covered Person
and shall inure to the benefit of the heirs, executors and
administrators of such person. Nothing contained herein shall
limit the Trust from entering into other insurance
arrangements or affect any rights to indemnification to which
Trust personnel, including Covered Persons, may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceeding of the character described
in paragraph (a) of this Section 5.3 shall be advanced by the
Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the Covered Person to repay
such amount if it is ultimately determined that the Covered
Person is not entitled to indemnification under this Section
5.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be
insured against losses arising out of any such
advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or legal
counsel meeting the requirement in Section
5.3(b)(iii)(B) above in a written opinion, shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one
(i) who is not an "Interested Person" of the Trust (including
anyone who has been exempted from being an "Interested Person"
by any rule, regulation or order of the Commission), and (ii)
against whom none of such actions, suits or other proceedings
or another action, suit or other proceeding on the same or
similar grounds is then or had been pending.
(e) With respect to any such determination or opinion referred to
in clause (b)(iii) above or clause (d)(ii) above, a rebuttable
presumption shall be afforded that the Covered Person has not
engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
such Covered Person's office in accordance with pronouncements
of the Commission.
The trustees and officers of the Registrant are covered by
Investment Trust Errors and Omission policies in the aggregate amount
of $5,000,000 (with a maximum deductible of $50,000) against liability
and expenses of claims of wrongful acts arising out of their position
with the Registrant, except for matters which involved willful acts,
bad faith, gross negligence and willful disregard of duty (i.e., where
the insured did not act in good faith for a purpose he or she
reasonably believed to be in the best interest of Registrant or where
he or she shall have had reasonable cause to believe this conduct was
unlawful).
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 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 director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
Section 6 of the Form of Purchase Agreement provides as follows:
(a) Indemnification of Underwriters. The Fund and the Advisers,
jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information,
if applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make
the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included
in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(e) below) any such
settlement is effected with the written consent of the Fund; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
(i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of
any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written
information furnished to the Fund or an Adviser by any Underwriter
through Merrill Lynch expressly for use in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); provided,
further, that the indemnity agreement contained in this Section 6(a)
shall not inure to the benefit of any Underwriter (or to the benefit of
any person controlling such Underwriter) from whom the person asserting
any such loss, liability, claim, damage and expense purchased the
Securities which are the subject thereof if the Prospectus corrected
any such alleged untrue statement or omission and if such Prospectus
was delivered to such Underwriter in a timely manner and if such
Underwriter failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such
Securities to such person.
(b) Indemnification of the Fund, Advisers, Trustees, Directors and
Officers. Each Underwriter severally agrees to indemnify and hold
harmless the Fund and the Advisers, their respective trustees and
directors, each of the Fund's officers who signed the Registration
Statement, and each person, if any, who controls the Fund or an Adviser
within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act, against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written
information furnished to the Fund or the Advisers by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement
(or any amendment thereto) or such preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(c) Indemnification for Marketing Materials. In addition to the
foregoing indemnification, the Fund and the Advisers also, jointly and
severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any
and all loss, liability, claim, damage and expense described in the
indemnity contained in Section 6(a), as limited by the proviso set
forth therein, with respect to any sales material.
(d) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of
which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any
liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Fund
or an Adviser, as applicable. In each case such counsel shall be
reasonably satisfactory to the indemnified party, and the indemnifying
party shall have the right to assume the defense of such action. An
indemnified party may participate at its own expense in the defense of
any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also
be counsel to the indemnified party. In no event shall the indemnifying
party be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from its own counsel for all
indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under
this Section 6 or Section 7 hereof (whether or not the indemnified
parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release
of each indemnified party from all liability arising out of such
litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for reasonable fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected
without its written consent if (i) such settlement is entered into more
than 60 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall have received notice of the
terms of such settlement at least 30 days prior to such settlement
being entered into and (iii) such indemnifying party shall not have
reimbursed such indemnified party in accordance with such request prior
to the date of such settlement.
Item 30: Business and Other Connections of Investment Adviser
(a) Investment Adviser. First Trust Advisors L.P. ("First Trust
Advisors") serves as investment adviser to the fund, First
Defined Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund,
First Trust Value Line(R) Dividend Fund, First Trust/Four
Corners Senior Floating Rate Income Fund, Macquarie/First Trust
Global Infrastructure/Utilities Dividend & Income Fund, First
Trust/Value Line(R) & Ibbotson Equity Allocation Fund, First
Trust/Four Corners Senior Floating Rate Income Fund II, Energy
Income and Growth Fund, First Trust/Fiduciary Asset Management
Covered Call Fund and six other mutual funds, serves as
sub-adviser to 8 mutual funds and is the portfolio supervisor
of certain unit investment trusts. Its principal address is
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
The principal business of certain of First Trust Advisors'
principal executive officers involves various activities in
connection with the family of unit investment trusts sponsored
by First Trust Portfolios L.P. ("First Trust Portfolios"). The
principal address of First Trust Portfolios is 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532.
OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT
DURING PAST TWO YEARS
NAME AND POSITION WITH
FIRST TRUST ADVISORS L.P. EMPLOYMENT DURING PAST TWO YEARS
James A. Bowen, Managing Director/President Managing Director/President, First Trust Portfolios
Ronald Dean McAlister, Managing Director Managing Director, First Trust Portfolios
Mark R. Bradley, Chief Financial Officer and Managing Chief Financial Officer and Managing Director, First
Director Trust Portfolios and Chief Financial Officer,
Bondwave LLC
Robert W. Bredemeier, Chief Operating Officer and Chief Operations Officer and Managing Director, First
Managing Director Trust Portfolios
Robert Franklin Carey, Chief Investment Officer and Senior Vice President, First Trust Portfolios
Senior Vice President
William Scott Jardine, General Counsel General Counsel, First Trust Portfolios and Secretary
of Bondwave LLC
Scott Hall, Managing Director Managing Director, First Trust Portfolios
Jon Carl Erickson, Senior Vice President Vice President, First Trust Portfolios
Jason Henry, Senior Vice President Senior Vice President, First Trust Portfolios
David McGarel, Senior Vice President Senior Vice President, First Trust Portfolios
Bob Porcellino, Senior Vice President Senior Vice President, First Trust Portfolios
Mark Sullivan, Senior Vice President Senior Vice President, First Trust Portfolios
Al Davis, Vice President Vice President, First Trust Portfolios
James P. Koeneman, Vice President Vice President, First Trust Portfolios since December 2003;
President, Burr Oak Advisors, Inc., June 2000 to December 2003
Daniel J. Lindquist, Vice President Vice President, First Trust Portfolios since April 2004;
Chief Operating Officer, Mina Capital Management, LLC,
January 2004 to April 2004; Chief Operating Officer,
Samaritan Asset Management Services, Inc.
Mitch Mohr, Vice President Vice President, First Trust Portfolios
David Pinsen, Vice President Vice President, First Trust Portfolios
Jonathan Steiner, Vice President Vice President, First Trust Portfolios
NAME AND POSITION WITH
FIRST TRUST ADVISORS L.P. EMPLOYMENT DURING PAST TWO YEARS
Walter E. Stubbings, Jr., Vice President Vice President, First Trust Portfolios since July 2004;
Assistant Vice President, Kansas City Life Insurance Company,
May 1999 to July 2004
Rick Swiatek, Vice President Vice President, First Trust Portfolios
Douglas Tichenor, Vice President Vice President, First Trust Portfolios
Roger Testin, Vice President Vice President, First Trust Portfolios
Kitty Collins, Assistant Vice President Assistant Vice President, First Trust Portfolios
Charles Bradley, Assistant Vice President Assistant Vice President, First Trust Portfolios
(b) Sub-Adviser. Four Corners Capital Management, LLC ("Four Corners")
serves as the investment sub-adviser of the Fund. Reference is made to: (i) the
information set forth under "Management of the Fund" in the Prospectus and
"Sub-Adviser" in the Statement of Additional Information; and (ii) the Form ADV
of Four Corners (File No. 801-60738) filed with the Commission, all of which are
incorporated herein by reference.
Item 31: Location of Accounts and Records
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, maintains the Declaration of Trust, By-Laws, minutes of trustees
and shareholders meetings and contracts of the Registrant, all advisory material
of the investment adviser, all general and subsidiary ledgers, journals, trial
balances, records of all portfolio purchases and sales, and all other required
records.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until
it amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act of 1933 shall be
deemed to be part of the Registration Statement as of the time it was
declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Lisle, and State of Illinois, on the 23rd day of
August, 2004.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING
RATE INCOME FUND II
By: /s/ James A. Bowen
------------------------------
James A. Bowen, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
---------------------- ----------------------------- -------------------------
Signature Title Date
---------------------- ----------------------------- -------------------------
/s/ Mark R. Bradley Chief Financial Officer August 23, 2004
------------------- and Treasurer (Principal
Mark R. Bradley Financial and Accounting
Officer)
---------------------- ----------------------------- -------------------------
/s/ James A. Bowen President, Chairman of the August 23, 2004
------------------ Board and Trustee
James A. Bowen (Principal Executive Officer)
---------------------- ----------------------------- -------------------------
Richard E. Erickson* Trustee )
---------------------- ----------------------------- By: /s/ W. Scott Jardine
Thomas R. Kadlec* Trustee ) ---------------------
---------------------- ----------------------------- W. Scott Jardine
Niel B. Nielson* Trustee ) Attorney-In-Fact
---------------------- ----------------------------- August 23, 2004
David M. Oster* Trustee )
---------------------- ------------------------------ -------------------------
--------------------
* Original powers of attorney authorizing James A. Bowen, W. Scott Jardine
and Eric F. Fess to execute this Registration Statement, and Amendments
thereto, for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, were previously executed and filed as
exhibits to Pre-effective Amendment No. 1 to Registrant's registration
statement on Form N-2 (File No. 333-113978) and are incorporated herein by
reference.
INDEX TO EXHIBITS
d. Form of Global Certificate.
g.1 Investment Management Agreement between Registrant and First Trust
Advisors L.P.
g.2 Sub-Advisory Agreement between First Trust Advisors L.P. and Four
Corners Capital Management, LLC.
h.1 Form of Purchase Agreement.
j. Custodian Services Agreement between Registrant and PFPC Trust
Company.
k.1 Transfer Agency Services Agreement between Registrant and PFPC Inc.
k.2 Administration and Accounting Services Agreement between Registrant
and PFPC, Inc.
k.3 Form of Auction Agency Agreement between Registrant and Deutsche Bank
Trust Company Americas.
k.4 Form of Broker-Dealer Agreement.
k.5 Form of DTC Blanket Letter of Representations.
l.1 Opinion and consent of Chapman and Cutler LLP.
l.2 Opinion and consent of Bingham McCutchen LLP.
n. Independent Auditors' Consent.