As filed with the Securities and Exchange Commission on May 12, 2004
1933 Act File No. 333-_____
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)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. _
[ ] POST-EFFECTIVE AMENDMENT NO. _
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 3
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 to:
Eric F. Fess
Chapman and Cutler LLP
111 West Monroe Street
Chicago, IL 60603
(312) 845-3000
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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
-------------------------- -------------- --------------------------- -------------------------------- ----------------------
Money Market Cumulative 40 $25,000 $1,000,000 $126.70
Preferred (MMP(R)) Shares
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(1) Estimated solely for the purpose of calculating the registration fee.
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 May 12, 2004
PROSPECTUS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
____ MONEY MARKET CUMULATIVE PREFERRED (MMP(R)) SHARES
Liquidation Preference $25,000 per Share
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First Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund") is
offering preferred shares (referred to as "Money Market Cumulative Preferred
Shares" or "MMP Shares"). The Fund is a newly organized, diversified, closed-end
management investment company. The Fund's primary investment objective is to
seek a high level of current income by investing in senior secured floating rate
corporate loans.
Investors in MMP Shares will be entitled to receive cash dividends at an
annual rate that may vary for each dividend period. Generally, following the
initial dividend period, each dividend period will be twenty-eight days. The
dividend rate for the initial period from and including the issue date through
__________, 2004, will be ____% per year. For each subsequent dividend 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 MMP Shares will not be listed on any exchange. Generally, investors may
only buy and sell the MMP Shares 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
MMP Shares, and a secondary market, if one develops, may not provide investors
with liquidity.
(continued on next page)
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INVESTING IN THE FUND'S MMP SHARES INVOLVES RISKS. SEE "RISKS" ON PAGE __.
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Per Share Total
Public offering price (1)................................... $ $
Sales load.................................................. $ $
Proceeds to the Fund (before expenses)...................... $ $
(1) Plus accumulated dividends, if any, from __________, 2004.
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 MMP SHARES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
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The underwriter expects to deliver the MMP Shares in book-entry form,
through the facilities of The Depository Trust Company, on or about
__________, 2004.
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_____________, 2004.
(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.
This offering is conditioned upon the MMP Shares 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
("S&P"). The MMP Shares will be senior in liquidation and distribution rights to
the Fund's outstanding common shares, $.01 par value (the "Common Shares"). The
Common Shares have sought approval for listing on the New York Stock Exchange
("NYSE") under the symbol "FCT."
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
"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 $11.7 billion in assets, which it
managed or supervised as of March 31, 2004. See the Statement of Additional
Information under "Adviser."
Sub-Adviser. Four Corners Capital Management, LLC ("Four Corners" or
"Sub-Adviser") will manage the Fund's portfolio subject to the Adviser's
supervision. See 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 MMP Shares,
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 (the
"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 __ 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 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 Commission's Public Reference Section, Washington D.C. 20549-0102.
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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.
TABLE OF CONTENTS
Page
Prospectus Summary...........................................................v
Financial Highlights.........................................................1
The Fund.....................................................................2
Use of Proceeds..............................................................2
Capitalization...............................................................3
The Fund's Investments.......................................................4
Risks........................................................................8
Management of the Fund......................................................14
Rating Agency Guidelines....................................................16
Description of Money Market Cumulative Preferred Shares.....................17
The Auction.................................................................27
Description of Borrowings...................................................29
Description of Common Shares................................................29
Certain Provisions in the Declaration of Trust..............................30
Federal Income Tax Matters..................................................32
Net Asset Value.............................................................34
Underwriting................................................................36
Custodian, Transfer Agent, Shareholder Services Agent, Dividend
Paying Agent and Administrator..........................................37
Legal Matters...............................................................37
Available Information.......................................................37
Table of Contents for the Statement of Additional Information...............38
(This page is intentionally left blank.)
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 Money Market Cumulative
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 in this Prospectus shall have the meanings given to
the terms in the Statement.
The Fund................... First Trust/Four Corners Senior Floating Rate
Income Fund II is a newly 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 have
sought approval for listing on the NYSE under
the symbol "FCT." As of __________, 2004, the
Fund had __________ Common Shares outstanding
and net assets applicable to Common Shares of
$__________.
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
imiplementation. Four Corners will be the
Fund's Sub-Adviser.
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 $11.7 billion in assets, which it
managed or supervised as of March 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., an affiliate of Macquarie Bank Limited,
and an experienced group of Senior Loan
Investment Professinals. Four Corners managed
and advised investment portfolios in excess of
$1 billion of investment capacity as of
March 31, 2004. See the SAI under
"Sub-Adviser."
The Offering............... The Fund is offering an aggregate of _______
Money Market Cumulative Preferred Shares at a
purchase price of $25,000 per share plus
accumulated dividends, if any, from the Date of
Original Issue. The MMP Shares are being
offered by _______________, as underwriter
("_______________"). See "Underwriting."
This offering is conditioned upon the MMP Shares
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 objective 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 MMP Shares will entitle their holders to
receive cash dividends at an annual rate that may
vary for each Dividend Period. Generally, except
as described under "Description of Money Market
Cumulative Preferred Shares-Dividends and Dividend
Periods," following the Initial Dividend Period,
each Dividend Period will be twenty-eight days.
The Auction Agent will determine the Applicable
Rate for a particular Dividend Period by Auction
conducted on the Business Day immediately prior to
the start of that Dividend Period. Generally, the
Applicable Rate will be the lowest rate per annum
that would result in the purchase of all available
MMP Shares in the Auction.
The MMP Shares will not be listed on an exchange.
Instead, investors may buy or sell MMP Shares at
an Auction by submitting orders to Broker-Dealers
that have entered into an agreement with the
Auction Agent or to other Broker-Dealers.
______________________ the Auction Agent, will
review orders for MMP Shares 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
Potential Beneficial Owners that wish to buy. The
Auction Agent then will determine the lowest
Applicable Rate that will result in all of the
outstanding MMP Shares continuing to be held.
The dividend rate for the Initial Dividend Period
from and including the Date of Original Issue
through __________, 2004, will be ____% per year.
The first Auction Date for MMP Shares will be
__________, 2004, and the Initial Dividend Payment
Date will be __________, 2004. Subsequent Auctions
generally will be held on every fourth __________
(unless the then current Dividend Period is a
Special Dividend 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 Dividend Period normally will
begin on the Business Day following an Auction
Date.
Auction Procedures......... In an Auction, you may choose to buy, sell or
hold the MMP Shares in an Auction. 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
the SAI.
Unless otherwise permitted by the Fund, Beneficial
Owners and Potential Beneficial Owners of MMP
Shares 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 MMP
Shares (usually the Business Day immediately
preceding the first day of each Dividend Period),
each Beneficial Owner may submit Orders to its
Broker-Dealer as follows:
o Hold Order--indicating its desire to hold the
MMP Shares without regard to the Applicable
Rate for the next Dividend Period.
o Bid--indicating its desire to hold the MMP
Shares, provided that the Applicable Rate for
the next Dividend Period is not less than the
rate per annum specified in the Bid.
o Sell Order--indicating its desire to sell the
MMP Shares without regard to the Applicable
Rate for the next Dividend Period.
A Beneficial Owner may submit different types of
Orders to its Broker-Dealer with respect to the
MMP Shares it holds. If a Beneficial Owner offers
through its Broker-Dealer to purchase additional
MMP Shares 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 Applicable Rate will be treated
as Sell Orders. A Hold Order (in the case of an
Auction relating to a Dividend Period of
twenty-eight days or less) or a Sell Order (in the
case of an Auction relating to a Special Dividend
Period of longer than twenty-eight days) shall be
deemed to have been submitted on behalf of a
Beneficial Owner if an Order with respect to the
MMP Shares 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 MMP Shares may
submit Bids through their Broker-Dealers in which
they offer to purchase MMP Shares if the
Applicable Rate for the next Dividend 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 Applicable 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 MMP Shares 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 MMP Shares held by it
or its customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in
respect of MMP Shares held by it, as we describe
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 MMP Shares (that is, in general, the
number of MMP Shares subject to Bids by Potential
Holders with rates equal to or lower than the
Maximum Applicable Rate is at least equal to the
number of MMP Shares 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 MMP Shares available for purchase in the
Auction.
If Sufficient Clearing Bids do not exist, the
Dividend Period next following the Auction
automatically will be twenty-eight days in length
(a "28-Day Dividend Period"), and the Applicable
Rate will be the Maximum Applicable 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, MMP Shares
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 Dividend Period next following the
Auction automatically shall be the same length as
the immediately preceding Dividend Period, and the
Applicable Rate will be 80% 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 MMP Shares that is less than the number
of MMP Shares specified in its Order. To the
extent the allocation has this result, a
Broker-Dealer will be required to make appropriate
pro rata allocations among its customers and
itself.
A Sell Order by an Existing Holder will constitute
an irrevocable offer to sell the MMP Shares. A Bid
placed by an Existing Holder also will constitute
an irrevocable offer to sell the MMP Shares 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 MMP Shares 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 Dividend
Periods.................... Through their Broker-Dealers, Beneficial Owners
and Potential Beneficial Owners of MMP Shares
may participate in Auctions, although, except
in the case of Special Dividend Periods of
longer than twenty-eight days, Beneficial
Owners desiring to continue to hold all of
their MMP Shares regardless of the Applicable
Rate resulting from Auctions need not
participate.
Prior to any Auction, the Fund may elect, subject
to limitations we describe herein, upon giving
notice to the Auction Agent and each
Broker-Dealer, a Special Dividend Period. A
"Special Dividend Period" is either a Dividend
Period consisting of a specified number of days
(other than twenty-eight) up to 364 days (a
"Short-Term Dividend Period"), or a Dividend
Period consisting of a specified period of one
whole year or more but not greater than five years
(a "Long-Term Dividend Period"). Dividends on the
MMP Shares are cumulative from the Date of
Original Issue and are payable when, as and if
declared by the Fund's Board of Trustees ("Board
of Trustees"), out of funds legally available
therefor, commencing on the Initial Dividend
Payment Date. In the case of Dividend Periods that
are not Special Dividend Periods, dividends
generally will be payable on the first Business
Day after the last day of the Dividend Period.
For each Subsequent Dividend Period, the cash
dividend rate on the MMP Shares will be the
Applicable Rate that the Auction Agent advises the
Fund has resulted from an Auction. See
"Description of Money Market Cumulative Preferred
Shares-Dividends and Dividend Periods." The first
Auction for the MMP Shares is scheduled to be held
on the last Business Day of the Initial Dividend
Period as set forth in "-The Offering" above.
Election of a Special Dividend Period will not be
effective unless Sufficient Clearing Bids exist at
the Auction in respect of the Special Dividend
Period. If Sufficient Clearing Bids do not exist
at the Auction, the Dividend Period commencing on
the Business Day succeeding the Auction will be a
28-Day Dividend Period, and the holders of the MMP
Shares outstanding immediately prior to the
Auction will be required to continue to hold some
or all of the shares for the Dividend Period. In
addition, the Fund may not give a Notice of
Special Dividend Period with respect to the MMP
Shares, or if the Fund has given a Notice of
Special Dividend Period for the MMP Shares, the
Fund will be required to give a Notice of
Revocation in respect thereof, if either:
(1) the 1940 Act MMP Shares Asset Coverage is
not satisfied or the Fund fails to maintain
Moody's Eligible Assets and S&P Eligible Assets
each with an aggregate Discounted Value at
least equal to the MMP Shares Basic Maintenance
Amount, in each case on each of the two
Valuation Dates immediately preceding the
Business Day prior to the related Auction Date
for the MMP Shares, or
(2) sufficient funds to pay the dividends
payable on the immediately succeeding Dividend
Payment Date have not been irrevocably
deposited with the Auction Agent by the close
of business on the third Business Day preceding
the related Auction Date.
In either case, the next succeeding Dividend
Period will be a 28-Day Dividend Period.
Determination of Maximum
Applicable Rates........... Except during a Default Period, the Applicable
Rate for any Dividend Period for MMP Shares
will not be more than the Maximum Applicable
Rate. The Maximum Applicable Rate will depend
on the credit rating assigned to the MMP Shares
and on the duration of the Dividend Period. The
Maximum Applicable Rate will be the Applicable
Percentage of the Reference Rate. The
Applicable Percentage will be determined based
on the lower of the credit ratings assigned on
that date to the MMP Shares by Moody's and S&P,
with the Applicable Percentage remaining
further subject to upward but not downward
adjustment in the discretion of the Board of
Trustees after consultation with the
Broker-Dealers, as follows:
Moody's S&P Applicable
Credit Rating Credit Rating Percentage
------------- -------------- ----------
Aa3 or above AA- or above 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
There is no minimum Applicable Rate in respect of
any Dividend Period. The Applicable Rate for any
Dividend Period commencing during any Default
Period, and the Default Rate described under
"Description of Money Market Cumulative Preferred
Shares-Dividends and Dividend Periods," initially
will be 300% of the Reference Rate. The Reference
Rate is the greater of:
(1) the applicable "AA" Financial Composite
Commercial Paper Rate (for a Dividend Period of
fewer than 184 days) or the applicable Treasury
Index Rate (for a Dividend Period of 184 days
or more), or
(2) the applicable London-Interbank Offered
Rate ("LIBOR").
Restrictions on Dividend
Redemption and
Other Payments............. If the Fund issues any 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
declare any dividend on MMP Shares 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 MMP Shares 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 MMP Shares also
would be prohibited at any time that an event
of default under any Borrowings has occurred
and is continuing.
See "Description of Money Market Cumulative
Preferred Shares- 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 MMP Shares Basic Maintenance Amount as of
each Valuation Date. The Fund also must
maintain asset coverage for the MMP Shares on a
non-discounted basis of at least 200% as of the
last business day of each month. See
"Description of Money Market Cumulative
Preferred Shares-Asset Maintenance."
The Discount Factors and guidelines for
calculating the Discounted Value of the Fund's
portfolio for purposes of determining whether the
MMP 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 MMP Shares on
their Date of Original Issue.
The Fund estimates that on the Date of Original
Issue, the 1940 Act MMP Shares Asset Coverage,
based on the composition of its portfolio as of
__________, 2004, will be ____%, after giving
effect to the issuance of the MMP Shares offered
hereby ($__________) and the deduction of sales
loads and estimated offering expenses for the MMP
Shares ($__________).
In addition, there may be additional asset
coverage requirements imposed in connection with
any Borrowings.
Redemption................. Although the Fund will not ordinarily redeem
MMP Shares, it may be required to redeem MMP
Shares 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 MMP Shares. The
Fund also may redeem MMP Shares, at its option,
in certain circumstances. See "Description of
Money Market Cumulative Preferred
Shares-Redemption."
Liquidation Preference..... The liquidation preference of the MMP Shares
will be $25,000 per share plus accumulated but
unpaid dividends, if any, thereon. See
"Description of Money Market Cumulative
Preferred Shares-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 MMP Shares, 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 the MMP
Shares 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 Money Market Cumulative Preferred
Shares-Voting Rights."
Book-Entry Only............ Except as described herein, investors in MMP
Shares will not receive certificates
representing ownership of their shares.
Ownership of MMP Shares 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 MMP Shares.
Accordingly, references in this Prospectus to
an investor's investment in or purchase, sale
or ownership of MMP Shares are to purchases,
sales or ownership of those shares by
Beneficial Owners.
Dividends on the MMP Shares 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 Money Market Cumulative
Preferred Shares-Dividends and Dividend Periods."
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
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. In the experience
of the Fund's portfolio managers, over the last 15
years, because of prepayments and refinancings,
the average life of a typical Senior Loan has been
approximately 18 to 30 months. 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.
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.
Leverage................... The Fund anticipates its total leverage from
the issuance of MMP Shares will be
approximately __% immediately after the
issuance of the MMP Shares. In addition to the
issuance of MMP Shares, the Fund may make
further use of financial leverage through
borrowings, including the issuance of
commercial paper or notes. Throughout this
Prospectus, commercial paper, notes or other
borrowings may be collectively referred to as
"Borrowings." Any Borrowings will have
seniority over the MMP Shares. Payments to
holders of MMP Shares 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 MMP Shares and
the Fund. For additional information about the
risks associated with investing in MMP Shares
and the Fund, see "Risks."
MMP Shares Risks. The primary risks of investing
in MMP Shares 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 MMP
Shares, 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 MMP Shares, which could affect
their liquidity;
o the Fund may be forced to redeem your MMP
Shares to meet regulatory or rating agency
requirements or may voluntarily redeem your
MMP Shares in certain circumstances;
o in extraordinary circumstances, the Fund may
not earn sufficient income from its
investments to pay dividends;
o the MMP Shares will be junior to any
Borrowings;
o any Borrowings may constitute a substantial
lien and burden on the MMP Shares by reason of
their prior claim against the income of the
Fund and against the net assets of the Fund in
liquidation; and
o if the Fund leverages through Borrowings, the
Fund may not be permitted to declare dividends
or other distributions with respect to the MMP
Shares or purchase MMP Shares unless the Fund
meets asset coverage requirements and the
payments of principal and of interest on any
of these Borrowings are not in default.
Fund Risks. The primary risks of investing in
the Fund include the following:
No Operating History. The Fund is a newly
organized, diversified, closed-end management
investment company. As of __________, 2004, the
Fund has invested approximately $__ million, or
____% of its net assets, in Senior Loans. As a
result, it is difficult to estimate whether the
Fund will meet its investment objectives at this
time.
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."
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 Investments. 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.
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.
Illiquidity. 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.
Valuation Difficulties. The Fund will value its
Senior Loans daily. 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 may increase its leverage
above the __% currently estimated after the
issuance of the MMP Shares. 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.
Federal Income
Tax Matters................ The Fund believes that the MMP Shares will be
treated as equity for federal income tax
purposes. Distributions with respect to the MMP
Shares 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 MMP Shares in proportion to the
total dividends paid to each class during or
with respect to that year.
Trading Market............. MMP Shares will not be listed on an exchange.
Instead, you may buy or sell MMP Shares at an
Auction that normally is held every fourth
Wednesday 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 and
other Broker-Dealers may maintain a secondary
trading market in MMP Shares 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.............. ___________________________ will serve as
auction agent, transfer agent, registrar and
dividend disbursing agent with respect to the MMP
Shares.
Custodian, Transfer Agent,
Shareholder Services Agent,
Dividend Paying Agent,
and Administrator.......... PFPC Trust Company serves as the custodian of
the assets of the Fund. PFPC Inc. serves as
transfer, shareholder services and dividend
paying agent with respect to the Common Shares
and also provides certain administrative and
accounting services to the Fund.
1685538.01.03
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on _______, 2004 until __________, 2004. Since the Fund is newly
organized and commenced operations on ______, 2004, the table covers less than
_____ 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.
______, 2004 -
__________, 2004
(Unaudited)
-------------
PER SHARE OPERATING PERFORMANCE:
Common share net asset value, beginning of period................. $
Net investment income........................................ $
Net realized/unrealized gain from investments................ $
Total from investment operations........................ $
Offering costs............................................... $
Common share net asset value, end of period....................... $
Per share market value, end of period............................. $
Total return on common share net asset value(s)(2)................ %
Total investment return on market value(s)(2)..................... %
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period (in thousands).....
Ratio of expenses to average net assets applicable to common shares
before reimbursement................................................ %
Ratio of net investment income to average net assets applicable to
common shares before reimbursement.................................. %
Ratio of expenses to average net assets applicable to common shares
after reimbursement................................................. %
Ratio of net investment income to average net assets applicable to
common shares after reimbursement................................... %
Portfolio turnover rate........................................... %
(1) Amount represents less than $0.01 per share.
(2) Total return on Common Share net asset value is the combination of
reinvested dividend income, reinvested capital gains distributions, 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, if any, and changes in stock price
per share. Total returns are not annualized.
(3) Annualized on 366-day calendar year.
THE FUND
The Fund is a newly 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 ______, 2004, the Fund issued an aggregate of _______ Common
Shares pursuant to which the Fund received approximately $__________, after the
payment of estimated organizational and offering costs. The Common Shares have
sought approval for listing 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
__________, 2004:
Amount Authorized
Amount Held by the Fund
Title of Class by the Fund for its Account Amount Outstanding
-------------- ----------- --------------- ------------------
Common Shares None
Preferred Shares None Unlimited 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.
CAPITALIZATION
The following table sets forth the capitalization (unaudited) of the Fund as
of _________, 2004, and as adjusted, to give effect to the issuance of the MMP
Shares offered hereby.
As of ________, 2004
Actual As Adjusted
(Unaudited) (Unaudited)
----------- -----------
Preferred Shares, $25,000 stated value per share,
at liquidation value; unlimited shares authorized
(no shares issued and _____ shares issued, as
adjusted, respectively)(1)............. $ - $
=====================
Common Shareholders' Equity:
Common shares, $.01 par value per share; unlimited
shares authorized (__________ shares outstanding)(1) $ $
Paid in surplus(2)......................................
Undistributed net investment income.....................
Accumulated net realized gain (loss) from investments
Net unrealized appreciation (depreciation) of investments $ $
(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 MMP Shares issuance ($__________).
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 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 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 "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.
Senior Loan Characteristics
Senior Loans are loans that typically are made to business Borrowers to
finance leveraged buy-outs, 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.
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
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 from the issuance of MMP Shares will
be approximately __% immediately after the issuance of the MMP Shares. In
addition to the issuance of MMP Shares, the Fund may make further use of
financial leverage through borrowings, including the issuance of commercial
paper or notes. See "Description of Money Market Cumulative Preferred Shares"
and "Description of Borrowings" below. 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 MMP Shares 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 MMP Shares, you should consider
carefully the following risks.
Risks of Investing in MMP Shares
Interest Rate Risk. The MMP Shares pay dividends based on short-term interest
rates. If short-term interest rates rise, dividend rates on the MMP Shares may
rise so that the dividends paid to holders of MMP Shares 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 MMP
Shares and jeopardizing the Fund's ability to pay dividends on the MMP Shares.
Auction Risk. If there are more MMP Shares offered for sale than there are
buyers for those shares, you may not be able to sell your MMP Shares at an
Auction. If Sufficient Clearing Bids do not exist in an Auction, the Applicable
Rate will be the Maximum Applicable Rate, and in this event, owners of the MMP
Shares who wish to sell will not be able to sell all, and may not be able to
sell any, of the shares in the Auction. As a result, your investment in the MMP
Shares may be illiquid. Also, if you place Hold orders (orders to retain MMP
Shares) at an Auction only at a specified rate, and that Bid rate exceeds the
rate set at the Auction, you will not retain your MMP Shares. 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 shares.
The dividend paid may be changed, subject to certain conditions and without
notice to the holders of MMP Shares, which could affect the liquidity of your
investment. See "Description of Money Market Cumulative Preferred Shares" and
"The Auction-Auction Procedures."
Secondary Market Risk. _______________ is not required to maintain a market
in the MMP Shares. 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 MMP Shares between Auctions, you may not be able to sell any or all
of your shares, or you may not be able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends. If the Fund has designated a
Special Dividend Period (a rate period other than twenty-eight 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 MMP Shares 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 MMP Shares are not listed on an exchange.
If you sell your MMP Shares to a Broker-Dealer between Auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen since the last Auction.
Ratings and Asset Coverage Risk. While S&P and Moody's assign ratings of
["AAA"] and ["Aaa,"] respectively, to MMP Shares, the ratings do not eliminate
or necessarily mitigate the risks of investing in MMP Shares. A rating agency
could downgrade MMP Shares, 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 MMP Shares, the Fund will alter its
portfolio or redeem MMP Shares. The Fund may voluntarily redeem MMP Shares to
meet regulatory or Rating Agency requirements. See "Description of Money Market
Cumulative Preferred Shares-Asset Maintenance" for a description of the asset
maintenance tests the Fund must meet. The Fund may not redeem MMP Shares 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 MMP Shares or to pay dividends on MMP Shares.
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 MMP Shares
investment or the income from that investment will be worth less in the future.
As inflation occurs, the real value of the MMP Shares and distributions
declines. In an inflationary period, however, it is expected that, through the
Auction process, MMP Shares 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 MMP Shares and the Common Shares unless it
satisfies certain conditions. See "Description of Money Market Cumulative
Preferred Shares-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 MMP Shares
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."
General Risks of Investing in the Fund
No Operating History. The Fund is a newly organized, diversified, closed-end
management investment company. As of __________, 2004, the Fund has invested
approximately $__ million, or ____% of its net assets, in Senior Loans. As a
result, it is difficult to estimate whether the Fund will meet its investment
objectives at this time.
Performance. 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, chief among which is 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 Funds will own securities with low credit quality and
consequently, will be subject to a high level of credit quality.
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 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 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.
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 minimal.
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.
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.
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.
Leverage Risk. Upon the issuance of the MMP Shares, the Fund will be
leveraged at approximately __% 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 MMP Shares, 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 MMP Shares, 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 MMP Shares, 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.
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.
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.
Management Risk. 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.
Restrictive Covenants and 1940 Act Restrictions. With respect to a leverage
borrowing program instituted by the Fund, the credit agreements governing such a
program (the "Potential Credit Agreements") will likely include usual and
customary covenants for their respective 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 objective or fundamental investment restrictions without the approval
of lenders; (4) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect; (5) make any changes
in its capital structure; (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,
incur, assume or permit to exist certain debt except for certain specific types
of debt; and (9) permit any of its Employee Retirement Income Security Act
("ERISA") affiliates to cause or permit to occur an event that could result in
the imposition of a lien under the Code or ERISA. 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. 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 MMP Shares, unless the Fund complies with the 300% asset coverage
test likely to be a provision in any Potential Credit Agreement. In addition,
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 MMP Shares: (1) at any time that any event of
default under any Potential Credit Agreement has occurred and is continuing; or
(2) if, after giving effect to the declaration, the Fund would not meet a 300%
asset coverage test likely set forth in any Potential Credit Agreement.
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.
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. United States 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.
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
$11.7 billion in assets managed or supervised as of March 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
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 in excess of
$1 billion of investment capacity as of March 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., an affiliate of the Macquarie Group, 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.
Investment Management Agreement
The Fund has agreed to pay a fee for the services and facilities provided by
the Adviser of 0.75% 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 0.38% 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.
RATING AGENCY GUIDELINES
The Fund is required under Rating Agency 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 MMP 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 Rating
Agency guidelines also impose limitations on the Fund's investments, which may
be in addition to the restrictions applicable to the MMP Shares imposed by the
Statement. See "Description of Money Market Cumulative Preferred Shares" in the
SAI.
The Fund also is required under the 1940 Act to maintain, with respect to MMP
Shares, 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 MMP Shares (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 MMP 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 MMP Shares Basic Maintenance Amount and, if requested
by the Rating Agency, the 1940 Act MMP Shares Asset Coverage tests.
If the Fund does not timely cure a failure to maintain (a) a Discounted Value
of its portfolio equal to the MMP Shares Basic Maintenance Amount or (b) the
1940 Act MMP Shares Asset Coverage, in each case in accordance with the
requirements of the Rating Agency or Agencies then rating the MMP Shares, the
Fund will be required by the Statement to redeem MMP Shares as described under
"Description of Money Market Cumulative Preferred Shares-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 MMP Shares.
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 MMP Shares 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 "Description of Money Market Cumulative Preferred Shares-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 MMP Shares.
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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares. The Fund may at some future time seek to have
the MMP Shares rated by an additional or Other Rating Agency.
DESCRIPTION OF MONEY MARKET CUMULATIVE PREFERRED SHARES
The following is a brief description of the terms of MMP Shares. 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 MMP Shares in the
Statement, attached as Appendix A to the SAI. Capitalized terms not otherwise
defined in the Prospectus shall have the same meaning as defined in the
Statement.
General
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, 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 "Money Market Cumulative Preferred Shares" or "MMP Shares"). The
Preferred Shares 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 MMP Shares 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 MMP Shares will be subject to
optional and mandatory redemption as described below under "-Redemption."
Holders of MMP Shares will not receive certificates representing their
ownership interest in the shares. Initially, DTC will act as Securities
Depository for the Agent Members with respect to the MMP Shares.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent will act as the transfer agent,
registrar, and paying agent for the MMP Shares. Furthermore, the Auction Agent
will send notices to holders of MMP Shares of any meeting at which holders of
MMP Shares 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 MMP Shares, so
long as the Fund is current in the payment of dividends on the MMP Shares and on
any other capital shares of the Fund ranking on a parity with the MMP Shares
with respect to the payment of dividends or upon liquidation.
Dividends and Dividend Periods
General. Holders of MMP Shares 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 Dividend Period and, thereafter, on each Dividend Payment Date with
respect to a Subsequent Dividend Period (generally a period of twenty-eight
days, subject to certain exceptions) at the rate per annum equal to the
Applicable Rate for each Dividend 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.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
dividends. The Fund does not intend to establish any reserves for the payment of
dividends.
All moneys paid to the Paying Agent for the payment of dividends shall be
held in trust for the payment of the dividends to the Holders. Each dividend
will be paid by the Paying Agent to the Holders as their names appear on the
share ledger or share records of the Fund, which Holder is expected to be the
nominee of the Securities Depository. The Securities Depository will credit the
accounts of the Agent Members of the beneficial owners in accordance with the
Securities Depository's normal procedures. The Securities Depository's current
procedures provide for it to distribute dividends in same day funds to Agent
Members who are in turn expected to distribute the dividends to the persons for
whom they are acting as agents. The Agent Member of a beneficial owner will be
responsible for holding or disbursing the payments on the applicable Dividend
Payment Date to the beneficial owner in accordance with the instructions of the
beneficial owner.
Dividends in arrears for any past Dividend 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 the
date, not exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Trustees. Any dividend payment shall first be credited against
the earliest accumulated but unpaid dividends. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"-Default Period" below.
The amount of dividends per share payable (if declared) on each Dividend
Payment Date of each Dividend Period of less than one year (or in respect of
dividends on another date in connection with a redemption during such Dividend
Period) shall be computed by multiplying the Applicable Rate (or the Default
Rate) for the Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in the Dividend Period (or portion
thereof) that the share was outstanding and for which the Applicable Rate or the
Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Dividend Period of one year or more,
the amount of dividends per share payable on any Dividend Payment Date (or in
respect of dividends on another date in connection with a redemption during the
Dividend Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of twelve 30
day months.
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e., the period from and including the Date of Original Issue to and
including the last day of the initial Dividend Period) and the initial Auction
Date are set forth on the cover page of the Prospectus. For each subsequent
Dividend Period, subject to certain exceptions, the dividend rate will be the
Applicable Rate that the Auction Agent advises the Fund has resulted from an
Auction.
The initial Dividend Period for the MMP Shares shall be 45 days. Dividend
Periods after the initial Dividend Period shall either be Standard Dividend
Periods or, subject to certain conditions and with notice to Holders, Special
Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient Clearing
Bids exist at the Auction in respect of the Special Dividend Period (that is, in
general, the number of shares subject to Buy Orders by Potential Holders is at
least equal to the number of shares subject to Sell Orders by Existing Holders).
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of less than 30 days Dividend Payment Dates shall occur on the
first Business Day following the Dividend Period and, if greater than 30 days
then on a monthly basis on the first Business Day of each month within the
Dividend Period and on the Business Day following the last day of the Dividend
Period. Dividends will be paid through the Securities Depository on each
Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Rate, which is
equal to 150% of the greater of (1) the applicable AA Composite Commercial Paper
Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury
Index Rate (for a Dividend Period of 184 days or more), or (2) the applicable
LIBOR rate (each, a "Reference Rate"), in each case 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
increase the Fund would be in compliance with the MMP Shares Basic Maintenance
Amount nor, for Standard Dividend Periods or less only, will the Applicable Rate
be less than the Minimum Rate, which is 70% of the applicable AA Composite
Commercial Paper Rate. No minimum rate is specified for Auctions in respect to
Dividend Periods of more than the Standard Dividend Period.
The Maximum Rate for the MMP Shares will apply automatically following an
Auction for the shares in which Sufficient Clearing Bids have not been made
(other than because all MMP Shares were subject to Submitted Hold Orders). If an
Auction for any subsequent Dividend Period is not held for any reason, including
because there is no Auction Agent or Broker-Dealer, then the Dividend Rate on
the MMP Shares for any such Dividend Period shall be the No Auction Rate (except
for circumstances in which the Dividend Rate is the Default Rate, as described
below).
The All Hold Rate will apply automatically following an Auction in which all
of the outstanding shares are subject to (or are deemed to be subject to)
Submitted Hold Orders. The All Hold Rate is 80% of the applicable AA Composite
Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders of the term of the
next succeeding Dividend Period as soon as practicable after the Broker-Dealers
have been so advised by the Fund. After each Auction, on the Auction Date,
Broker-Dealers will notify Holders of the Applicable Rate for the next
succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of the MMP Shares; provided, however, that no designation is
necessary for a Standard Dividend Period and that any designation of a Special
Dividend Period shall be effective only if (1) notice thereof shall have been
given as provided herein, (2) any failure to pay in the timely manner to the
Auction Agent the full amount of any dividend on, or the redemption price of,
the MMP Shares shall have been cured as set forth under "-Default Period," (3)
Sufficient Clearing Bids shall have existed in an Auction held on the Auction
Date immediately preceding the first day of the proposed Special Dividend
Period, (4) if the Fund shall have mailed a notice of redemption with respect to
any shares, as described under "-Redemption" below, the Redemption Price with
respect to the shares shall have been deposited with the Paying Agent, and (5)
in the case of the designation of a Special Dividend Period, the Fund has
confirmed that, as of the Auction Date next preceding the first day of the
Special Dividend Period, it has Eligible Assets with an aggregate Discounted
Value at least equal to the MMP Shares Basic Maintenance Amount and has
consulted with the Broker-Dealers and has provided notice and a MMP Shares Basic
Maintenance Report to each Rating Agency which is then rating the MMP Shares and
so requires.
Designation of a Special Dividend Period. If the Fund proposes to designate
any Special Dividend Period, not fewer than seven (or two Business Days in the
event the duration of the Dividend Period prior to the Special Dividend Period
is fewer than eight days) nor more than 30 days prior to the first day of the
Special Dividend Period, notice shall be (1) made by press release and (2)
communicated by the Fund by telephonic or other means to the Auction Agent and
confirmed in writing promptly thereafter. Each such notice shall state (A) that
the Fund proposes to exercise its option to designate a succeeding Special
Dividend Period, specifying the first and last days thereof and (B) that the
Fund will, by 3:00 p.m. New York City time, on the second Business Day next
preceding the first day of the Special Dividend Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with the Special
Dividend Period, subject to the terms of any Specific Redemption Provisions, or
(y) its determination not to proceed with the Special Dividend Period in which
latter event the succeeding Dividend Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day next
preceding the first day of any proposed Special Dividend Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(1) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as a Special Dividend Period, specifying the
first and last days thereof and (B) the terms of any Specific Redemption
Provisions; or
(2) a notice stating that the Fund has determined not to exercise its
option to designate a Special Dividend Period.
If the Fund fails to deliver either notice with respect to any designation of
any proposed Special Dividend Period to the Auction Agent or is unable to make
the confirmation described above by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of the proposed Special Dividend
Period, the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to the Dividend Period to the effect set forth in clause (2) above,
thereby resulting in a Standard Dividend Period.
Default Period. Subject to cure provisions, a "Default Period" with respect
to the MMP Shares 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 the MMP Shares
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 cure provisions, 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 Dividend Period
commencing during a Default Period will be equal to the Default Rate, and each
subsequent Dividend Period commencing after the beginning of a Default Period
shall be a Standard Dividend Period; provided, however, that the commencement of
a Default Period will not by itself cause the commencement of a new Dividend
Period.
No Auction shall be held during a Default Period applicable to the MMP
Shares. 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 the 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 the non payment based on the
actual number of days comprising the period divided by 360. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).
Subject to the foregoing, and any requirements of Massachusetts law, to the
extent that the Fund's investment company taxable income for any year exceeds
any current or accumulated dividends on the MMP Shares, the Fund intends to
distribute the excess investment company taxable income to the holders of the
Common Shares. The term "investment company taxable income," as it is defined in
the Code, includes interest, dividends, net short-term capital gains and other
income received or accrued less the advisory fee, bank custodian charges, taxes
(except capital gains taxes) and other expenses properly chargeable against
income, but generally does not include net capital gain, dividends paid in
shares of stock, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. The Fund also intends to
distribute any realized net capital gain (defined as the excess of net long-term
capital gains over net short-term capital losses and capital loss carry forwards
from prior periods) annually to the holders of the Common Shares (subject to the
prior rights of the holders of the MMP Shares) subject to the foregoing and any
requirements of Massachusetts law. The Fund will designate distributions made
with respect to MMP Shares as capital gain distributions in proportion to the
MMP Shares' share of total dividends paid by the Fund during the year.
Restrictions on Dividend, Redemption and Other Payments
Under the 1940 Act, the Fund may not (1) declare any dividend with respect to
the MMP Shares 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 MMP Shares) or (2) declare any other distribution on
the MMP Shares or purchase or redeem MMP Shares 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 MMP Shares, 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 MMP Shares 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 MMP
Shares will acquire certain additional voting rights. See "-Voting Rights"
below. These rights shall be the exclusive remedy of the holders of MMP Shares
upon any failure to pay dividends on the MMP Shares.
For so long as any MMP Shares are outstanding, except in connection with the
liquidation of the Fund, or a refinancing of the MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares Basic Maintenance
Amount (as defined below) and the Fund would maintain the 1940 Act MMP 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 MMP Shares
due on or prior to the date of the transaction have been declared and paid; (5)
the Fund has redeemed the full number of MMP Shares 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 MMP Shares having a
Dividend 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 Dividend Period or during any period during
which the Fund may not, at its option, redeem the MMP Shares. The optional
redemption price per share shall be $25,000 per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption. Preferred Shares having a Dividend Period of more
than one year are redeemable at the option of the Fund, in whole or in part, out
of funds legally available therefor, prior to the end of the relevant Dividend
Period, subject to any Specific Redemption Provisions, which may include the
payment of redemption premiums to the extent required under any applicable
Specific Redemption Provisions. The Fund shall not effect any optional
redemption unless after giving effect thereto (i) the Fund has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less than the
amount (including any applicable premium) due to Holders of MMP Shares by reason
of the redemption of MMP Shares on such date fixed for the redemption and (ii)
the Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the MMP Shares Basic Maintenance Amount.
The Fund also reserves the right to repurchase MMP Shares 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 MMP Shares, but
is under no obligation to do so.
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 MMP Shares Basic Maintenance Amount or, (2) as of the last Business Day of
any month, the 1940 Act MMP 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 MMP 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 MMP
Shares Asset Coverage as of such last Business Day (each an "Asset Coverage Cure
Date"), the MMP Shares will be subject to mandatory redemption out of funds
legally available therefor. See "-Asset Maintenance." The number of MMP Shares
to be redeemed in such circumstances will be equal to the lesser of (A) the
minimum number of MMP Shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset Coverage Cure
Date, would result in the Fund having sufficient Eligible Assets to restore the
MMP Shares Basic Maintenance Amount or 1940 Act MMP 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 MMP Shares then outstanding will be redeemed),
and (B) the maximum number of MMP Shares 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).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the MMP Shares Basic Maintenance Amount or the 1940 Act MMP Shares Asset
Coverage, as the case may be, pro rata among the Holders of MMP Shares 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 a mandatory redemption not later than 30 days
after the Fund last satisfied the MMP Shares Basic Maintenance Amount or the
1940 Act MMP 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, all of
the required number of MMP Shares which are subject to mandatory redemption, or
the Fund otherwise is unable to effect the redemption on or prior to the
Mandatory Redemption Date, the Fund will redeem those MMP Shares on the earliest
practicable date on which the Fund will have these funds available, upon notice
to record owners of shares of preferred shares and the Paying Agent. The Fund's
ability to make a mandatory redemption may be limited by the provisions of the
1940 Act or Massachusetts law.
The redemption price per share 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 Dividend
Period of more than one year) any redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth in
any applicable Specific Redemption Provisions (the "Mandatory Redemption
Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the Fund
will file a notice of its intention to redeem with the 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 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 MMP Shares 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 MMP Shares called for redemption, the Paying Agent (if
different from the Auction Agent) and the Securities Depository ("Notice of
Redemption"). Notice of Redemption will be addressed to the registered owners of
the MMP Shares 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 MMP Shares 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 MMP Shares 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. MMP Shares may be subject to
mandatory redemption as described herein notwithstanding the terms of any
Specific Redemption Provisions. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all of the MMP
Shares, and the Securities Depository will determine the number of shares to be
redeemed from the account of the Agent Member of each beneficial owner. Each
Agent Member will determine the number of shares to be redeemed from the account
of each beneficial owner for which it acts as agent. An Agent Member may select
for redemption shares from the accounts of some beneficial owners without
selecting for redemption any shares from the accounts of other beneficial
owners. Notwithstanding the foregoing, if neither the Securities Depository nor
its nominee is 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 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 MMP Shares called for
redemption on the date and (2) the other amounts, if any, to which holders of
MMP Shares 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 MMP Shares called for redemption may look only to the Fund for
payment.
So long as any MMP Shares 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 MMP Shares
may be redeemed unless all dividends in arrears on the outstanding MMP Shares,
and all shares of beneficial interest of the Fund ranking on a parity with the
MMP Shares with respect to the payment of dividends or upon liquidation, have
been or are being contemporaneously paid or set aside for payment, except in
connection with the liquidation of the Fund in which case all MMP Shares and all
shares ranking in a parity with the MMP Shares must receive proportionate
amounts and that the foregoing shall not prevent the purchase or acquisition of
all the Outstanding MMP Shares 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 MMP Shares.
Except for the provisions described above, nothing contained in the Statement
limits any legal right of the Fund to purchase or otherwise acquire any MMP
Shares outside of an Auction at any price, whether higher or lower than the
price that would be paid in connection with an optional or mandatory redemption,
so long as, at the time of any purchase, there is no arrearage in the payment of
dividends on or the mandatory or optional redemption price with respect to, any
MMP Shares for which Notice of Redemption has been given and the Fund is in
compliance with the 1940 Act MMP Shares Asset Coverage and has Eligible Assets
with an aggregate Discounted Value at least equal to the MMP 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 MMP
Shares 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 MMP Shares: (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 MMP
Shares plus specified liabilities, payment obligations and other amounts; and
(2) the Fund must maintain asset coverage for MMP Shares of at least 200%.
MMP Shares Basic Maintenance Amount. The Fund must maintain, as of each
Valuation Date on which any share of MMP Shares is Outstanding, Eligible Assets
having an aggregate Discounted Value at least equal to the MMP Shares Basic
Maintenance Amount, which is calculated separately for Moody's (if Moody's is
then rating the MMP Shares), S&P (if S&P is then rating the MMP Shares) and any
Other Rating Agency which is then rating the MMP Shares and so requires. If the
Fund fails to maintain Eligible Assets having an aggregated Discounted Value at
least equal to the MMP 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 MMP Shares.
See "-Redemption-Mandatory Redemption."
The "MMP 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 MMP Shares Outstanding on such date
multiplied by $25,000, plus any redemption premium applicable to the MMP
Shares 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 MMP Shares Outstanding that follow such
Valuation Date;
(C) the aggregate amount of cash dividends that would accumulate on the
MMP Shares Outstanding from such first respective Dividend Payment Date
therefor through the 30th day after such Valuation Date, at the Maximum
Applicable Rate for a 28-Day Dividend 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 MMP Shares; 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 MMP Shares 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 MMP Shares subject to redemption or to
satisfy any of (i)(B) through (i)(F).
The Market Value of the Fund's portfolio securities (used in calculating the
Discounted Value of Eligible Assets) is calculated in the same manner as the
Fund calculates its net asset value. See "Net Asset Value" in the SAI.
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 MMP Shares Basic Maintenance Amount are based on criteria
established in connection with rating the MMP Shares. The Discount Factor
relating to any asset of the Fund, the MMP 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 MMP Shares and which so requires that any
changes would not impair its rating.
A rating agency's guidelines will apply to MMP Shares 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 MMP Shares. The ratings assigned to MMP Shares are not
recommendations to buy, sell or hold MMP Shares. The ratings may be subject to
revision or withdrawal by the assigning rating agent at any time. Any rating of
MMP Shares should be evaluated independently of any other rating.
1940 Act MMP Shares Asset Coverage. The Fund also is required to maintain,
with respect to MMP Shares, as of the last Business Day on any month in which
any MMP Shares 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)
("1940 Act MMP Shares Asset Coverage"). If the Fund fails to maintain the 1940
Act MMP 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 MMP Shares. See "-Redemption-Mandatory
Redemption."
The Fund estimates that based on the composition of its portfolio as of
__________, 2004, assuming the issuance of all MMP Shares offered hereby and
giving effect to the deduction of sales load and estimated offering costs
related thereto estimated at $__________, the 1940 Act MMP Shares Asset Coverage
would be:
Value of Fund assets less liabilities
not representing senior securities = $__________ = ----%
--------------------------------------- ----------
Senior securities representing indebtedness plus $__________
aggregate liquidation preference of
MMP Shares
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
MMP Shares (1) a certificate with respect to the calculation of the MMP Shares
Basic Maintenance Amount; (2) a certificate with respect to the calculation of
the 1940 Act MMP 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 Money Market 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 MMP Shares then
outstanding and any other shares ranking on a parity with the MMP Shares 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 MMP Shares, 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 MMP Shares will not be entitled to any
premium to which the holder would be entitled to receive upon redemption of the
MMP Shares. After payment of the full amount of the liquidation distribution,
the owners of the MMP Shares 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 MMP Shares, 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 MMP Shares, 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. 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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares, 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 MMP Shares, 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 MMP Shares, 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 MMP Shares, 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 MMP Shares, 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 MMP Shares,
for all past Dividend 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 MMP Shares (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 MMP Shares, have the right to elect
in any event), will terminate automatically. Any Preferred Shares issued after
the date hereof shall vote with the MMP Shares 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 MMP Shares.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including the MMP Shares, 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 (except that 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 MMP Shares, ranking on
a parity with the MMP Shares 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 MMP Shares, including shares previously purchased or
redeemed by the Fund, subject to continuing compliance by the Fund with 1940
Act MMP Shares Asset Coverage and MMP Shares Basic Maintenance Amount
requirements);
(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;
(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 MMP Shares, 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
MMP Shares Basic Maintenance Amount as of the immediately preceding Valuation
Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares, including any series of MMP Shares, 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 MMP Shares
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 MMP Shares, or any other shareholder of the Fund, may from
time to time adopt, amend, alter or repeal any or all of any 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 MMP Shares and any adoption,
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of MMP Shares 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 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
MMP Shares, 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 MMP Shares Basic Maintenance Amount.
Unless otherwise required by law, holders of MMP Shares shall not have any
relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of MMP Shares shall have no
rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the MMP Shares, the exclusive remedy of the holders shall be the
right to vote for Trustees as discussed above.
THE AUCTION
General
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
______________________________) 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 MMP Shares 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 (1) upon notice
to the Fund on a date no earlier than 60 days after the notice and (2) upon
notice to the Fund if the Fund has failed to pay the Auction Agent's invoice
within 30 days of its receipt. If the Auction Agent should resign, the Fund will
use its best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agency
Agreement. The Fund may remove the Auction Agent provided that prior to the
removal the Fund shall have entered into the 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 MMP Shares.
The Auction Agent after each Auction for MMP Shares will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding a Dividend
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Dividend
Period of one year or longer, of the purchase price of MMP Shares placed by the
Broker-Dealer at the Auction. For the purposes of the preceding sentence, MMP
Shares will be placed by a Broker-Dealer if the shares were (a) the subject of
Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by the Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (1) a
Submitted Bid of an Existing Holder that resulted in the Existing Holder
continuing to hold the shares as a result of the Auction, (2) a Submitted Bid of
a Potential Holder that resulted in the Potential Holder purchasing the shares
as a result of the Auction or (3) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more Broker-Dealer
Agreements at any time, provided that at least one Broker-Dealer Agreement is in
effect after the termination.
Auction Procedures
Prior to the Submission Deadline on each Auction Date for a series of MMP
Shares, 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 the series without
regard to the Applicable Rate for shares of the series for the next
Dividend Period thereof.
o Bid--indicating its desire to sell shares of the series at $25,000 per
share if the Applicable Rate for shares of the series for the next
Dividend Period thereof is less than the rate specified in the Bid (also
known as a hold at a rate order).
o Sell Order--indicating its desire to sell shares of the series at $25,000
per share without regard to the Applicable Rate for shares of the series
for the next Dividend Period thereof.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of a series of MMP Shares 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 Dividend Period of more than 28
Dividend Period 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 MMP Shares subject thereto. A
Beneficial Owner that offers to become the Beneficial Owner of additional MMP
Shares is, for purposes of the offer, a Potential Beneficial Owner.
A customer of a Broker-Dealer that is not a Beneficial Owner of a series of
MMP Shares but that wishes to purchase shares of the series, or that is a
Beneficial Owner of shares of the series that wishes to purchase additional
shares of the series (in each case, 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
Dividend 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 MMP Shares
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 MMP Shares 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 Sufficient Clearing Bids for a series of MMP Shares 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 Dividend 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 MMP Shares do not exist, the Applicable Rate for shares of the series
for the next succeeding Dividend 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 MMP Shares, the Applicable Rate for shares of the series
for the next succeeding Dividend Period thereof will be the All Hold Rate.
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 MMP Shares
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.
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.
Secondary Market Trading and Transfer of MMP Shares
The Broker-Dealers may maintain a secondary trading market of MMP Shares
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 MMP Shares will provide owners with liquidity of investment. MMP
Shares are not registered on any stock exchange or on the Nasdaq Stock Market.
Investors who purchase shares in an Auction for a Special Dividend Period should
note that because the dividend rate on the shares will be fixed for the length
of the Dividend 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.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of MMP Shares only in whole shares and only (1) pursuant to a Bid or
Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (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 MMP Shares 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.
DESCRIPTION OF BORROWINGS
The Declaration of Trust authorizes the Fund, without prior approval of
holders of Common and Preferred Shares, including MMP Shares, 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 MMP Shares.
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 MMP Shares shareholders, and the terms of any Borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to MMP Shares 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.
The discussion above describes the Board of Trustees' present intention with
respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, 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 $0.01 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 MMP Shares are outstanding, holders of Common
Shares will not be entitled to receive any cash distributions from the Fund
unless all accrued dividends on MMP Shares have been paid, and unless asset
coverage (as defined in the 1940 Act) with respect to MMP Shares would be at
least 200% after giving effect to the distributions.
The Common Shares have sought approval for listing 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 objective
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.
Reference should be made to the Declaration of Trust on file with the
Commission for the full text of these provisions.
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, diversified, closed-end management investment
company (commonly referred to as a closed-end fund). Closed-end funds differ
from open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their 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 MMP Shares, outstanding. Any share repurchases or tender
offers will be made in accordance with requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the 1940 Act and the principal
stock exchange on which the Common Shares are traded.
Conversion to Open-Ended 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 MMP Shares, 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 MMP Shares, 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
MMP Shares 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.
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 MMP Shares 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 MMP Shares 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). 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.
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
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.
UNDERWRITING
_______________ is acting as Underwriter in this offering. Subject to the
terms and conditions contained in the underwriting agreement by and among the
Underwriter and the Fund, First Trust Advisors, L.P. and Four Corners Capital
Management, LLC, dated the date of this Prospectus (a copy of which is filed
as an exhibit to the Registration Statement of which this Prospectus is a
part), _______________ has agreed to purchase from the Fund, and the Fund has
agreed to sell to _______________, the MMP Shares offered hereby.
The underwriting agreement provides that _______________ is obligated to
purchase, subject to certain conditions, all of the MMP Shares being offered
if any are purchased. The conditions contained in the underwriting agreement
include requirements that (1) the representations and warranties made by the
Fund to _______________ are true; (2) there has been no material change in
the financial markets; and (3) the Fund, First Trust Advisors and Four
Corners deliver customary closing documents to _______________.
Subject to the terms and conditions set forth in the underwriting agreement,
the Fund will sell the MMP Shares to _______________ on the Date of Original
Issue by releasing the MMP Shares to _______________ account at the Securities
Depository against payment by _______________ for the securities to the Fund's
account. On the next Auction Date after the Date of Original Issue, all the
__________ MMP Shares sold to _______________ will be auctioned in the Auction
of the MMP Shares pursuant to the Auction Procedures described in "Description
of the Money Market Cumulative Preferred Shares" and will thereafter be held in
book-entry form, as described in this Prospectus.
After the Auction which includes the newly issued MMP Shares, payment by each
purchaser of MMP Shares sold through the Auction will be made in accordance with
the procedures described under "The Auction."
Sales Load and Expenses
_______________ has advised the Fund that it proposes to offer the MMP Shares
directly to the public at the public offering price presented on the cover page
of this Prospectus less a selling concession equal to $_____ per share which is
equal to ___% of the initial offering price. Investors must pay for any MMP
Shares purchased on or before __________, 2004. After the offering,
_______________ may change the offering price and other selling terms.
Indemnification
The Fund, First Trust Advisors and Four Corners have agreed to indemnify
_______________ against certain liabilities relating to this offering, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement and to contribute to payments that _______________ may be required to
make for those liabilities.
Listing
The MMP Shares, which have no history of public trading, will not be listed
on an exchange or automated quotation system. Broker-Dealers may maintain a
secondary trading market in the MMP Shares outside of Auctions; however, they
have no obligation to do so, and there can be no assurance that a secondary
market for the MMP Shares will develop or, if it does develop, that it will
provide holders with a liquid trading market (i.e., trading will depend on the
presence of willing buyers and sellers and the trading price will be subject to
variables to be determined at the time of the trade by such Broker-Dealers). The
Fund has been advised by _______________ that _______________ currently intends
to make a market in the MMP Shares, as permitted by applicable laws and
regulations. However, _______________ is not obligated to make a market in the
MMP Shares between Auctions and the market making may be discontinued at any
time at its sole discretion.
Electronic Distribution
A Prospectus in electronic format may be made available on the Internet sites
or through other online services maintained by _______________ or its
affiliates. In those cases, prospective investors may view offering terms online
and prospective investors may be allowed to place orders online. _______________
may allocate a specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be made by the
representative on the same basis as other allocations.
Other than the Prospectus in electronic format, the information on
_______________ web site and any information contained in any other web site
maintained by _______________ is not part of the prospectus or the registration
statement of which this prospectus forms a part, has not been approved and/or
endorsed by the Fund and should not be relied upon by investors.
Certain Relationships and Fees
To the extent permitted under the 1940 Act and the rules and regulations
promulgated thereunder, the Fund anticipates that _______________ may from time
to time act as a broker or dealer and receive fees in connection with the
execution of the Fund's portfolio transactions after _______________ has ceased
to be the underwriter and, subject to certain restrictions, may act as broker
while it is the underwriter. The Fund anticipates that _______________ or one of
its affiliates may from time to time act in Auctions as a Broker-Dealer or
dealer and receive fees as described under "Description of the Money Market
Cumulative Preferred Shares."
Address
_______________'s principal office is located at __________________________.
CUSTODIAN, TRANSFER AGENT, SHAREHOLDER SERVICES AGENT, DIVIDEND PAYING AGENT
AND ADMINISTRATOR
The custodian of the assets of the Fund is PFPC Trust Company ("Custodian"),
301 Bellevue Parkway, Wilmington, Delaware 19809.
_________________________________, ______________________________ will serve as
auction agent, transfer agent, registrar and dividend disbursing agent with
respect to the MMP Shares.
The Fund's transfer, shareholder services and dividend paying agent, with
respect to the Common Shares, is PFPC Inc., 301 Bellevue Parkway, Wilmington,
Delaware 19809. Pursuant to an Administration and Accounting Services Agreement,
PFPC Inc. also provides certain administrative and accounting services to the
Fund, including maintaining the Fund's books of 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, 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 MMP Shares will be passed upon
for the Fund by Chapman and Cutler LLP, Chicago, Illinois, and for the
Underwriters by ____________________, __________. Chapman and Cutler LLP and
____________________ 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 Commission. These documents can be inspected and copied for
a fee at the 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 Exchange.
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 MMP Shares can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the Commission. The Commission maintains a web site
(http://www.sec.gov) that contains each Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Exchange Act.
TABLE OF CONTENTS FOR 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.....................................................................25
Proxy Voting Procedures.....................................................27
Sub-Adviser.................................................................28
Portfolio Transactions......................................................29
Net Asset Value.............................................................30
Description of Money Market Cumulative Preferred Shares.....................31
Additional Information Concerning Auctions for Money Market Cumulative
Preferred Shares............................................................32
Concerning the Auction Agent................................................33
Broker-Dealers..............................................................34
Federal Income Tax Matters..................................................34
Performance Related and Comparative Information.............................39
Experts.....................................................................39
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent............................................................39
Additional Information......................................................40
Financial Information......................................................F-1
Appendix A Statement Establishing and Fixing the Rights and Preferences
of Money Market Cumulative Preferred Shares....................A-1
Part I: Money Market Cumulative Preferred Shares Terms
Part II: Auction Procedures
Appendix B Description of Ratings.........................................B-1
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(This page is intentionally left blank.)
FIRST TRUST/FOUR CORNERS
SENIOR FLOATING RATE INCOME FUND II
____ MONEY MARKET CUMULATIVE PREFERRED (MMP(R)) SHARES
-----------------------------
PROSPECTUS
__________, 2004
-----------------------------
___________________
SUBJECT TO COMPLETION, DATED MAY 12, 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 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 newly 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 "Money Market Cumulative Preferred Shares" or "MMP Shares") 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 MMP Shares, 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 Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
This Statement of Additional Information is dated __________, 2004.
TABLE OF CONTENTS
The Fund.....................................................................1
Investment Objectives........................................................1
Investment Restrictions......................................................2
Additional Information About The Fund's Investments..........................4
Management Of The Fund......................................................21
Adviser.....................................................................25
Proxy Voting Procedures.....................................................27
Sub-Adviser.................................................................28
Portfolio Transactions......................................................29
Net Asset Value.............................................................30
Description of Money Market Cumulative Preferred Shares.....................31
Additional Information Concerning Auctions For Money Market
Cumulative Preferred Shares..............................................32
Concerning The Auction Agent................................................33
Broker-Dealers..............................................................34
Federal Income Tax Matters..................................................34
Performance Related And Comparative Information.............................39
Experts.....................................................................39
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing
Agent And Redemption Agent...............................................39
Additional Information......................................................40
Financial Information......................................................F-1
Appendix A Statement Establishing and Fixing the Rights and Preferences of
Money Market Cumulative Preferred Shares.......................A-1
Part I: Money Market Cumulative Preferred Shares Terms
Part II: Auction Procedures
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
Page 1
preference of the Preferred Shares is not treated as a liability. Percentage
limitations described in this Statement of Additional Information are as of the
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.
Page 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
Page 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
Page 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
Page 5
Loan in the form of a participation, the agreement between the buyer and seller
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.
Page 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,
trade creditors, and preferred and common stockholders. However, these factors
Page 7
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.
Page 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 risk of
Page 9
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 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
Page 10
adverse market or economic conditions, the secondary market 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
Page 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
Page 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
Page 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
Page 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.
Page 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.
Page 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 obligations to
Page 17
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
Page 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.
Page 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 __% 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.
Page 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. The mailing address of the officers and Trustees, unless otherwise
noted, is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
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 Trust 17 Portfolios None
D.O.B.: 09/55 Chairman of the Portfolios, L.P. and First
Board, Chief o 2004 Trust Advisors; Chairman
Executive Officer of the Board of
and Trustee Directors, Bond Wave, LLC
Trustees who are not
Interested Persons of the
Fund
------------------------
Richard E. Erickson Trustee o One Year(2) Physician, 17 Portfolios None
327 Gundersen Drive Sportsmed/Wheaton
Carol Stream, IL 60188 o 2004 Orthopedics
D.O.B.: 04/51
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 17 Portfolios None
26W110 Sandpiper Court Financial Officer (1990
Wheaton, IL 60188-4541 o 2004 to Present), ADM Investor
D.O.B.: 11/57 Services, Inc. (Futures
Commission Merchant);
Registered Representative
(2000 to Present),
Segerdahl & Company,
Inc., an NASD member
(Broker-Dealer)
Niel B. Nielson Trustee o One Year(2) President (2002 to 17 Portfolios Director of
1117 Mountain Terrace Present), Covenant Good News
Lookout Mountain, GA 30750 o 2004 College; Pastor (1997 to Publishers
D.O.B.: 03/54 2002), College Church in - Crossway
Wheaton Books; Covenant
Transport Inc.
David M. Oster Trustee o One Year(2) Trader (Self-Employed) 6 Portfolios None
3N550 Wildflower Lane (1987 to Present)
West Chicago, IL 60185 o 2004 (Options Trading and
D.O.B.: 03/64 Market Making)
Page 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 Officer, 17 Portfolios N/A
D.O.B.: 11/57 Controller, Chief term Managing Director, First
Financial Officer Trust Portfolios, L.P. and
and Chief o 2004 First Trust Advisors
Accounting Officer
Susan M. Brix Assistant Vice o Indefinite Representative, First 17 Portfolios N/A
D.O.B.: 01/60 President term Trust Portfolios, L.P.;
Assistant Portfolio
o 2004 Manager, First Trust
Advisors
Robert F. Carey Vice President o Indefinite Senior Vice President, 17 Portfolios N/A
D.O.B.: 07/63 term First Trust Portfolios,
L.P. and First Trust
o 2004 Advisors
W. Scott Jardine Secretary o Indefinite General Counsel, First 17 Portfolios N/A
D.O.B.: 05/60 term Trust Portfolios, L.P. and
First Trust Advisors
o 2004
Roger Testin Vice President o Indefinite Vice President (August 17 Portfolios N/A
D.O.B.: 06/66 term 2001-Present), First
Trust Advisors; Analyst
o 2004 (1998-2001), 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
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
Page 22
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. Because the Fund is newly organized, none of the
committees have met during the Fund's last fiscal year.
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 and
First Trust/Value Line(R) & Ibbotson Equity Allocation 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 Senior Floating Rate Income Fund,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund and
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, as they hold with
the Fund.
The officers of the Fund and the Trustee who are "interested persons" of
the Fund as designated above serve without any compensation from the Fund.
Trustees who are not interested persons of the Fund ("Independent Trustees")
receive a $10,000 annual retainer for serving as trustee of the Fund, $1,000 per
meeting fee for their attendance (in-person or through electronic means), $500
for attendance in-person or through electronic means at a committee meeting and
are reimbursed for expenses incurred as a result of attendance at meetings of
the Trustees. The following table sets forth estimated compensation to be paid
by the Fund projected during the Fund's first full fiscal year to each of the
Page 23
Independent Trustees and estimated total compensation to be paid to each of the
Independent Trustees by the First Trust Fund Complex for a full calendar year.
The Fund has no retirement or pension plans.
ESTIMATED TOTAL
COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND (1) FUND COMPLEX (2)
Richard E. Erickson $13,000 $99,500
Thomas R. Kadlec $13,000 $99,500
Niel B. Nielson $13,000 $99,500
David M. Oster $13,000 $78,000
--------------------
(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 and First Trust/Value Line(R) & Ibbotson Equity Allocation 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 and First Trust/Value Line(R) & Ibbotson Equity Allocation 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 March 31, 2004:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL REGISTERED INVESTMENT
DOLLAR RANGE OF COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
Mr. Bowen None $50,001 - $100,000
Mr. Erickson None $ 1 - $ 10,000
Mr. Kadlec None $50,001 - $100,000
Mr. Nielson None $10,001 - $ 50,000
Mr. Oster None $10,001 - $ 50,000
As of December 31, 2003, 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
Page 24
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.
As of __________, 2004, First Trust Portfolios, L.P. owned both
beneficially and of record all of the Common 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 25
mutual funds and six 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
Page 25
terminated, at any time, without payment of any penalty, by the Board or by vote
of a majority of the outstanding voting securities of 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 to review the matters contained in the above-referenced
memorandum.
In evaluating the Investment Management Agreement and the Sub-Advisory
Agreement, the Board reviewed the Independent Trustees' role in approving the
advisory contracts under the 1940 Act. 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, the fees to be paid to the
respective adviser and the sub-adviser and the experience, resources and
Page 26
staffing of the respective adviser and sub-adviser. More specifically, as First
Trust Advisors already serves as investment adviser on various funds in the
First Trust complex, the Trustees are already well aware of and considered its
personnel, staffing, experience, investment philosophy and fees paid by other
clients. In evaluating the Investment Management Agreement, the Trustees
considered the supervisory services to be provided by First Trust Advisors, as
the investment adviser, the resources available to fulfill such function and the
fees to be paid to First Trust Advisors (as well as fees paid by other funds).
With respect to the Sub-Advisory Agreement, as Four Corners already serves
as a sub-adviser to funds in the First Trust complex, the Trustees were familiar
with and considered its experience and skill with the senior loan asset class,
its personnel, resources, investment personnel, investment philosophy and
process and fees received for similar services. The Trustees also considered the
level of complexity required in managing this asset class. In considering 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.
In light of the foregoing, the Trustees concluded that the arrangements
with the Adviser and the Sub-Adviser, including the level of fees, were
reasonable. The Trustees did not identify any single factor discussed above as
all-important or controlling. The Board of Trustees, including a majority 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 have determined that the terms of the Fund's Investment
Management Agreement and the Sub-Advisory Agreement are fair and reasonable and
that the agreements are in the Fund's best interests. The Independent Trustees
believe that the Investment Management Agreement and the Sub-Advisory Agreement
will enable the Fund to obtain high quality investment management services at a
cost that they deem appropriate, reasonable, and in the best interests of the
Fund and its shareholders.
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 code 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.
Page 27
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 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 and
publicly described. 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
Page 28
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
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
Page 29
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
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.
Page 30
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 MONEY MARKET CUMULATIVE PREFERRED SHARES
Notices
The Fund shall deliver to Moody's (if Moody's is then rating MMP Shares),
S&P (if S&P is then rating MMP Shares) and any other rating agency which is then
rating MMP Shares and which so requires a certificate which sets forth a
determination of certain items (the "MMP Shares Basic Maintenance Report"),
including the assets of the Fund, the Market Value and the Discounted Value
thereof (separately and in aggregate), the MMP 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 MMP 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 MMP Shares Basic
Maintenance Amount. The Fund shall deliver the MMP 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.
The Fund shall deliver to the Auction Agent, Moody's (if Moody's is then
rating MMP Shares), S&P (if S&P is then rating MMP Shares) and any Other Rating
Agency which is then rating MMP Shares and which so requires a certificate with
respect to the calculation of the 1940 Act MMP Shares Asset Coverage and the
value of the portfolio holdings of the Fund (a "1940 Act MMP 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 MMP Shares Asset Coverage. The 1940 Act MMP 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 MMP 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 MMP Shares),
S&P (if S&P is then rating MMP Shares) and any Other Rating Agency which is then
rating MMP Shares 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 MMP Shares Basic Maintenance Report
and the 1940 Act MMP Shares Asset Coverage Certificate required to be delivered
by the Fund as of the Date of Original Issue. Within ten Business Days after the
Page 31
last Valuation Date of each fiscal year of the Fund on which a MMP 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 MMP Shares), S&P (if S&P is
then rating MMP Shares) and any other Rating Agency which is then rating MMP
Shares and which so requires, an Accountant's Certificate regarding the accuracy
of the calculations made by the Fund in such MMP Shares Basic Maintenance
Certificate and in any other MMP 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 MMP 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 MMP Shares), S&P (if S&P is then rating MMP Shares) and any Other
Rating Agency which is then rating MMP Shares and which so requires, an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund in such 1940 Act MMP 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 MMP Shares Basic Maintenance Report and 1940 Act MMP 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
basis shall not be deemed to be a failure to maintain the MMP Shares Basic
Maintenance Amount on any prior Valuation Dates.
ADDITIONAL INFORMATION CONCERNING AUCTIONS
FOR MONEY MARKET CUMULATIVE PREFERRED SHARES
Auction Agency Agreement
The Fund has entered into an Auction Agency Agreement (the "Auction Agency
Agreement") with the Auction Agent (currently, ___________________________)
which provides, among other things, that the Auction Agent will follow the
Auction Procedures for purposes of determining the Applicable Rate for the MMP
Shares 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
Page 32
Agreements") with several Broker-Dealers selected by the Fund, which provide for
the participation of those Broker-Dealers in Auctions for MMP Shares. 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 MMP Shares. One certificate for all of
the shares of the MMP Shares 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 MMP Shares contained in the Statement. The Fund also will issue
stop-transfer instructions to the transfer agent for the MMP Shares. Prior to
the commencement of the right of holders of Preferred Shares to elect a majority
of the Fund's trustees, as described under "Description of MMP Shares--Voting
Rights" in the Prospectus, Cede & Co. will be the holder of record of all shares
of the MMP Shares 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 MMP Shares, 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
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 MMP Shares, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction--Secondary Market Trading and Transfer of MMP Shares" in the
Prospectus and notices from the Fund. The Auction Agent is not required to
accept any notice for an Auction unless it is received by the Auction Agent by
3:00 p.m., New York City time, on the Business Day preceding the Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice
to the Fund on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
Page 33
BROKER-DEALERS
The Auction Agent after each Auction for MMP Shares will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period
of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of MMP Shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence, MMP
Shares will be placed by a Broker-Dealer if such shares were (a) the subject of
Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by the Broker-Dealer for its customers who are Beneficial owners
or (b) the subject of an order submitted by such Broker-Dealer that is (1) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold the shares as a result of the Auction or (2) a Submitted Bid
of a Potential Holder that resulted in the Potential Holder purchasing the
shares as a result of the Auction or (3) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit Orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in Auctions, but only if 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 MMP Shares 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
Page 34
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 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
Page 35
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.
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 MMP Shares for a year will be divided between those designated as
capital gains dividends and ordinary income distributions in the same proportion
Page 36
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.
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.
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.
Page 37
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.
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
Page 38
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 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 May __, 2004 (commencement of the Fund's operations)
through __________, 2004, the Fund's net increase in net assets resulting from
investment operations was $__________.
EXPERTS
The Financial Statements of the Fund as of __________, 2004, appearing
in this Statement of Additional Information have been audited by
_________________________, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. _________________________ provides accounting and auditing services
to the Fund. The principal business address of _________________________ is
--------------------------.
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.
[__________________________, _____________, _______________] is the Auction
Agent with respect to the MMP Shares and acts as transfer agent, registrar,
Page 39
dividend disbursing agent and redemption agent with respect to the MMP Shares.
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.
Page 40
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder of
First Trust/Four Corners Senior Floating Rate Income Fund II
We have audited the accompanying statement of net assets of First
Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund"), as of
__________, 2004. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 of this financial statement provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the financial position of the Fund as
of __________, 2004, in conformity with generally accepted accounting
principles.
--------------------------
---------, ----------
__________, 2004
F-1
FINANCIAL STATEMENTS
(AUDITED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
__________, 2004
ASSETS:
Cash $_______
Offering costs $_______
$-------
LIABILITIES:
Offering costs payable $_______
Net Assets $_______
NET ASSETS - Applicable to _____ shares $_______
NET ASSET VALUE PER SHARE $_______
(net assets divided by _____ shares)
MAXIMUM OFFERING PRICE PER SHARE $_______
(net asset value plus sales charge of ____% of offering price)
F-2
FINANCIAL STATEMENTS
(UNAUDITED)
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
__________, 2004
F-3
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE MONTH ENDED __________, 2004
(UNAUDITED)
F-4
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
PERIOD FROM __________, 2004 THROUGH __________, 2004
F-5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS AS OF __________, 2004
(UNAUDITED)
Maturity Date Tranche Principal Amount Market Value
---------------------- ---------------- ------------
F-6
APPENDIX A
STATEMENT
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES
OF MONEY MARKET CUMULATIVE 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, are 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 "Money Market Cumulative Preferred Shares"
or "MMP Shares," 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
MMP Shares are as follows:
DESIGNATION
MMP Shares: _____ Preferred Shares, liquidation preference $25,000 per
share, are designated "MMP Shares." The initial Dividend Period for the MMP
Shares shall be the period from and including the Date of Original Issue thereof
to but excluding __________, 2004. Each MMP Share shall have an Applicable Rate
for its initial Dividend Period equal to ____% per annum and an initial Dividend
Payment Date of __________, 2004 and each MMP Share 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 MMP Shares shall constitute a separate series of Preferred Shares
of the Fund.
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
MMP Shares 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 Dividend 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.
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PART I: MMP SHARES TERMS
1. Number of Shares; Ranking. (a) The initial number of authorized shares
constituting MMP Shares is ____ shares. No fractional shares of the MMP Shares
shall be issued.
(b) Any MMP Shares 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) The MMP Shares shall rank on a parity with shares of any other series
of Preferred Shares (including any other MMP Shares) 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 MMP Shares 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 MMP Shares, Common Shares of the
Fund or other securities of the Fund which it may hereafter issue or sell.
2. Dividends. (a) The Holders of MMP Shares 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 MMP Shares 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 MMP Shares, with respect to any Dividend
Period on the first Business Day following the last day of the Dividend Period;
provided, however, if the Dividend Period is greater than 30 days then on a
monthly basis on the first Business Day of each month within the Dividend Period
and on the Business Day following the last day of the Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b)(i) above is not a Business Day, then the Dividend Payment Date
shall be the first Business Day that falls prior to such day for payment of
dividends.
(iii) The Fund shall pay to the Paying Agent not later than 3:00 p.m., New
York City time, on the Business Day next preceding each Dividend Payment Date
for the MMP Shares, 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
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moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends, including interest earned on
such moneys, will, to the extent permitted by law, be repaid to the Fund at the
end of 90 days from the date on which such moneys were to have been so applied.
(v) Each dividend on MMP Shares shall be paid on the Dividend Payment Date
therefor to the Holders 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 Dividend 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 MMP Shares during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor shall be equal to the rate per annum set
forth under "Designation" above. For each subsequent Dividend Period with
respect to the MMP Shares Outstanding 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 all MMP Shares being the subject of Submitted Hold Orders), then the
dividend rate on the MMP Shares for any such Dividend Period shall be the
Maximum Rate (except (i) during a Default Period when the dividend rate shall be
the Default Rate (as set forth in Section 2(c) (ii) below) or (ii) after a
Default Period and prior to the beginning of the next Dividend Period when the
dividend rate shall be the Maximum Rate at the close of business on the last day
of such Default Period). If an Auction for any subsequent Dividend Period is not
held for any reason, including because there is no Auction Agent or
Broker-Dealer, then the dividend rate on the MMP Shares for such Dividend Period
shall be the No Auction Rate (except (i) during a Default Period when the
dividend rate shall be the Default Rate (as set forth in Section 2(c)(ii) below)
or (ii) after a Default Period and prior to the beginning of the next Dividend
Period when the dividend rate shall be the Maximum Rate at the close of business
on the last day of such Default Period).
The All Hold Rate will apply automatically following an Auction in
which all of the Outstanding MMP Shares are subject (or are deemed to be
subject) to Hold Orders. The rate per annum at which dividends are payable on
MMP Shares as determined pursuant to this Section 2(c)(i) shall be the
"Applicable Rate."
(ii) Subject to the cure provisions below, a "Default Period" 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 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
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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 Dividend Period commencing during a
Default Period will be equal to the Default Rate, and each subsequent Dividend
Period commencing after the beginning of a Default Period shall be a Standard
Dividend Period; provided, however, that the commencement of a Default Period
will not by itself cause the commencement of a new Dividend Period. No Auction
shall be held during a Default Period.
(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. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be
360, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Dividend Period of one (1) year or
more, the amount of dividends per share payable on any Dividend Payment Date (or
in respect of dividends on another date in connection with a redemption during
such Dividend Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of twelve
30-day months.
(d) Any dividend payment made on MMP Shares shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such Shares.
(e) For so long as the MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Fund would have Eligible Assets with an aggregate Discounted
Value at least equal to the MMP Shares Basic Maintenance Amount and the 1940 Act
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MMP Shares Asset Coverage would be achieved, (ii) full cumulative dividends on
the MMP Shares due on or prior to the date of the transaction have been declared
and paid and (iii) the Fund has redeemed the full number of MMP Shares required
to be redeemed by any provision for mandatory redemption contained in Section
3(a)(ii).
(f) The Fund will not declare, pay or set apart for payment any dividend or
other distribution in respect to the MMP Shares unless (i) there is not an event
of default under indebtedness senior to the MMP Shares, if any, or (ii)
immediately after such transaction, the Fund would have eligible portfolio
holdings with an aggregate discounted value at least equal to the asset coverage
requirements under the indebtedness senior to the MMP Shares.
3. Redemption. (a) (i) After the initial Dividend Period, subject to the
provisions of this Section 3 and to the extent permitted under the 1940 Act and
Massachusetts law, the Fund may, at its option, redeem in whole or in part out
of funds legally available therefor MMP Shares herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption to the Auction Agent
not less than 15 days and not more than 40 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
Dividend Period of more than one year, on any Business Day prior to the end of
the relevant Dividend Period by delivering a notice of redemption to the Auction
Agent not less than 15 days and not more than 40 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 Dividend Period as set forth in Section 4 of this
Statement; provided, however, that during a Dividend Period of more than one
year no MMP Shares 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
Dividend 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 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 MMP Shares by reason of the redemption of such MMP Shares 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 MMP 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 MMP Shares Basic
Maintenance Amount or, as of the last Business Day of any month, the 1940 Act
MMP 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 MMP
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 MMP Shares Asset
Coverage as of such last Business Day (each an "Asset Coverage Cure Date"), the
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MMP Shares will be subject to mandatory redemption out of funds legally
available therefor. The number of MMP Shares to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of MMP
Shares the redemption of which, if deemed to have occurred immediately prior to
the opening of business on the relevant Asset Coverage Cure Date, would result
in the Fund having Eligible Assets with an aggregate Discounted Value at least
equal to the MMP Shares Basic Maintenance Amount, or sufficient to satisfy 1940
Act MMP 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 MMP Shares
then Outstanding will be redeemed), and (B) the maximum number of MMP Shares
that can be redeemed out of funds expected to be available therefor on the
Mandatory Redemption Date at the Mandatory Redemption Price set forth in
subparagraph (a)(iii) of this Section 3.
(iii) In determining the MMP Shares 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 MMP Shares Basic Maintenance
Amount or the 1940 Act MMP Shares Asset Coverage, as the case may be, pro rata
among the Holders of MMP Shares 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 MMP Shares Basic Maintenance Amount or
the 1940 Act MMP 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 MMP Shares 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 MMP Shares, 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 MMP Shares to be redeemed and the Paying Agent. The Fund
will deposit with the Paying Agent funds sufficient to redeem the specified
number of MMP Shares with respect to a redemption required under subparagraph
(a)(ii) of this Section 3, by 12:00 p.m., New York City time, on the Mandatory
Redemption Date. If fewer than all of the Outstanding MMP Shares 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 Dividend Period of one year or more
only) a redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.
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(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 30th day preceding the Mandatory Redemption Date. The
Auction Agent will use its reasonable efforts to provide notice to each Holder
of MMP Shares 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 MMP Shares 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 MMP Shares to be redeemed, (iii) the redemption price (specifying the amount
of accumulated dividends to be included therein), (iv) that dividends on the
shares to be redeemed will cease to accumulate on such 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 MMP Shares may be redeemed unless all dividends in
arrears on the Outstanding MMP Shares and all shares of beneficial interest of
the Fund ranking on a parity with the MMP Shares 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 MMP Shares 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 MMP Shares.
(d) Upon the deposit of funds on the date fixed for redemption sufficient
to redeem MMP Shares 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 MMP Shares
Basic Maintenance Amount or the 1940 Act MMP 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
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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 the MMP Shares called for redemption on such date and (ii) such other
amounts, if any, to which Holders of MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares for which a Notice of
Redemption has been given, dividends may be declared and paid on MMP Shares and
shall include those MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP
Shares outside of an Auction at any price, whether higher or lower than the
price that would be paid in connection with an optional or mandatory redemption,
so long as, at the time of any such purchase, there is no arrearage in the
payment of dividends on, or the mandatory or optional redemption price with
respect to, any MMP Shares for which Notice of Redemption has been given and the
Fund is in compliance with the 1940 Act MMP Shares Asset Coverage and has
Eligible Assets with an aggregate Discounted Value at least equal to the MMP
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 MMP Shares are redeemed or otherwise acquired by the Fund, the
Fund shall give notice of such transaction to the Auction Agent, in accordance
with the procedures agreed upon by the Board of Trustees.
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(i) In the case of any redemption pursuant to this Section 3, only MMP
Shares 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 MMP Shares, ranking prior to or on a parity
with the MMP Shares 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 Fund would meet the 1940 Act MMP Shares Asset Coverage, the MMP Shares Basic
Maintenance Amount and the requirements of Section 11 of Part I hereof.
4. Designation of Dividend Period. (a) The initial Dividend Period for the
MMP Shares is as set forth under "Designation" above. The Fund will designate
the duration of subsequent Dividend Periods of MMP Shares; provided, however,
that no such designation is necessary for a Standard Dividend Period and,
provided further, that any designation of a Special Dividend Period shall be
effective only if (i) notice thereof shall have been given as provided herein,
(ii) any failure to pay in a timely manner to the Auction Agent the full amount
of any dividend on, or the redemption price of, MMP Shares 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 Dividend 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, and (v) in the case of
the designation of a Special Dividend Period, the Fund has confirmed that as of
the Auction Date next preceding the first day of such Special Dividend Period,
it has Eligible Assets with an aggregate Discounted Value at least equal to the
MMP Shares Basic Maintenance Amount, and the Fund has consulted with the
Broker-Dealers and has provided notice of such designation and a MMP Shares
Basic Maintenance Report to Moody's (if Moody's is then rating the MMP Shares),
S&P (if S&P is then rating the MMP Shares) and any Other Rating Agency which is
then rating the MMP Shares and so requires.
(b) If the Fund proposes to designate any Special Dividend Period, not
fewer than seven (or two Business Days in the event the duration of the Dividend
Period prior to such Special Dividend Period is fewer than eight days) nor more
than 30 Business Days prior to the first day of such Special Dividend Period,
notice shall be (i) made by press release and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Fund proposes to exercise
its option to designate a succeeding Special Dividend Period, specifying the
first and last days thereof and (B) that the Fund will by 3:00 p.m., New York
City time, on the second Business Day next preceding the first day of such
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Special Dividend Period, notify the Auction Agent, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to certain conditions,
to proceed with such Special Dividend Period, subject to the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Dividend Period, in which latter event the succeeding Dividend
Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Dividend Period as a Special Dividend Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise
its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 p.m., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the Fund shall
be deemed to have delivered a notice to the Auction Agent with respect to such
Dividend Period to the effect set forth in clause (ii) above, thereby resulting
in a Standard Dividend Period.
5. Restrictions on Transfer. MMP Shares 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 MMP Shares through different
Broker-Dealers, advises the Auction Agent of such transfer. The certificates
representing the MMP Shares 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 MMP Shares
shall be entitled to one vote for each MMP Share held on each matter submitted
to a vote of shareholders of the Fund, and (ii) the Holders of Outstanding
Preferred Shares, including the MMP Shares, 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
MMP Shares, 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 MMP Share, 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 MMP
Shares, voting together as a single class, shall elect the balance of the
Trustees.
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(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 MMP Shares, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and the holders of Preferred Shares, including the MMP Shares, 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 MMP Shares, 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 the MMP Shares, 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 MMP Shares, held during a Voting Period at which Trustees are to
be elected, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of 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 MMP Shares 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.
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(e) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the MMP Shares and
holders of other Preferred Shares pursuant to paragraph (b) of this Section 6
shall terminate, the remaining Trustees shall constitute the Trustees of the
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 MMP
Shares, 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 MMP 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 MMP Shares, ranking on a parity with
the MMP Shares 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 MMP Shares, including
shares previously purchased or redeemed by the Fund, subject to continuing
compliance by the Fund with 1940 Act MMP Shares Asset Coverage and MMP 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
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,
A-12
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 MMP 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 MMP Shares, 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 MMP Shares), S&P
(if S&P is then rating MMP Shares) and any Other Rating Agency which is then
rating the MMP Shares 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 MMP Shares, 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
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 MMP Shares, 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
A-13
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 MMP Shares 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 MMP Shares 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 MMP Shares:
Deposit Securities MMP Shares Basic Maintenance Amount
Discounted Value MMP 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 MMP 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 MMP Shares, 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 MMP Shares Basic Maintenance Amount.
(j) Unless otherwise required by law, Holders of MMP Shares shall not have
any relative rights or preferences or other special rights other than those
specifically set forth herein. The Holders of MMP Shares shall have no rights to
cumulative voting. If the Fund fails to pay any dividends on the MMP Shares, 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 MMP
Shares if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds 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 MMP
Shares then Outstanding, together with holders of shares of any class of shares
ranking on a parity with the MMP Shares upon dissolution, liquidation or winding
A-14
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 MMP Shares 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 MMP Shares, 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
MMP Shares, 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 MMP Shares 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 MMP Shares 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 MMP Shares 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.
(e) After the payment to the holders of Preferred Shares, including MMP
Shares, of the full preferential amounts provided for in this Section 7, the
holders of Preferred Shares, including MMP Shares, 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 MMP Shares, 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 MMP Shares unless proportionate distributive amounts
shall be paid on account of the MMP Shares, 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.
A-15
(g) Subject to the rights of the holders of shares of any series or class
or classes of stock ranking on a parity with MMP Shares 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 MMP Shares 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 MMP
Shares 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 MMP Shares
shall not be entitled to share therein.
8. Auction Agent. For so long as any MMP Shares 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 MMP Shares 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 MMP Shares Asset Coverage. The Fund shall maintain, as of the
last Business Day of each month in which any shares of the MMP Shares are
Outstanding, asset coverage with respect to the MMP Shares which is equal to or
greater than the 1940 Act MMP Shares Asset Coverage; provided, however, that
Section 3(a)(ii) shall be the sole remedy if the Fund fails to do so.
10. MMP Shares Basic Maintenance Amount. So long as the MMP Shares are
Outstanding and Moody's, S&P or any Other Rating Agency which so requires is
then rating the shares of the MMP Shares, the Fund shall maintain, as of each
Valuation Date, Moody's Eligible Assets (if Moody's is then rating the MMP
Shares), S&P Eligible Assets (if S&P is then rating the MMP Shares) and (if
applicable) Other Rating Agency Eligible Assets having an aggregate Discounted
Value equal to or greater than the MMP 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.
11. Additional Restrictions Applicable Only When MMP Shares 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 MMP Shares), for so long as any MMP Shares are
outstanding and S&P is rating such shares, the Fund will not, unless it has
received written confirmation from S&P 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;
A-16
(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 MMP 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 MMP Shares or any class or series of shares
ranking prior to or on a parity with MMP Shares with respect to the
payment of dividends or the distribution of assets upon dissolutions,
liquidation or winding up of the Fund, or reissue any MMP Shares
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 MMP Shares 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 MMP 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
compliance with the provisions relating to the MMP Shares Basic Maintenance
Amount; (E) for purposes of the MMP 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 MMP 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.
A-17
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 MMP Shares, 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
MMP Shares 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 MMP Shares Basic Maintenance Amount, total price, NAV, and
total return.
(b) Upon any failure to maintain the required MMP Shares Basic
Maintenance Amount or 1940 Act MMP Shares Asset Coverage on any Valuation
Date, the Fund may use reasonable commercial efforts (including, without
limitation, altering the composition of its portfolio, purchasing MMP
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 MMP Shares Basic Maintenance Amount or 1940 Act
MMP Shares Asset Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the MMP Shares Basic Maintenance Amount and 1940
Act MMP Shares Asset Coverage tests shall be determined with reference to
those MMP Shares which are deemed to be Outstanding hereunder.
(d) The Fund shall deliver to Moody's (if Moody's is then rating MMP
Shares), S&P (if S&P is then rating MMP Shares) and any Other Rating
Agency which is then rating MMP Shares 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 MMP Shares Basic Maintenance Amount, trade price, NAV, and total
return (a "MMP Shares Basic Maintenance Report"). Such MMP 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 MMP
Shares Basic Maintenance Amount. It shall also be delivered to S&P (if S&P
is rating MMP Shares): (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 MMP Shares Basic Maintenance Amount; (iii) upon any
redemptions; and (iv) when requested by S&P. The Fund shall deliver the
A-18
MMP 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 MMP Shares), S&P (if S&P is then rating MMP Shares) and any
Other Rating Agency which is then rating MMP Shares and which so requires,
a certificate with respect to the calculation of the 1940 Act MMP Shares
Asset Coverage and the value of the portfolio holdings of the Fund ("1940
Act MMP 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 MMP Shares Asset
Coverage. Such 1940 Act MMP 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 MMP Shares Basic Maintenance Amount. The
certificates of (d) and (e) of this Section 12 may be combined into a
single certificate.
(f) 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 MMP
Shares), S&P (if S&P is then rating MMP Shares) and any Other Rating
Agency which is then rating MMP Shares 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 MMP Shares Basic Maintenance Report and the 1940 Act MMP 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 MMP 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 MMP Shares), S&P (if
S&P is then rating MMP Shares) and any Other Rating Agency which is then
rating MMP Shares and which so requires, an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such MMP
Shares Basic Maintenance Report and in any other MMP 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 MMP 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 MMP Shares), S&P (if
S&P is then rating MMP Shares) and any Other Rating Agency which is then
rating MMP Shares and which so requires, an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such 1940
Act MMP 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 MMP Shares Basic Maintenance Report and 1940 Act MMP
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
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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 MMP 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 MMP
Shares Basic Maintenance Amount and 1940 Act MMP 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 MMP Shares Basic
Maintenance Amount in accordance with the Declaration.
(h) In the event that a MMP Shares Basic Maintenance Report or 1940
Act MMP 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 MMP
Shares Basic Maintenance Amount or the 1940 Act MMP Shares Asset Coverage,
as the case may be, on such Valuation Date for purposes of Section 12(b).
If a MMP Shares Basic Maintenance Report or 1940 Act MMP 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 MMP Shares Basic Maintenance Amount or the 1940 MMP 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.
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 MMP Shares, 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-20
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 MMP 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 MMP Shares or additional shares of a
series of MMP Shares (and terms relating thereto) to the series and MMP 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) "`AA' Composite Commercial Paper Rate" on any date means (i) the
interest equivalent of the 30-day rate, in the case of a Dividend Period which
is a Standard Dividend Period or shorter, or the 180-day rate, in the case of
all other Dividend Periods on commercial paper on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper Dealers
(or Dealer), if any, or, if there are no such Commercial Paper Dealers, by a
nationally recognized dealer in commercial paper of such issuers then making
such quotations selected by the Fund. For purposes of this definition, (A)
"Commercial Paper Dealers" shall mean (1) _______________, _______________,
_______________, ______________________________; (2) in lieu of any thereof, its
respective Affiliate or successor; and (3) if any of the foregoing shall cease
to quote rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Fund, and (B) "interest
equivalent" of a rate stated on a discount basis for commercial paper of a given
number of days' maturity shall mean a number equal to the quotient (rounded
A-21
upward to the next higher one-thousandth of 1%) of (1) such rate expressed as a
decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction, the
numerator of which shall be the product of such rate expressed as a decimal,
multiplied by the number of days in which such commercial paper shall mature and
the denominator of which shall be 360.
(b) "Accountant's Certificate" has the meaning set forth in Section
12(f) of this Part I.
(c) "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.
(d) "Agent Member" means a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "All Hold Rate" means 80% of the "AA" Composite Commercial Paper
Rate.
(f) "Applicable Rate" means, with respect to the MMP Shares for each
Dividend Period (i) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders
do not exist for the Auction in respect thereof, the Maximum Applicable
Rate, (iii) in the case where all the MMP Shares are the subject of Hold
Orders for the Auction in respect thereof, the All Hold Rate, and (iv) if
an Auction is not held for any reason (including the circumstance where
there is no Auction Agent or Broker-Dealer), the No Auction Rate.
(g) [Reserved.]
(h) [Reserved.]
(i) "Asset Coverage Cure Date" has the meaning set forth in Section
3(a)(ii).
(j) "Auction" means each periodic operation of the procedures set
forth under "Auction Procedures."
(k) "Auction Agent" means _________________________________, 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.
(l) "Auction Date" means the first Business Day next preceding the
first day of a Dividend Period.
A-22
(m) "Auction Procedures" means the procedures for conducting
Auctions set forth in Part II hereof.
(n) "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 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.
(o) "Beneficial Owner," with respect to MMP Shares, 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.
(p) "Bid" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
(q) "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.
(r) "Board of Trustees" or "Board" means the Board of Trustees of
the Fund or any duly authorized committee thereof as permitted by
applicable law.
(s) "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.
(t) "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.
(u) "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.
(v) [Reserved.]
(w) "Code" means the Internal Revenue Code of 1986, as amended.
(x) "Commercial Paper Dealers" has the meaning set forth in the
definition of AA Composite Commercial Paper Rate.
A-23
(y) "Commission" means the Securities and Exchange Commission.
(z) "Common Share" means the shares of beneficial interest, par
value $.01 per share, of the Fund.
(aa) "Date of Original Issue" means, with respect to the MMP Shares,
____________, 2004.
(bb) [Reserved.]
(cc) "Default" has the meaning set forth in Section 2(c)(ii) of this
Part I.
(dd) "Default Period" has the meaning set forth in Section 2(c)(ii)
of this Part I.
(ee) "Default Rate" means the Reference Rate multiplied by three (3).
(ff) "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.
(gg) "Discount Factor" means the S&P Discount Factor.
(hh) "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.
(ii) "Dividend Default" has the meaning set forth in Section 2(c)(ii)
of this Part I.
(jj) "Dividend Payment Date" with respect to the MMP Shares means any
date on which dividends are payable pursuant to Section 2(b) of this Part
I.
(kk) "Dividend Period" means, with respect to the MMP Shares, the
period commencing on the Date of Original Issue thereof and ending on the
date specified for such series on the Date of Original Issue thereof and
thereafter, as to such series, the period commencing on the day following
each Dividend Period for such series and ending on the day established for
such series by the Fund.
(ll) "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 MMP Shares, whichever is applicable.
A-24
(mm) "Existing Holder," with respect to shares of a series of MMP
Shares, shall mean 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.
(nn) "Fitch" means Fitch Ratings and its successors at law.
(oo) "Holder" means, with respect to MMP Shares, the registered
holder of MMP Shares as the same appears on the share ledger or share
records of the Fund.
(pp) "Hold Order" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(qq) [Reserved.]
(rr) [Reserved.]
(ss) [Reserved.]
(tt) [Reserved.]
(uu) [Reserved.]
(vv) [Reserved.]
(ww) "MMP Shares" means MMP Shares, liquidation preference $25,000
per share.
(xx) "MMP Shares Basic Maintenance Amount" as of any Valuation Date,
shall mean the dollar amount equal to the sum of
(i) (A) the product of the number of MMP Shares Outstanding on
such date multiplied by $25,000, plus any redemption premium applicable to
the MMP Shares 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 MMP Shares Outstanding
that follow such Valuation Date;
(C) the aggregate amount of cash dividends that would
accumulate on the MMP Shares Outstanding from such first respective
Dividend Payment Date therefor through the 30th day after such Valuation
Date, at the Maximum Applicable Rate for a 28-Day Dividend 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;
A-25
(E) the amount of any indebtedness or obligations of the Fund
senior in right of payment to the MMP Shares; 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 MMP Shares 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 MMP
Shares subject to redemption or to satisfy any of (i)(B) through (i)(F).
(yy) "MMP Shares Basic Maintenance Report" has the meaning set forth
in Section 12(d) of this Part I.
(zz) [Reserved.]
(aaa) [Reserved.]
(bbb) [Reserved.]
(ccc) "Mandatory Redemption Date" has the meaning set forth in Section
3(a)(iii) of this Part I.
(ddd) "Mandatory Redemption Price" has the meaning set forth in
Section 3(a)(iii) of this Part I.
(eee) "Market Value" of any asset shall include any interest accrued
thereon and shall mean 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
A-26
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.
(fff) "Maximum Rate" means, on any date on which the Applicable Rate
is determined, the rate equal to 150% of the applicable Reference Rate,
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 MMP Shares Basic Maintenance Amount.
(ggg) "Minimum Rate" means, on any Auction Date with respect to a
Dividend Period of 28 days or fewer, 70% of the AA Composite Commercial
Paper Rate at the close of business on the Business Day next preceding
such Auction Date. There shall be no Minimum Rate on any Auction Date with
respect to a Dividend Period of more than the Standard Dividend Period.
(hhh) "Moody's" means Moody's Investors Service, Inc. or its
successors.
(iii) [Reserved.]
(jjj) [Reserved.]
(kkk) [Reserved.]
(lll) [Reserved.]
(mmm) [Reserved.]
(nnn) [Reserved.]
(ooo) [Reserved.]
A-27
(ppp) [Reserved.]
(qqq) "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 stock): The percentage determined by
reference to the sector groupings of the issuer of
the convertible security with reference to the rating
of such security, in accordance with the table set
forth below.
RATING(1) DISCOUNT FACTORS(2)
UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
Aaa 162% 256% 233% 250%
Aa 167 261 238 265
A 172 266 243 275
Baa 188 282 259 285
Ba 195 290 265 290
B 199 293 270 295
Unrated 300 300 300 300
----------------
(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, unrated
fixed-income and convertible securities (which are securities that are not
rated by any of Moody's, S&P or Fitch Ratings) are limited to 10% of Moody's
Eligible Assets for purposes of calculations related to the MMP Shares Basic
Maintenance Amount. If a convertible security is not rated by any of Moody's,
S&P or Fitch Ratings, the Fund will use the applicable percentage set forth
in the row entitled "Unrated" in the table above. Ratings assigned by S&P
and/or Fitch Ratings are generally accepted 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 Ratings do not seem to approximate a
Moody's rating equivalent. Split-rated securities assigned by S&P and Fitch
Ratings (i.e., these Rating Agencies assign different rating categories to
the security) will be accepted at the lower of the two ratings.
(2) Discount factors are for seven-week exposure period.
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.
A-28
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
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 Ratings) are limited to 10% of
Moody's Eligible Assets for purposes of calculations related to the MMP
Shares Basic Maintenance Amount. If a corporate debt security is not rated
by any of Moody's, S&P or Fitch Ratings, 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 Ratings 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 Ratings do not seem to approximate a Moody's rating equivalent.
Split-rated securities assigned by S&P and Fitch Ratings (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
A-29
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 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
Ratings 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 DISCOUNT STRIPS 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):
A-30
MOODY'S RATING CATEGORY
CAA AND BELOW
BAA (INCLUDING
AND DISTRESSED AND
TYPE OF LOAN AAA-A BA(1) B(1) UNRATED)(1)
Senior Loans greater
than $250 mm 118% 136% 149% 250%
Non-Senior Loans
greater than $250 mm 128% 146% 159% 260%
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 Ratings,
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 Ratings 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 Ratings do not seem to
approximate a Moody's rating equivalent. Split-rated securities
assigned by S&P and Fitch Ratings (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 10 185 174
years)
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.
A-31
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 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 Ratings 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 Ratings 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 Ratings, 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 Ratings as
Aaa for purposes of the table above and a rating of AA by S&P or Fitch
Ratings 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 Ratings (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.
(rrr) "Moody's Eligible Assets" means:
A-33
(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
Ratings and not rated by Moody's) need not meet any otherwise
applicable rating criteria of S&P or Fitch Ratings;
(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 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 Ratings; (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
A-34
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 Ratings 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 Ratings, (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.
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
TYPE ISSUER (%) (1) INDUSTRY (%) STATE (%)(1)
Utility 4 50 7(2)
Other 6 20 n/a
----------------
(1) Percentage represent a portion of the aggregate market value and
number of outstanding shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be
diversified according to the state in which they generate the largest
part of their revenues. Publicly available information on utility
company revenues by state is available from the Uniform Statistical
Report (USR) or the Federal Energy Regulation Commission (FERC).
(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
A-35
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:
(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
Ratings, (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 Ratings, (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
A-36
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 Ratings 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
A-37
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 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
$10,000,000;
(xi) Structured Notes, rated TRACERs and TRAINs;
(xii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this
definition but only upon receipt by the Fund of a letter from
Moody's specifying any conditions on including such financial
contract in Moody's Eligible Assets and assuring the Fund that
including such financial contract in the manner so specified would
not affect the credit rating assigned by Moody's to the AMPS; and
(xiii) Common stock, preferred stock or any debt security of
REITs or real estate companies.
In addition, portfolio holdings as described below must be within
the following diversification and issue size requirements in order
to be included in Moody's Eligible Assets:
A-38
MAXIMUM MAXIMUM MINIMUM
SINGLE SINGLE ISSUE SIZE
RATINGS(1) ISSUER(2,3) INDUSTRY(3,4) ($ 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.
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 MMP 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 MMP 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.
A-39
(sss) "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): Scaps, 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
A-40
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
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
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
A-41
(ttt) "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(uuu) "1940 Act MMP 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 MMP Shares (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are 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.
(vvv) "1940 Act MMP Shares Asset Coverage Certificate" means the
certificate required to be delivered by the Fund pursuant to Section 12(e)
of this Part I.
(vvv) (1) "No Auction Rate" means, as of any Auction Date, the
immediately preceding dividend rate applicable to the MMP Shares, plus 25
basis points; provided, however, that in no event shall the No Auction
Rate exceed the Maximum Auction Rate.
(www) "Notice of Redemption" means any notice with respect to the
redemption of MMP Shares pursuant to Section 3.
(xxx) "Order" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
(yyy) "Other Rating Agency" means any rating agency other than S&P or
Moody's then providing a rating for the MMP Shares pursuant to the request
of the Fund.
(zzz) "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 MMP Shares.
(aaaa) "Outstanding" or "outstanding" means, as of any date, MMP Shares
theretofore issued by the Fund except, without duplication, (i) any MMP
Shares 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 MMP Shares and (ii) any MMP
Shares 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 MMP
Shares to which the Fund or any Affiliate of the Fund shall be the
A-42
Existing Holder shall be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any MMP Shares 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 MMP Shares Basic
Maintenance Amount, MMP Shares held by the Fund shall be disregarded and
not deemed Outstanding but shares held by any Affiliate of the Fund shall
be deemed Outstanding.
(bbbb) "Paying Agent" means ___________________________________ 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.
(cccc) "Performing" means with respect to any asset, the issuer of such
investment is not in default of any payment obligations in respect
thereof.
(dddd) "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.
(eeee) "Potential Beneficial Owner," with respect to shares of a series
of MMP Shares, shall mean 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.
(ffff) "Preferred Share" means the preferred shares of beneficial
interest, par value $.01 per share, including the MMP Shares, of the Fund
from time to time.
(gggg) "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 MMP Shares Basic Maintenance Amount.
(hhhh) "Redemption Default" has the meaning set forth in Section
2(c)(ii) of this Part I.
(iiii) "Redemption Price" has the meaning set forth in Section 3(a)(i)
of this Part I.
(jjjj) "Reference Rate" means, with respect to the determination of the
Maximum Rate and Default Rate, the greater of (1) the applicable AA
Composite Commercial Paper Rate (for a Dividend Period of fewer than 184
days) or the applicable Treasury Index Rate (for a Dividend Period of 184
days or more) or (2) the applicable LIBOR rate.
(kkkk) [Reserved.]
A-43
(llll) "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.
(mmmm) "S&P" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc., or its successors.
(nnnn) "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%
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%
A-44
25 B-d
Type of S&P Eligible Asset AAA Rating
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
A-45
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 MMP shares. 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.
(oooo) "S&P Eligible Assets" means:
A-46
(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;
(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-47
(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.
A-48
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 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.
A-49
(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
dividend period of less than or equal to 49 days, except for a
new issue, where the first dividend 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.
A-50
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.
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).
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).
Note: Add 20 percentage points to the overcollateralization level for common
stock that do not meet the requirement of item number 5 above.
(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
A-51
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 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.
A-52
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.
(oooo) "S&P Exposure Period" shall mean 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 MMP Shares Basic Maintenance
Amount to the Valuation Date on which the Fund's Discounted Value of S&P
Eligible Assets failed to exceed the MMP Shares 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 MMP Shares Basic
Maintenance Amount, and (iii) the maximum number of days the Fund has to
effect a mandatory redemption under this Statement.
(pppp) "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 MMP shares 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 MMP shares 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
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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 MMP 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 MMP 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.
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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 MMP shares.
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 MMP Shares Basic Maintenance Amount on
two consecutive valuation dates then the agreement shall terminate
immediately.
5. For the purpose of calculating the MMP 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.
(qqqq) "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
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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 Semi Conductor
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.
(rrrr) "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.
(ssss) "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;
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(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.
(tttt) "Securities Act" means the Securities Act of 1933, as amended
from time to time.
(uuuu) "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 MMP Shares.
(vvvv) "Sell Order" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(wwww) "Senior Loans" has the meaning set forth under the definition of
"Moody's Discount Factor."
(xxxx) "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
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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.
(yyyy) "Special Dividend Period" means a Dividend Period that is not a
Standard Dividend Period.
(zzzz) "Specific Redemption Provisions" means, with respect to any
Special Dividend 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 Dividend 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 Dividend 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.
(aaaaa) "Standard Dividend Period" means a Dividend Period of 28 days.
(bbbbb) "Submission Deadline" means 1:00 P.M., Eastern Standard time, on
any Auction Date or such other time on any Auction Date by which
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Broker-Dealers are required to submit Orders to the Auction Agent as
specified by the Auction Agent from time to time.
(ccccc) "Submitted Bid" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of this Statement.
(ddddd) "Submitted Hold Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(eeeee) "Submitted Order" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of this Statement.
(fffff) "Submitted Sell Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(ggggg) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(hhhhh) "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 Dividend 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
Dividend 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 recognized dealers in U.S. Government securities selected by
the Fund.
(iiiii) "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.
(jjjjj) "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.
(kkkkk) "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.
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(lllll) "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 MMP Shares initially are issued.
(mmmmm) "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.
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PART II: AUCTION PROCEDURES
1. Orders. (a) Prior to the Submission Deadline on each Auction Date for
shares of a series of MMP Shares:
(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 Dividend 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 Dividend 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 Dividend 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 Dividend 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."
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(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
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(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
(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 MMP Shares 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 MMP Shares 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 MMP Shares of a
series held by any Existing Holder is not submitted to the Auction Agent prior
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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 Dividend Period consisting of more than 28
Dividend Period 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 is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding MMP Shares
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
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series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of MMP Shares
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 MMP Shares, 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
MMP Shares" 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
between the Minimum Rate (for Standard Dividend Periods or less,
only) and the Maximum Rate (for all Dividend 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
between the Minimum Rate (for Standard Dividend Periods or less,
only) and the Maximum Rate (for all Dividend 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 MMP Shares 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 Minimum Rate and Maximum Rate for shares of the series of MMP Shares 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 Dividend 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
Dividend 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 Dividend 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 Dividend Period thereof shall be All Hold
Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Existing Holders shall continue to hold the MMP Shares
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-66
(a) If Sufficient Clearing Bids for shares of a series of MMP Shares
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 MMP Shares 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 MMP Shares 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 MMP Shares subject to the Submitted
Bid, unless the number of Outstanding MMP Shares subject to all
Submitted Bids shall be greater than the number of MMP Shares
("remaining shares") in the excess of the Available MMP Shares of
the series over the number of MMP Shares 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
MMP Shares subject to the Submitted Bid, but only in an amount equal
to the number of MMP Shares of the series obtained by multiplying
the number of remaining shares by a fraction, the numerator of which
shall be the number of Outstanding MMP Shares held by the Existing
Holder subject to the Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding MMP Shares 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 MMP Shares of the
series over the number of MMP Shares 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
A-67
MMP Shares subject to the Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding MMP Shares subject to
Submitted Bids 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 MMP Shares
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 MMP Shares 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 MMP Shares 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 MMP Shares 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 MMP Shares 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
A-68
each Existing Holder or Potential Holder on the Auction Date shall be
whole shares of MMP Shares.
(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 MMP Shares on
any Auction Date, the Auction Agent shall, in the manner as it shall
determine in its sole discretion, allocate MMP Shares of the series or
purchase among Potential Holders so that only whole shares of MMP Shares
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 MMP Shares of the series on the
Auction Date.
(f) Based on the results of each Auction for shares of a series of
MMP Shares, 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,
MMP Shares of the series. Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event an
Existing Holder or Beneficial Owner of shares of a series of MMP Shares
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 MMP Shares 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 MMP
Shares of any series or to pay for MMP Shares of any series sold or
purchased pursuant to the Auction Procedures or otherwise.
[Signature Page Follows]
A-69
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-70
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:
o 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;
o Nature of and provisions of the obligation; and
o 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
B-2
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC
An obligation rated `CCC' is currently vulnerable to 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', `AA', `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:
o Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
B-4
o 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.
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-5
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.
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.
B-8
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.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
B-9
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.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
B-10
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:
The Registrant has not conducted any business as of the date of this
filing, other than in connection with its organization. Financial Statements
indicating that the Registrant has met the net worth requirements of Section
14(a) of the 1940 Act will be filed by Pre-effective Amendment to the
Registration Statement.
2. Exhibits:
a.1 Declaration of Trust dated March 25, 2004. Filed on April 29, 2004 as
Exhibit a. to Registrant's Registration Statement on Form N-2 (File No.
333-113978) and incorporated herein by reference.
a.2 Form of Statement Establishing and Fixing the Rights and Preferences
of Money Market Cumulative Preferred Shares. Filed herewith as Appendix A to the
Statement of Additional Information contained herein.
b. By-Laws of Registrant. Filed on April 29, 2004 as Exhibit b. to
Registrant's Registration Statement on Form N-2 (File No. 333-113978) and
incorporated herein by reference.
c. None.
d. None.
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 _________, 2004.*
g.2 Sub-Advisory Agreement between First Trust Advisors L.P. and Four
Corners Capital Management, LLC dated ____________, 2004.*
h.1 Form of Underwriting Agreement. *
i. None.
j. Custodian Services Agreement between Registrant and PFPC Trust
Company dated ____________, 2004.*
k.1 Transfer Agency Services Agreement between Registrant and PFPC Inc.
dated ____________, 2004.*
k.2 Administration and Accounting Services Agreement between Registrant
and PFPC, Inc. dated ____________, 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 on April 29, 2004 as Exhibit s. to Registrant's Registration
Statement on Form N-2 (File No. 333-113978) and incorporated herein by
reference.
--------------------
* To be filed by amendment
Item 25: Marketing Arrangements
[To Come.]
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fee....................... $
Investment advisory fee......................................
Administration fee...........................................
Trustees' fees and expenses..................................
Legal fees...................................................
Audit fees...................................................
Custodian fees...............................................
Transfer agent fees..........................................
Printing fees................................................
Other........................................................
Fees reimbursed by investment advisor........................
-------
Total............................................... $
=======
Item 27: Persons Controlled By or Under Common Control With Registrant
Not applicable.
Item 28: Number of Holders of Securities
At ____________, 2004: ____________
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Shares, $0.01 par value ____________
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.
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 Trust
Defined Portfolios, 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 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
NAME AND POSITION WITH
FIRST TRUST ADVISORS L.P. EMPLOYMENT DURING PAST TWO YEARS
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
Andy Roggensack, Managing Director Managing Director, 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
Jon Carl Erickson, Vice President Vice President, First Trust Portfolios
Bob James, Vice President Vice President, First Trust Portfolios
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
Rick Swiatek, Vice President Vice President, First Trust Portfolios
Roger Testin, Vice President Vice President, First Trust Portfolios
NAME AND POSITION WITH
FIRST TRUST ADVISORS L.P. EMPLOYMENT DURING PAST TWO YEARS
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 12th day of
May, 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 May 12, 2004
------------------- and Treasurer (Principal
Mark R. Bradley Financial and Accounting
Officer)
---------------------- ----------------------------- -------------------------
/s/ James A. Bowen President, Chairman of the May 12, 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
---------------------- ----------------------------- May 12, 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.