PROSPECTUS
(PIONEER LOGO)
$234,500,000
PIONEER FLOATING RATE TRUST
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,130 SHARES, SERIES M7
3,125 SHARES, SERIES W7
3,125 SHARES, SERIES TH7
LIQUIDATION PREFERENCE $25,000 PER SHARE
----------------------
Pioneer Floating Rate Trust (the "Fund") is offering 3,130 Series M7
Auction Market Preferred Shares, 3,125 Series W7 Auction Market Preferred Shares
and 3,125 Series TH7 Auction Market Preferred Shares. The shares are referred to
in this prospectus as "AMPS." The Fund is a recently organized, non-diversified,
closed-end management investment company. The AMPS do not have a maturity date
but are subject to mandatory redemption in certain circumstances. Any series of
AMPS may be redeemed, in whole or in part, at the option of the Fund at any
time, subject to certain circumstances. Dividends on the AMPS will be cumulative
from the date the shares are issued.
Investment Objectives. The Fund's primary investment objective is to
provide a high level of current income. As a secondary investment objective, the
Fund seeks preservation of capital to the extent consistent with its primary
investment objective. There can be no assurance that the Fund will achieve its
investment objectives.
Portfolio Contents. Under normal market conditions, the Fund seeks to
achieve its investment objectives by investing at least 80% of its assets (net
assets plus borrowings for investment purposes) in senior floating rate loans
("Senior Loans"), all or any portion of which may be below investment grade
("junk") obligations. Senior Loans are made to corporations, partnerships and
other business entities that operate in various industries and geographical
regions, including non-U.S. borrowers. Senior Loans pay interest at rates that
are redetermined periodically on the basis of a floating base lending rate plus
a premium. The Fund also may invest in other floating and variable rate
instruments, including second lien loans, and in high yield corporate bonds. The
Fund may invest in Senior Loans and other securities of any credit quality,
including Senior Loans and other investments that are rated below investment
grade, or are unrated but are determined by the investment subadviser to be of
equivalent credit quality, commonly referred to as "junk bonds" (which include
below investment grade "junk" obligations). The Fund may invest all or any
portion of its assets in securities of issuers that are in default or that are
in bankruptcy. The Fund does not have a policy of maintaining a specific average
credit quality of its portfolio or a minimum portion of its portfolio that must
be rated investment grade. The Fund may invest up to 10% of its total assets in
Senior Loans and other securities of non-U.S. issuers, including emerging market
issuers, and may engage in certain hedging transactions.
(continued on following page)
INVESTING IN THE AMPS INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 49 OF THIS PROSPECTUS. THE MINIMUM PURCHASE
AMOUNT OF THE AMPS IS $25,000.
----------------------
PER SHARE TOTAL
--------- -----
Public offering price (1)................................... $25,000 $234,500,000
Sales load.................................................. $250 $2,345,000
Estimated offering expenses................................. $33.05 $310,000
Proceeds, after expenses, to the Fund....................... $24,717 $231,845,000
(1) Plus accumulated dividends, if any, from the date the AMPS are
issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
AMPS will be ready for delivery, in book-entry form only, through the facilities
of The Depository Trust Company on or about March 28, 2005.
----------------------
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
CITIGROUP
----------------------
The date of this prospectus is March 23, 2005.
(continued from previous page)
Non-investment grade securities, commonly referred to as junk bonds, are
obligations that are rated below investment grade by the national rating
agencies that cover the obligations (i.e., Ba and below by Moody's Investors
Service, Inc. ("Moody's") or BB and below by Standard & Poor's Ratings Group
("S&P")), or if unrated, are determined by the Fund's investment subadviser,
Highland Capital Management, L.P. (the "Subadviser"), to be of comparable
quality. Investment in securities of below investment grade quality involves
substantial risk of loss. "Junk bonds" are considered predominantly speculative
with respect to the issuer's ability to pay interest and repay principal and are
susceptible to default or decline in market value due to adverse economic and
business developments. Because Senior Loans are senior in a borrower's capital
structure and often are secured by specific collateral, the Subadviser believes,
based on its experience, that Senior Loans generally have more favorable loss
recovery rates compared to most other types of below investment grade
obligations. However, there can be no assurance that the Fund's actual loss
recovery experience will be consistent with the Subadviser's prior experience or
that the Senior Loans will achieve any specific loan recovery rate.
Investment Adviser. Pioneer Investment Management, Inc. is the Fund's
investment adviser (the "Adviser"). As of December 31, 2004, the Adviser had
over $42 billion in assets under management. The Adviser has engaged Highland
Capital Management, L.P. to act as the Fund's investment subadviser and manage
the Fund's investments. As of December 31, 2004, the Subadviser had
approximately $11.9 billion in assets under management. See "Management of the
Fund."
You should read this prospectus, which contains important information
about the Fund, before deciding whether to invest in the AMPS, and retain it for
future reference. A Statement of Additional Information, dated March 23, 2005,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You can review the table of contents of the
Statement of Additional Information on page 88 of this prospectus. You may
request a free copy of the Statement of Additional Information by calling (800)
225-6292 or by writing to the Fund, or obtain a copy (and other information
regarding the Fund) from the Securities and Exchange Commission's web site
(http://www.sec.gov). The Fund's registration number under the Investment
Company Act of 1940, as amended (the "1940 Act"), is 811-21654. You may also
email requests for these documents to publicinfo@sec.gov or make a request in
writing to the Securities and Exchange Commission's Public Reference Section,
Washington, D.C. 20549-0102.
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the AMPS are first
issued.
The AMPS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Fund is offering 3,130 Series M7 AMPS, 3,125 Series W7 AMPS and 3,125
Series TH7 AMPS. The AMPS have a liquidation preference of $25,000 per share,
plus any accumulated, unpaid dividends. The AMPS also have priority over the
Fund's common shares as to distribution of assets, as described in this
prospectus. It is a condition of closing this offering that the AMPS be assigned
a rating of Aaa by Moody's and AAA by Fitch, Inc. ("Fitch").
The dividend rate for the initial dividend period will be 3.00% for Series
M7 AMPS, 3.00% for Series W7 AMPS and 3.00% for Series TH7 AMPS. The initial
dividend period for Series M7 AMPS is from the date of issuance through April 4,
2005. The initial dividend period for Series W7 AMPS is from the date of
issuance through April 6, 2005. The initial dividend period for Series TH7 AMPS
is from the date of issuance through April 7, 2005. For subsequent periods, AMPS
will pay dividends based on a rate set at auction, usually held every seven
days. Prospective purchasers should carefully
2
review the auction procedures described in this prospectus and should note: (1)
a buy order (called a "bid order") or sell order is a commitment to buy or sell
AMPS based on the results of an auction; and (2) purchases and sales will be
settled on the next business day after the auction.
THE AMPS WILL NOT BE LISTED ON AN EXCHANGE. YOU MAY ONLY BUY OR SELL AMPS
THROUGH AN ORDER PLACED AT AN AUCTION WITH OR THROUGH CERTAIN BROKER-DEALERS OR
IN A SECONDARY MARKET MAINTAINED BY CERTAIN BROKER-DEALERS. THESE BROKER-DEALERS
ARE NOT REQUIRED TO MAINTAIN THIS MARKET, AND IT MAY NOT PROVIDE YOU WITH
LIQUIDITY.
3
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 5
Financial Highlights (Unaudited)............................ 31
The Fund.................................................... 33
Use of Proceeds............................................. 33
Capitalization (Unaudited).................................. 33
Portfolio Composition....................................... 34
Investment Objectives and Principal Investment Strategies... 35
Portfolio Contents.......................................... 38
Risk Factors................................................ 49
Management of the Fund...................................... 58
Description of AMPS......................................... 62
The Auction................................................. 72
Federal Income Tax Matters.................................. 79
Net Asset Value............................................. 82
Description of Common Shares................................ 83
Underwriting................................................ 86
Administrator, Custodian, Transfer Agent, Registrar and
Dividend Disbursing Agent................................. 87
Validity of Shares.......................................... 87
Table of Contents of the Statement of Additional
Information............................................... 88
---------------------
You should rely only on the information contained in or incorporated by
reference into this prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. The Fund is not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. The
information appearing in this prospectus is given as of the date of this
prospectus. The Fund's business, financial condition, results of operations and
prospects may have changed since the date of this prospectus.
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its shareholders and
to safeguarding their non-public personal information. The following information
is provided to help you understand what personal information the Fund collects,
how the Fund protects that information and why, in certain cases, the Fund may
share information with select other parties.
Generally, the Fund does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Fund. The Fund does not disclose
any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third-party
administrator).
The Fund restricts access to non-public personal information about its
shareholders to employees of the Fund's investment adviser and its affiliates
with a legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders. For more information about
the Fund's privacy policies, please visit http://www.pioneerfunds.com.
4
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's AMPS,
especially the information set forth under the heading "Risk Factors." You
should review the more detailed information contained in this prospectus, the
Statement of Additional Information and the Fund's Statement of Preferences of
Auction Market Preferred Shares (the "Statement") attached as Appendix C to the
Statement of Additional Information.
THE FUND.................... The Pioneer Floating Rate Trust (the "Fund") is a
recently organized, non-diversified, closed-end
management investment company. The Fund closed an
initial public offering of 22,500,000 common
shares of beneficial interest, no par value, and
commenced investment operations on December 28,
2004. The Fund's common shares are traded on the
New York Stock Exchange under the symbol "PHD." As
of March 11, 2005, the Fund had 24,330,240 common
shares outstanding and had net assets of
$468,797,390. Pioneer Investment Management, Inc.
is the Fund's investment adviser. The Adviser has
engaged Highland Capital Management, L.P. to act
as the Fund's investment subadviser to manage the
Fund's investments. The Fund's principal offices
are located at 60 State Street, Boston,
Massachusetts 02109. See "The Fund."
THE OFFERING................ The Fund is offering an aggregate of 3,130 shares
of Series M7 AMPS, 3,125 shares of Series W7 AMPS
and 3,125 shares of Series TH7 AMPS, each at a
purchase price of $25,000 per share plus
dividends, if any, that have accumulated from the
date the Fund first issues the AMPS. The AMPS are
being offered through a group of underwriters led
by Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch").
The AMPS entitle their holders to receive cash
dividends at an annual rate that may vary for
successive dividend periods. In general, except as
described under "Dividends and Dividend Periods"
below and "Description of AMPS -- Dividends and
Dividend Periods," the dividend period for each
series of AMPS will be seven days. Deutsche Bank
Trust Company Americas (the "Auction Agent") will
determine the dividend rate for any dividend
period by an auction conducted on the business day
immediately prior to the start of that dividend
period. See "The Auction."
The AMPS are not listed on an exchange. Instead,
investors may buy or sell AMPS at an auction by
submitting orders to broker-dealers
("Broker-Dealers") that have entered into an
agreement with the Auction Agent (a "Broker-Dealer
Agreement") or to broker-dealers that have entered
into separate agreements with a Broker-Dealer.
Generally, investors in the AMPS will not receive
certificates representing ownership of their
shares. The Depositary Trust Company or any
successor (the "Securities Depositary") or its
nominee for the account of the investor's
Broker-Dealer will maintain record ownership of
AMPS in book-entry form. An
5
investor's Broker-Dealer, in turn, will maintain
records of that investor's beneficial ownership of
AMPS.
INVESTMENT OBJECTIVES AND
PRINCIPAL INVESTMENT
STRATEGIES................ Investment Objectives. The Fund's primary
investment objective is to provide a high level of
current income. As a secondary investment
objective, the Fund seeks preservation of capital
to the extent consistent with its primary
investment objective. There can be no assurance
that the Fund will achieve its investment
objectives.
Principal Investment Strategies. Under normal
market conditions, the Fund seeks to achieve its
investment objectives by investing at least 80% of
its assets (net assets plus borrowings for
investment purposes) in senior floating rate loans
("Senior Loans"). The Fund also may invest in
other floating and variable rate instruments,
including second lien loans, and high yield, high
risk corporate bonds, investment grade
fixed-income debt securities, preferred stocks
(many of which have fixed maturities), convertible
securities, securities that make "in-kind"
interest payments, bonds not paying current
income, bonds that do not make regular interest
payments and money market instruments. The Fund
may invest up to 10% of its total assets in Senior
Loans and other securities of non-U.S. issuers,
including emerging market issuers, and may engage
in certain hedging transactions.
The Subadviser uses a fundamental research
approach in selecting the Fund's investments and
seeks to invest in those sectors, industries and
companies that provide value on a relative basis.
The Subadviser seeks to identify those companies
that are dominant players in their industries and
generally does not invest in securities of issuers
that it believes cannot be adequately researched.
The Subadviser's process focuses on those issuers
that generate positive cash flow momentum, exhibit
stable or improving debt coverage, have an
experienced management team and demonstrate net
tangible asset protection.
The Subadviser's investment philosophy is based on
the belief that fundamental research and a
disciplined asset acquisition/disposition process
will produce superior long-term results. The
Subadviser's investment process combines an
economic and industry overlay with a disciplined
securities selection process. The Subadviser's
economic and industry overlay utilizes a variety
of macro and economic variables to identify broad
market sectors that the Subadviser believes have
positive fundamentals. Within these broad sectors,
the Subadviser targets specific industries that
appear to have, in the Subadviser's view, the most
promising prospects under current market
conditions. Within a targeted industry, the
Subadviser engages in a disciplined securities
selection process. In this process, the Subadviser
conducts an extensive analysis of issuers within
the targeted industry to identify issuers that
appear to have the most
6
favorable prospects for improving financial
condition. The Subadviser also reviews the terms
of the agreements documenting the Senior Loans to
seek to identify those Senior Loans that have the
most favorable risk and return characteristics.
Based on this analysis, the Subadviser constructs
and actively manages a portfolio of Senior Loans.
The Subadviser's goal is to achieve the highest
potential level of current income with the lowest
potential volatility over long periods of time.
The Fund intends to manage the liquidity of the
Fund so that, in the event the Fund is required to
redeem any AMPS because it has failed to meet the
rating agencies' guidelines, the Fund will be able
to satisfy such redemption obligations.
Duration Management. The Subadviser expects that
the average effective duration of the Fund's
portfolio of Senior Loans will normally be between
zero and 1.5 years, reflecting the Fund's focus on
floating rate instruments. As a measure of a
fixed-income security's cash flow, duration is an
alternative to the concept of "term to maturity"
in assessing the price volatility associated with
changes in interest rates. Generally, the longer
the duration, the more volatility an investor
should expect. For example, the market price of a
fixed-income security with a duration of three
years would be expected to decline 3% if interest
rates rose 1%. Conversely, the market price of the
same security would be expected to increase 3% if
interest rates fell 1%. The market price of a
fixed-income security with a duration of six years
would be expected to increase or decline twice as
much as the market price of a security with a
three-year duration. Duration is a way of
measuring a security's maturity in terms of the
average time required to receive the present value
of all interest and principal payments as opposed
to its term to maturity. The maturity of a
security measures only the time until final
payment is due; it does not take account of the
pattern of a security's cash flows over time,
which would include how cash flow is affected by
prepayments and by changes in interest rates.
Because the interest rate on Senior Loans held by
the Fund will reset at short-term intervals, the
duration of Senior Loans will be shorter than a
fixed income security with a comparable term to
maturity. The Subadviser can manage the duration
of the portfolio by selecting Senior Loans with
different interest rate reset periods and final
maturity dates. Incorporating a security's yield,
coupon interest payments, final maturity and
option features into one measure, duration is
computed by determining the weighted average
maturity of a fixed-income security's cash flows,
where the present values of the cash flows serve
as weights. In computing the duration of the
Fund's portfolio of Senior Loans, the Subadviser
will estimate the duration of obligations that are
subject to features such as prepayment or
redemption by the issuer, put options retained by
the investor or other imbedded options, taking
into account the influence of interest rates on
prepayments and coupon flows.
7
Credit Management. The Fund may invest in Senior
Loans and other securities of any credit quality,
including Senior Loans and other investments that
are rated below investment grade or are unrated
but determined by the Subadviser to be of
equivalent credit quality. The Fund does not have
a policy of maintaining a specific average credit
quality of its portfolio nor a minimum portion of
its portfolio that must be rated investment grade.
The Subadviser's staff monitors the credit quality
and price of Senior Loans and other securities
held by the Fund, as well as other securities that
are available to the Fund. Although the Subadviser
considers ratings when making investment
decisions, it performs its own credit and
investment analysis and does not rely primarily on
ratings assigned by rating services. In evaluating
the attractiveness of a particular Senior Loan or
other security, whether rated or unrated, the
Subadviser generally gives equal weight to the
security's yield and the issuer's creditworthiness
and will normally take into consideration, among
other things, the issuer's financial resources and
operating history, its sensitivity to economic
conditions and trends, the availability of its
management, its debt maturity schedules and
borrowing requirements, and relative values based
on anticipated cash flow, interest and asset
coverage, and earnings prospects.
PORTFOLIO CONTENTS.......... Senior Loans. Senior Loans hold the most senior
position in the capital structure of a business
entity, are typically secured with specific
collateral and have a claim on the general assets
of the borrower that is senior to that held by
subordinated debtholders and stockholders of the
borrower. The proceeds of Senior Loans frequently
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. These base lending
rates generally are the London Interbank Offered
Rate ("LIBOR"), the prime rate offered by one or
more major United States banks (Prime Rate) or the
certificate of deposit (CD) rate or other base
lending rates used by commercial lenders.
The Fund may purchase obligations issued in
connection with a restructuring pursuant to
Chapter 11 of the U.S. Bankruptcy Code. While
these investments are not a primary focus of the
Fund, the Fund does not have a policy limiting
such investments to a specific percentage of the
Fund's assets.
The Fund may invest up to 10% of its total assets
in Senior Loans and other securities of non-U.S.
issuers, including emerging market issuers, and
may engage in certain hedging transactions.
Senior Loans and other corporate debt obligations
are subject to the risk of non-payment of
scheduled installments of interest or principal.
Such non-payment would result in a reduction of
income
8
to the Fund, a reduction in the value of the
investment and a potential decrease in the net
asset value of the Fund. There can be no assurance
that the liquidation of any collateral securing a
Senior Loan would satisfy a borrower's obligation
in the event of non-payment of scheduled
installments of interest or principal, or that
such collateral could be readily liquidated. In
the event of bankruptcy of a borrower, the Fund
could experience delays or limitations with
respect to its ability to realize the benefits of
the collateral securing a Senior Loan. To the
extent that a Senior Loan is collateralized by
stock in the borrower or its subsidiaries, such
stock may lose all or substantially all of its
value in the event of bankruptcy of a borrower.
Some Senior Loans are subject to the risk that a
court, pursuant to fraudulent conveyance or other
similar laws, could subordinate Senior Loans to
presently existing or future indebtedness of the
borrower or take other action detrimental to the
holders of Senior Loans including, in certain
circumstances, invalidating Senior Loans or
causing interest previously paid to be refunded to
the borrower. If interest were required to be
refunded, it could result in a loss to the Fund
negatively affecting the Fund's performance.
Many loans in which the Fund will invest may not
be rated by a rating agency, will not be
registered with the Securities and Exchange
Commission or any state securities commission and
will not be listed on any national securities
exchange. The amount of public information
available with respect to issuers of Senior Loans
will generally be less extensive than that
available for issuers of registered or exchange
listed securities. In evaluating the
creditworthiness of borrowers, the Subadviser will
consider, and may rely in part, on analyses
performed by others. The Subadviser does not view
ratings as the determinative factor in its
investment decisions and relies more upon its
credit analysis abilities than upon ratings.
Borrowers may have outstanding debt obligations
that are rated below investment grade by a rating
agency. A high percentage of Senior Loans held by
the Fund may be rated below investment grade by
independent rating agencies. In the event Senior
Loans are not rated, they are likely to be the
equivalent of below investment grade quality. Debt
securities which are unsecured and rated below
investment grade (i.e., Ba and below by Moody's or
BB and below by S&P) and comparable unrated bonds,
are viewed by the rating agencies as having
speculative characteristics and are commonly known
as "junk bonds." A description of the ratings of
corporate bonds by Moody's and S&P is included as
Appendix A to the Statement of Additional
Information. Because Senior Loans are senior to
subordinated creditors and stockholders in a
borrower's capital structure and are often secured
by specific collateral, the Subadviser believes,
based on its experience, that Senior Loans have
more favorable loss recovery rates as compared to
most other types of below investment grade
obligations. However, there can be no assurance
that the Fund's actual loss recovery experience
will be
9
consistent with the Subadviser's prior experience
or that the Senior Loans will achieve any specific
loan recovery rate.
The Fund may hold securities that are unrated or
in the lowest ratings categories (rated C by
Moody's or D by S&P). Debt securities rated C by
Moody's are regarded as having extremely poor
prospects of ever attaining any real investment
standing. Debt securities rated D by S&P are in
payment default or a bankruptcy petition has been
filed and debt service payments are jeopardized.
In order to enforce its rights with defaulted
securities, the Fund may be required to retain
legal counsel and/or a financial adviser. The Fund
may have to pursue legal remedies, the results of
which are uncertain and expensive. This may
increase operating expenses and adversely affect
net asset value. The credit quality of most
securities held by the Fund reflects a greater
possibility that adverse changes in the financial
condition of an issuer, or in general economic
conditions, or both, may impair the ability of the
issuer to make payments of interest or principal.
The inability (or perceived inability) of issuers
to make timely payment of interest and principal
would likely make the values of such securities
more volatile and could limit the Fund's ability
to sell securities at favorable prices. In the
absence of a liquid trading market for securities
held by it, the Fund may have difficulties
determining the fair market value of such
securities. Because of the greater number of
investment considerations involved in investing in
high yield, high risk Senior Loans and bonds, the
achievement of the Fund's objectives depends more
on the Subadviser's judgment and analytical
abilities than would be the case if invested
primarily in securities in the higher ratings
categories.
No active trading market may exist for many Senior
Loans, and some Senior Loans may be subject to
restrictions on resale. The Fund is not limited in
the percentage of its assets that may be invested
in Senior Loans and other securities deemed to be
illiquid. Any secondary market may be subject to
irregular trading activity, wide bid/ask spreads
and extended trade settlement periods, which may
impair the ability of the Fund to realize full
value on the disposition of an illiquid Senior
Loan and cause a material decline in the Fund's
net asset value.
Investing in Senior Loans involves investment
risk. Some borrowers default on their Senior Loan
payments. The Fund attempts to manage this credit
risk through portfolio diversification and ongoing
analysis and monitoring of borrowers. The Fund
also is subject to market, liquidity, interest
rate and other risks. See "Risk Factors."
Other Fixed Income Securities. The Fund also may
purchase unsecured loans, other floating rate debt
securities such as notes, bonds and asset-backed
securities (such as securities issued by special
purpose funds investing in bank loans), investment
grade and below investment grade fixed income debt
obligations and money market instruments, such as
commercial paper. The high
10
yield securities in which the Fund may invest are
rated Ba or lower by Moody's or BB or lower by S&P
or are unrated but determined by the Subadviser to
be of comparable quality. Debt securities rated
below investment grade are commonly referred to as
"junk bonds" and are considered speculative with
respect to the issuer's capacity to pay interest
and repay principal. Below investment grade debt
securities 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
securities. The Fund's fixed-income securities may
have fixed or variable principal payments and all
types of interest rate and dividend payment and
reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment
in kind and auction rate features. The Fund may
invest in fixed-income securities with a broad
range of maturities.
The Fund may invest in zero coupon bonds, deferred
interest bonds and bonds or preferred stocks on
which the interest is payable in-kind (PIK bonds).
To the extent the Fund invests in such
instruments, they will not contribute to the
Fund's primary goal of current income. Zero coupon
and deferred interest bonds are debt obligations
which are issued at a significant discount from
face value. While zero coupon bonds do not require
the periodic payment of interest, deferred
interest bonds provide for a period of delay
before the regular payment of interest begins. PIK
bonds are debt obligations that provide that the
issuer thereof may, at its option, pay interest on
such bonds in cash or in the form of additional
debt obligations. Such investments may experience
greater volatility in market value due to changes
in interest rates. The Fund may be required to
accrue income on these investments for federal
income tax purposes and is required to distribute
its net income each year in order to qualify for
the favorable federal income tax treatment
potentially available to regulated investment
companies. The Fund may be required to sell
securities to obtain cash needed for income
distributions at times and at prices that the
Adviser believes do not reflect the intrinsic
value of such securities.
OTHER INVESTMENTS........... Normally, the Fund will invest substantially all
of its assets to meet its investment objectives.
The Fund may invest the remainder of its assets in
securities with remaining maturities of less than
one year or cash equivalents, or it may hold cash.
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 or
cash equivalents, or it may hold cash. During such
periods, the Fund may not be able to achieve its
investment objectives.
HEDGING AND INTEREST RATE
TRANSACTIONS.............. The Fund may, but is not required to, use various
hedging and interest rate transactions to earn
income, facilitate portfolio management and
mitigate risks. The Fund may purchase and sell
derivative instruments such as exchange-listed and
over-the-counter
11
put and call options on securities, fixed income
and interest rate indices and other financial
instruments; purchase and sell financial futures
contracts and options thereon; and enter into
various interest rate transactions such as swaps,
caps, floors or collars or credit transactions and
credit default swaps. The Fund also may purchase
derivative instruments that combine features of
these instruments. The Fund generally seeks to use
these instruments and transactions as a portfolio
management or hedging technique that seeks to
protect against possible adverse changes in the
market value of Senior Loans or other securities
held in or to be purchased for the Fund's
portfolio, to facilitate the sale of certain
securities for investment purposes, manage the
effective interest rate exposure of the Fund,
manage the effective maturity or duration of the
Fund's portfolio or establish positions in the
derivatives markets as a temporary substitute for
purchasing or selling particular securities. Under
normal market conditions, up to 20% of the Fund's
assets may be invested in instruments other than
Senior Loans, including derivative securities.
USE OF LEVERAGE BY THE
FUND........................ The Fund expects to utilize financial leverage on
an ongoing basis for investment purposes, such as
through the issuance of the AMPS. After completion
of the offering of the AMPS, the Fund anticipates
its total leverage from the issuance of AMPS will
be approximately 33 1/3% of the Fund's total
assets. This amount may change but the Fund will
not incur additional leverage if the total
leverage would exceed 50% of the Fund's total
assets. Although the Fund may in the future offer
other preferred shares or incur indebtedness,
which would further leverage the Fund, the Fund
does not currently intend to offer preferred
shares other than the AMPS offered hereby or to
incur indebtedness, other than short-term credits
in connection with the settlements of portfolio
transactions. The Fund may also invest in
derivative instruments, each of which may amplify
the effects of leverage in the Fund's portfolio
since the value of the derivative instruments may
be more volatile than the Senior Loans in which
the Fund primarily invests.
The Fund generally will not utilize leverage if
the Adviser anticipates that leverage would result
in a lower return to holders of the common shares
over time. Use of financial leverage creates an
opportunity for increased income for the holders
of the common shares but, at the same time,
creates the possibility for greater loss
(including the likelihood of greater volatility of
net asset value and market price of the common
shares and of dividends), and there can be no
assurance that a leveraging strategy will be
successful during any period in which it is
employed. Because the fees paid to the Adviser
will be calculated on the basis of the Fund's
managed assets, the fees will be higher when
leverage (including the AMPS) is utilized, giving
the Adviser an incentive to utilize leverage.
SPECIAL RISK
CONSIDERATIONS.............. The following is a summary of the principal risks
of investing in the AMPS. You should read the
fuller discussion in this prospectus under "Risk
Factors" beginning on page 49.
12
Risks of Investing in AMPS. The primary risks of
investing in AMPS are:
- If an auction fails you may not be able to sell
some or all of your shares.
- Because of the nature of the market for AMPS,
you may receive less than the price you paid for
your AMPS if you sell them outside of the
auction, especially when market interest rates
are rising.
- A rating agency could, at any time, downgrade or
withdraw its rating assigned to the AMPS without
prior notice to the Fund or shareholders. Any
downgrading or withdrawal of rating could affect
the liquidity of the AMPS in an auction.
- The Fund may be forced to redeem AMPS to meet
regulatory or rating agency requirements or may
voluntarily redeem your shares in certain
circumstances.
- In certain circumstances, the Fund may not earn
sufficient income from its investments to pay
dividends on the AMPS.
- If interest rates rise, the value of the Fund's
investment portfolio will decline, reducing the
asset coverage for AMPS.
Leverage Risk. The Fund's leveraged capital
structure creates special risks not associated
with unleveraged funds having a similar investment
objective and policies. These include the
possibility of higher volatility of the net asset
value of the Fund and the value of assets serving
as asset coverage for the AMPS.
Interest Rate Risk. The AMPS pay dividends based
on shorter-term interest rates. The Fund may
invest the proceeds from the issuance of the AMPS
in Senior Loans which pay interest based upon
rates that float with changes in interest rates,
similar to short-term rates. The interest rates on
Senior Loans are typically, although not always,
higher than shorter-term interest rates of
securities with a AAA/Aaa credit rating, which is
the credit rating the Fund anticipates receiving
from Moody's and Fitch on the AMPS. Shorter-term
rates, including the floating rates paid on the
Fund's portfolio of Senior Loans, can be expected
to fluctuate. If shorter-term interest rates rise,
dividend rates on the AMPS may also rise since the
auction setting the dividends on AMPS will compete
for investors with other short-term instruments.
This rise in dividends rates could result in the
amount of dividends to be paid to holders of AMPS
exceeding the income from the Senior Loans
purchased by the Fund with the proceeds from the
sale of the AMPS. Similarly, the anticipated
differential on the rate anticipated to be paid on
the AMPS and the Fund's portfolio of Senior Loans
would decline or be eliminated if, in the future,
the rating agencies lower the rating assigned to
the AMPS. Because income from the Fund's entire
investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the AMPS
13
offering) is available to pay dividends on the
AMPS, however, dividend rates on the AMPS would
need to exceed the rate of return on the Fund's
investment portfolio by a wide margin before the
Fund's ability to pay dividends on the AMPS would
be jeopardized.
Auction Risk. The dividend rate for the AMPS
normally is set through an auction process. In the
auction, holders of AMPS may indicate the dividend
rate at which they would be willing to hold or
sell their AMPS or purchase additional AMPS. The
auction also provides liquidity for the sale of
AMPS. An auction fails if there are more AMPS
offered for sale than there are buyers. You may
not be able to sell your AMPS at an auction if the
auction fails. A holder of the AMPS therefore can
be given no assurance that there will be
sufficient clearing bids in any auction or that
the holder will be able to sell its AMPS in an
auction. Also, if you place bid orders (orders to
retain AMPS) at an auction only at a specified
dividend rate, and that rate exceeds the rate set
at the auction, you will not retain your AMPS.
Additionally, if you buy AMPS or elect to retain
AMPS without specifying a dividend rate below
which you would not wish to buy or continue to
hold those AMPS, you could receive a lower rate of
return on your AMPS than the market rate. Finally,
the dividend periods for the AMPS may be changed
by the Fund, subject to certain conditions and
with notice to the holders of AMPS, which could
also affect the liquidity of your investment.
As noted above, if there are more auction rate
securities offered for sale than there are buyers
for those auction rate securities in any auction,
the auction will fail and you may not be able to
sell some or all of your auction rate securities
at that time. The relative buying and selling
interest of market participants in your auction
rate securities and in the auction rate securities
market as a whole will vary over time, and such
variations may be affected by, among other things,
news relating to the issuer, the attractiveness of
alternative investments, the perceived risk of
owning the security (whether related to credit,
liquidity or any other risk), the tax treatment
accorded the instruments, the accounting treatment
accorded auction rate securities, including recent
clarifications of U.S. generally accepted
accounting principles relating to the treatment of
auction rate securities, reactions to regulatory
actions or press reports, financial reporting
cycles and market sentiment generally. Shifts of
demand in response to any one or simultaneous
particular events cannot be predicted and may be
short-lived or exist for longer periods.
Secondary Market Risk. If you try to sell your
AMPS between auctions you may not be able to sell
any or all of your AMPS or you may not be able to
sell them for $25,000 per share or $25,000 per
share plus accumulated but unpaid dividends. If
the Fund has designated a special dividend period,
changes in interest rates could affect the price
you would receive if you sold your AMPS in the
secondary market. You may transfer AMPS outside
14
of auctions only to or through a Broker-Dealer
that has entered into a Broker-Dealer Agreement,
or other person as the Fund permits.
Securities and Exchange Commission Inquiries. The
Underwriters have advised the Fund that the
Underwriters and various other broker-dealers and
other firms that participate in the auction rate
securities market received letters from the staff
of the Securities and Exchange Commission last
spring. The letters requested that each of these
firms voluntarily conduct an investigation
regarding its respective practices and procedures
in that market. Pursuant to these requests, each
of the Underwriters conducted its own voluntary
review and reported its findings to the Securities
and Exchange Commission staff. At the Securities
and Exchange Commission staff's request, the
Underwriters are engaging in discussions with the
Securities and Exchange Commission staff
concerning its inquiry. Neither the Underwriters
nor the Fund can predict the ultimate outcome of
the inquiry or how that outcome will affect the
market for the AMPS or the auctions.
Ratings and Asset Coverage Risk. While it is
expected that Moody's will assign a rating of Aaa
to the AMPS and Fitch will assign a rating of AAA
to the AMPS, such ratings do not eliminate or
necessarily mitigate the risks of investing in
AMPS. Moody's or Fitch could downgrade its rating
of the AMPS or withdraw its rating of the AMPS at
any time, which may make your shares less liquid
at an auction or in the secondary market and may
materially and adversely affect the value of the
AMPS if sold outside an auction. If the Fund fails
to satisfy the asset coverage ratios discussed
under "Description of AMPS -- Rating Agency
Guidelines and Asset Coverage," the Fund will be
required to redeem, at a time that is not
favorable to the Fund or its shareholders, a
sufficient number of AMPS in order to return to
compliance with the asset coverage ratios.
Restrictions on Dividends and Other
Distributions. Restrictions imposed on the
declaration and payment of dividends or other
distributions to the holders of the Fund's common
shares and AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might
impair the Fund's ability to maintain its
qualification as a regulated investment company
for federal income tax purposes.
GENERAL RISKS OF INVESTING IN THE FUND. The Fund
is not a complete investment program and should
only be considered as an addition to an investor's
existing diversified portfolio of investments. Due
to uncertainty inherent in all investments, there
can be no assurance that the Fund will achieve its
investment objectives.
Limited Operating History. The Fund is a recently
organized, non-diversified, closed-end management
investment company and has a limited operating
history and a limited history of public trading.
15
Non-Diversified Status Risk. The Fund is
classified as "non-diversified" under the 1940
Act. As a result, it can invest a greater portion
of its assets in obligations of a single issuer
than a "diversified" fund. The Fund will therefore
be more susceptible than a diversified fund to
being adversely affected by any single corporate,
economic, political or regulatory occurrence. The
Fund intends to diversify its investments to the
extent necessary to qualify, and maintain its
status, as a regulated investment company under
U.S. federal income tax laws. See "Risks
Factors -- Non-Diversified Status Risk" and
"Federal Income Tax Matters."
Interest Rate Risk. The Fund's net asset value
will usually change in response to interest rate
fluctuations. When interest rates decline, the
value of fixed-rate securities already held by the
Fund can be expected to rise. Conversely, when
interest rates rise, the value of existing fixed-
rate portfolio securities can be expected to
decline. Because market interest rates are
currently near their lowest levels in many years,
there is a greater than normal risk that the
Fund's portfolio will decline in value due to
rising interest rates. The Fund will primarily
invest in floating rate obligations, including
Senior Loans, the rate on which periodically
adjusts with changes in interest rates.
Until the interest rates on the floating rate
obligations in its portfolio reset, the Fund's
income also would likely be affected adversely
when prevailing short term interest rates increase
and the Fund is using leverage.
To the extent that changes in market 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 loans of
the type and quality in which the Fund invests,
the Fund's net asset value could be adversely
affected. This is because the value of a Senior
Loan is partially a function of whether the Senior
Loan is paying what the market perceives to be a
market rate of interest, given its individual
credit and other characteristics. However, unlike
changes in market rates of interest for which
there is generally 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 in the Fund's portfolio may
be of longer duration.
Reinvestment Risk. Income from the Fund's
portfolio will decline if the Fund invests the
proceeds, repayment or sale of Senior Loans or
other obligations into lower yielding instruments
or Senior Loans with a lower spread over the base
lending rate. A decline in income could affect the
common shares' distribution rate and their overall
return.
Senior Loans Risk. The Fund's investments in
Senior Loans are typically below investment grade,
commonly referred to as "junk bonds," and are
considered speculative because of the credit risk
of their issuers. Economic and other events,
whether real or perceived, can reduce the demand
for certain Senior Loans or Senior Loans
16
generally, which may reduce market prices and
cause the Fund's net asset value per share to
fall. The frequency and magnitude of such changes
cannot be predicted.
In order to borrow money pursuant to a
collateralized Senior Loan, a borrower will
typically, for the term of the Senior Loan, pledge
as collateral assets, which may include one or
more of the following: accounts receivable,
inventory, buildings, other real estate,
trademarks, franchises and common and preferred
stock in its subsidiaries. In addition, in the
case of some Senior Loans, there may be additional
collateral pledged in the form of guarantees by
and/or securities of affiliates of the borrowers.
In some instances, a collateralized Senior Loan
may be secured only by stock in the borrower or
its subsidiaries. Collateral may consist of assets
that are not readily liquidated, and there is no
assurance that the liquidation of such assets
would satisfy fully a borrower's obligations under
a Senior Loan. Although a Senior Loan may be
senior to equity and other debt securities in a
borrower's capital structure, such obligations may
be structurally subordinated to obligations of the
borrower's subsidiaries. For example, if a holding
company were to issue a Senior Loan, even if that
borrower pledges the capital stock of its
subsidiaries to secure the obligations under the
Senior Loan, the assets of the operating companies
are available to the direct creditors of an
operating company before they would be available
to the holders of the Senior Loan issued by the
holding company. Similarly, in the event of
bankruptcy proceedings involving the borrower, the
Lenders may be delayed or prevented from
liquidating collateral or may choose not to do so
as part of their participation in a plan of
reorganization of the borrower. The Fund does not
have a policy limiting the Fund's investment in
Senior Loans that may be secured by similar types
of collateral. Nor does the Fund have a policy
requiring that any specific Senior Loan have a
minimum ratio of the value of the collateral to
the value of the Senior Loan. Moreover, any
specific collateral used to secure a loan may
decline in value or lose all its value or become
illiquid, which would adversely affect the loan's
value. In certain circumstances, it is possible
that the Fund or the agent bank of the Senior Loan
may receive actual possession of the collateral
and the Fund would incur the cost of maintaining
and disposing of the collateral. The Fund may also
invest in Senior Loans that are not secured by
collateral.
Senior Loans and other debt securities are also
subject to the risk of price declines and to
increases in prevailing interest rates.
Conversely, the floating rate feature of Senior
Loans means the Senior Loans will not generally
experience capital appreciation in a declining
interest rate environment. Declines in interest
rates may also increase prepayments of debt
obligations and require the Fund to invest assets
at lower yields. No active trading market may
exist for certain Senior Loans, which may impair
the ability of the Fund to realize full value in
the event of the need to liquidate such
17
assets. Adverse market conditions may impair the
liquidity of some actively traded Senior Loans.
Credit Risk and Junk Bond Risk. Credit risk is
the risk that an issuer of a Senior Loan or other
debt security will become unable to meet its
obligation to make interest and principal
payments.
The Fund may invest all or a substantial portion
of its assets in Senior Loans and other debt
securities that are rated below investment grade
(commonly referred to as "junk bonds" or "high
yield securities"), that is, rated Ba or below by
Moody's or BB or below by S&P, or unrated
securities determined by the Subadviser to be of
comparable credit quality. Investment in Senior
Loans and other fixed income securities of
below-investment grade quality involves
substantial risk of loss. "Junk bonds" are
considered predominantly speculative with respect
to the issuer's ability to pay interest and repay
principal and are susceptible to default or
decline in market value due to adverse economic
and business developments. The market values for
fixed income securities of below-investment grade
quality tend to be more volatile, and these
securities are less liquid, than investment grade
debt securities. For these reasons, an investment
in the Fund is subject to the following specific
risks:
- increased price sensitivity to changing
interest rates and to a deteriorating economic
environment;
- greater risk of loss due to default or
declining credit quality;
- adverse issuer-specific events are more likely
to render the issuer unable to make interest
and/or principal payments; and
- if a negative perception of the high yield
market develops, the price and liquidity of
high yield securities may be depressed, and
this negative perception could last for a
significant period of time.
Adverse changes in economic conditions are more
likely to lead to a weakened capacity of a high
yield issuer to make principal payments and
interest payments than an investment grade issuer.
The principal amount of high yield securities
outstanding has proliferated in the past decade as
an increasing number of issuers have used high
yield securities for corporate financing. An
economic downturn could severely affect the
ability of highly leveraged issuers to service
their debt obligations or to repay their
obligations upon maturity.
Issuer Risk. The value of corporate
income-producing securities may decline for a
number of reasons which directly relate to the
issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods
and services.
Inflation Risk. Inflation risk is the risk that
the value of assets or income from investment will
be worth less in the future as inflation decreases
the value of money. As inflation increases, the
real value
18
of the common shares and distributions thereon can
decline. In addition, during any periods of rising
inflation, dividend rates of preferred shares
would likely increase, which would tend to further
reduce returns to common shareholders.
Convertible Securities Risk. Convertible
securities generally offer lower interest or
dividend yields than non-convertible securities of
similar quality. As with all fixed income
securities, the market values of convertible
securities tend to decline as interest rates
increase and, conversely, to increase as interest
rates decline. However, when the market price of
the common stock underlying a convertible security
exceeds the conversion price, the convertible
security tends to reflect the market price of the
underlying common stock. As the market price of
the underlying common stock declines, the
convertible security tends to trade increasingly
on a yield basis and thus may not decline in price
to the same extent as the underlying common stock.
Convertible securities rank senior to common
stocks in an issuer's capital structure.
Foreign Securities Risk. The Fund's investments
in non-U.S. issuers may involve unique risks
compared to investing 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. investment in one region or in the
securities of emerging market issuers. These risks
may include
- Less information about non-U.S. issuers or
markets may be available due to less rigorous
disclosure, accounting standards or regulatory
practices.
- Many non-U.S. markets are smaller, less liquid
and more volatile. In a changing market, the
Subadviser may not be able to sell the Fund's
portfolio securities at times, in amounts and
at prices it considers reasonable.
- Currency exchange rates or controls may
adversely affect the value of the Fund's
investments.
- The economies of non-U.S. countries may grow
at slower rates than expected or may
experience a downturn or recession.
- Withholdings and other non-U.S. taxes may
decrease the Fund's return.
Currency Risk. A portion of the Fund's assets may
be quoted or denominated in non-U.S. currencies.
These securities may be adversely affected by
fluctuations in relative currency exchange rates
and by exchange control regulations. The Fund's
investment performance may be negatively affected
by a devaluation of a currency in which the Fund's
investments are quoted or denominated. Further,
the Fund's investment performance may be
significantly affected, either positively or
negatively, by currency exchange rates because the
U.S. dollar value of securities quoted or
denominated in another currency will increase or
decrease in
19
response to changes in the value of such currency
in relation to the U.S. dollar.
Liquidity Risk. Some Senior Loans are not readily
marketable and may be subject to restrictions on
resale. Senior Loans generally are not listed on
any national securities exchange or automated
quotation system and no active trading market may
exist for some of the Senior Loans in which the
Fund will invest. Where a secondary market exists,
such market for some Senior Loans may be subject
to irregular trading activity, wide bid/ask
spreads and extended trade settlement periods.
Senior Loans that are illiquid may be more
difficult to value or may impair the Fund's
ability to realize the full value of its assets in
the event of a voluntary or involuntary
liquidation of such assets and thus may cause a
decline in the Fund's net asset value. The Fund
has no limitation on the amount of its assets that
may be invested in securities which are not
readily marketable or are subject to restrictions
on resale. In certain situations, the Fund could
find it more difficult to sell such securities at
desirable times and/or prices. Most Senior Loans
are valued by an independent pricing service that
uses market quotations of investors and traders in
Senior Loans. In other cases, Senior Loans are
valued at their fair value in accordance with
procedures approved by the Board of Trustees.
Derivatives Risk. Even a small investment in
derivatives can have a significant impact on the
Fund's exposure to interest rates. If changes in a
derivative's value do not correspond to changes in
the value of the Fund's other investments, the
Fund may not fully benefit from or could lose
money on the derivative position. In addition,
some derivatives involve risk of loss if the party
that entered into the derivative contract defaults
on its obligation. Certain derivatives, such as
over-the-counter options, may be less liquid and
more difficult to value than exchange traded
options and futures. The Fund generally seeks to
use these instruments and transactions as a
portfolio management or hedging technique that
seeks to protect against possible adverse changes
in the market value of Senior Loans or other
securities held in or to be purchased for the
Fund's portfolio, to facilitate the sale of
certain securities for investment purposes, manage
the effective interest rate exposure of the Fund,
manage the effective maturity or duration of the
Fund's portfolio or establish positions in the
derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some
of these uses, such as the use of derivatives to
manage interest rate exposure or as a substitute
for the purchase of securities, may be deemed to
be speculative.
Regulatory Risk. To the extent that legislation
or federal regulators that regulate certain
financial institutions impose additional
requirements or restrictions with respect to the
ability of such institutions to make loans,
particularly in connection with highly leveraged
transactions, the availability of Senior Loans for
20
investment may be adversely affected. In addition,
such legislation could depress the market value of
Senior Loans.
Market Disruption Risk. The terrorist attacks in
the United States on September 11, 2001 had a
disruptive effect on the securities markets. The
Fund cannot predict the effects of similar events
in the future on the U.S. economy. These terrorist
attacks and related events, including the war in
Iraq, its aftermath, and continuing occupation of
Iraq by coalition forces, have led to increased
short-term market volatility and may have
long-term effects on U.S. and world economies and
markets. A similar disruption of the financial
markets could impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation
and other factors relating to the common shares.
In particular, below investment grade securities
tend to be more volatile than higher rated fixed
income securities so that these events and any
actions resulting from them may have a greater
impact on the prices and volatility of junk bonds
and Senior Loans than on higher rated fixed income
securities.
Anti-Takeover Provisions Risk. The Fund's
Agreement and Declaration of Trust and By-Laws
include provisions that could limit the ability of
other entities or persons to acquire control of
the Fund or to change the composition of its Board
of Trustees. Such provisions could limit the
ability of shareholders to sell their shares at a
premium over prevailing market prices by
discouraging a third party from seeking to obtain
control of the Fund. These provisions include
staggered terms of office for the Trustees,
advance notice requirements for shareholder
proposals, super-majority voting requirements for
certain transactions with affiliates, open-ending
the Fund and a merger, liquidation, asset sale or
similar transaction.
INVESTMENT ADVISER.......... Pioneer Investment Management, Inc. is the Fund's
investment adviser. The Adviser has engaged
Highland Capital Management, L.P. to act as
investment subadviser to the Fund to manage the
Fund's portfolio. The Subadviser is responsible on
a day-to-day basis for investment of the Fund's
portfolio in accordance with its investment
objectives and principal investment strategies.
The Subadviser makes all investment decisions for
the Fund and places purchase and sale orders for
the Fund's portfolio securities.
The Adviser or its predecessors have been managing
investment companies since 1928. The Adviser is an
indirect, wholly-owned subsidiary of UniCredito
Italiano S.p.A. ("UniCredito"), one of the leading
banking groups in Italy. As of December 31, 2004,
assets under management by the Adviser and its
affiliates were approximately $175 billion
worldwide, including over $42 billion in assets
under management by the Adviser. The Adviser
supervises the Subadviser's investments on behalf
of the Fund, supervises the Fund's compliance
program and provides for the general management of
the business affairs of the Fund.
The Fund pays the Adviser a fee for its investment
advisory services equal on an annual basis to .70%
of the Fund's average
21
daily managed assets. "Managed assets" means the
total assets of the Fund (including any assets
attributable to any financial leverage that may be
outstanding) minus the sum of accrued liabilities
(other than liabilities representing financial
leverage). The liquidation preference on any
preferred shares, including the AMPS, is not a
liability. The fee is accrued daily and payable
monthly. Because the Adviser's fee is based upon
managed assets, the Adviser may have an incentive
to leverage the Fund, including through the
issuance of the AMPS.
The Adviser has agreed for the first three years
of the Fund's investment operations to limit the
Fund's total annual expenses (excluding offering
costs for common and preferred shares, interest
expense, the cost of defending or prosecuting any
claim or litigation to which the Fund is a party
(together with any amount in judgment or
settlements), indemnification expenses or taxes
incurred due to the failure of the Fund to qualify
as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the
"Code"), or any other nonrecurring or
non-operating expenses) to .95% of the Fund's
average daily managed assets.
Highland Capital Management, L.P. serves as the
investment subadviser to the Fund. In this
capacity, the Subadviser is responsible for the
selection and on-going monitoring of the assets in
the Fund's investment portfolio. The Subadviser is
a Delaware limited partnership founded in 1993.
The principal office of the Subadviser is located
at 13455 Noel Road, Suite 1300, Dallas, Texas
75240. The Subadviser also maintains an office at
245 Park Avenue, 39th Floor, New York, New York
10167. The Subadviser's expertise in managing
portfolios of Senior Loans and structured finance
assets is particularly suited to the Fund's focus
on Senior Loans. As of December 31, 2004, the
Subadviser had approximately $11.9 billion in
assets under management.
The Adviser, and not the Fund, will pay a portion
of the fees it receives from the Fund to the
Subadviser in return for the Subadviser's
services.
TRADING MARKET.............. The AMPS will not be listed on an exchange.
Instead, you may buy or sell AMPS at an auction
that normally is held every seven days, by
submitting orders to a Broker-Dealer 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 AMPS
outside of auctions but may discontinue this
activity at any time. There is no assurance that a
secondary market will provide holders of AMPS with
liquidity. You may transfer AMPS 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.
DIVIDENDS AND
DIVIDEND PERIODS.......... The "dividend period," with respect to shares of a
series of AMPS, is the period from and including
the date of original issue of shares
22
of such series to but excluding the initial
dividend payment date for shares of such series,
and for any dividend period thereafter from and
including the dividend payment date for shares of
such series to but excluding the next succeeding
dividend payment date for shares of such series.
Subject to certain conditions, the Fund may elect
a "special dividend period," which is a dividend
period of more than seven days. A special dividend
period is a "short-term dividend period" if it
consists of a specified number of days, evenly
divisible by seven (other than seven days) and not
more than 364, or a "long-term dividend period" if
it consists of a specific period of one whole year
or more but not greater than five years. The
"dividend payment date" for each series of AMPS,
(i) with respect to any seven day dividend period
or any short-term dividend period of 35 or fewer
days, is the business day next succeeding the last
day of that dividend period and (ii) with respect
to any short-term dividend period of more than 35
days and with respect to any long-term dividend
period, is the first business day of each month
and the business day next succeeding the last day
of such dividend period. A "business day" is 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 New York City are
authorized or obligated by law to close.
The AMPS will entitle their holders to receive
cash dividends at a rate per annum that may vary
for the successive dividend periods for such
shares. The applicable rate for a particular
dividend period will be determined by an auction
conducted on the business day immediately
preceding the start of such dividend period.
The table below shows the initial dividend rate,
the dividend payment date, subsequent dividend
payment day and the number of days for the initial
dividend period of the AMPS offered in this
prospectus.
DIVIDEND PAYMENT SUBSEQUENT NUMBER OF DAYS IN
INITIAL DATE FOR INITIAL DIVIDEND PAYMENT INITIAL DIVIDEND
SERIES DIVIDEND RATE DIVIDEND PERIOD DAY PERIOD
------ ------------- ---------------- ---------------- -----------------
M7 3.00% April 5, 2005 Tuesday 8
W7 3.00% April 7, 2005 Thursday 10
TH7 3.00% April 8, 2005 Friday 11
After the initial dividend period, each subsequent
dividend period will generally consist of seven
days; provided, however, that prior to any
auction, the Fund may elect, subject to certain
limitations and upon notice to holders of AMPS of
the applicable series, a special dividend period
for any or all series. The rate set at auction may
not exceed the maximum applicable rate. See
"Description of AMPS -- Dividends and Dividend
Periods." Dividends on the AMPS will be cumulative
from the date the shares are first issued and will
be paid out of legally available funds.
Determination of Maximum Applicable
Rate. Generally, the applicable rate for any
regular dividend period for AMPS will not
23
be more than the maximum applicable rate
attributable to such shares. The maximum
applicable rate for each series of AMPS will
depend on the credit rating assigned to such
shares and on the duration of the dividend period.
The maximum applicable rate will be the higher of
the applicable percentage of the reference rate or
the applicable spread plus the reference rate. The
reference rate (the "Reference Rate") is the
applicable LIBOR Rate (as defined in "Description
of AMPS -- Dividends and Dividend Periods --
Determination of Maximum Applicable Rate") for a
dividend period of fewer than 365 days or the
applicable Treasury Index Rate (as defined in
"Description of AMPS -- Dividends and Dividend
Periods -- Determination of Maximum Applicable
Rate") for a dividend period of 365 days or more.
The applicable percentage or applicable spread as
so determined is further subject to upward but not
downward adjustment in the discretion of the
Fund's Board of Trustees after consultation with
the lead Broker-Dealer, initially Merrill Lynch.
In the case of a special dividend period, the
maximum applicable rate will be specified by the
Fund in the notice of the special dividend period
for such special dividend payment period.
The applicable percentage and spread are as
follows:
APPLICABLE PERCENTAGE PAYMENT TABLE
----------------------------------------------------------------------
CREDIT RATINGS APPLICABLE PERCENTAGE APPLICABLE SPREAD
--------------------------- --------------------- -----------------
MOODY'S FITCH
------------- ------------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
BB+ and
Ba1 and lower lower 300% 3.00%
There is no minimum applicable rate in respect of
any dividend period. See "Description of
AMPS -- Dividends and Dividend Periods."
Assuming the Fund maintains a Aaa/AAA rating on
the AMPS, the practical effect of the different
methods used to calculate the maximum applicable
rate is shown in the table below:
MAXIMUM MAXIMUM METHOD USED TO
APPLICABLE RATE APPLICABLE RATE DETERMINE THE
USING THE USING THE MAXIMUM
REFERENCE RATE APPLICABLE PERCENTAGE APPLICABLE SPREAD APPLICABLE RATE
-------------- --------------------- ----------------- ---------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
Prior to each dividend payment date, the Fund is
required to deposit with the Auction Agent
sufficient funds for the payment of
24
declared dividends. The failure to make such a
deposit will result in the cancellation of any
auction and the dividend rate will be the maximum
applicable rate until such failure to deposit is
cured or, if not timely cured, a non-payment rate
of 300% of the Reference Rate. The Fund does not
intend to establish any reserves for the payment
of dividends.
RATINGS..................... The AMPS are expected to receive a rating of Aaa
from Moody's and AAA from Fitch. These ratings are
an assessment of the capacity and willingness of
an issuer to pay preferred stock obligations. The
ratings are not a recommendation to purchase, hold
or sell those shares inasmuch as the rating does
not comment as to market price or suitability for
a particular investor. The ratings also do not
address the likelihood that an owner of AMPS will
be able to sell such shares in an auction or
otherwise. The ratings are based on information
obtained from the Fund and other sources. The
ratings may be changed, suspended, or withdrawn in
the rating agencies' discretion as a result of
changes in, or the unavailability of, such
information. See "Description of AMPS -- Rating
Agency Guidelines and Asset Coverage."
REDEMPTION.................. The Fund is required to redeem AMPS if the Fund
does not meet the asset coverage ratio required by
the 1940 Act, or to correct a failure to meet a
rating agency guideline in a timely manner. The
Fund may voluntarily redeem AMPS, in whole or in
part, subject to certain conditions. See
"Description of AMPS -- Redemption" and
"Description of AMPS -- Rating Agency Guidelines
and Asset Coverage."
ASSET MAINTENANCE........... Under the Statement, which establishes and fixes
the rights and preferences of the shares of each
series of AMPS, the Fund must maintain asset
coverage of the AMPS as required by the rating
agency or agencies rating the AMPS (the "Preferred
Shares Basic Maintenance Amount"). The Preferred
Shares Basic Maintenance Amount is the sum of (a)
the aggregate liquidation preference of the AMPS
then outstanding, together with the aggregate
liquidation preference on any other series of
preferred shares (plus redemption premium, if
any), and (b) certain accrued and projected
dividend and other payment obligations of the
Fund. Moody's and Fitch have each established
separate guidelines for calculating discounted
value of the Fund's assets for purposes of this
asset coverage test. To the extent any particular
portfolio holding does not satisfy a rating
agency's guidelines, all or a portion of the
holding's value will not be included in the rating
agency's calculation of discounted value. The
Moody's and Fitch guidelines also impose certain
diversification requirements on the Fund's
portfolio.
As required by the 1940 Act, the Fund must also
maintain asset coverage of at least 200% with
respect to outstanding senior securities that are
preferred stock, including the AMPS (the "1940 Act
Preferred Share Asset Coverage").
25
In the event that the Fund does not satisfy these
coverage tests, some or all of the AMPS will be
subject to mandatory redemption. See "Description
of AMPS -- Redemption."
Based on the composition of the Fund's portfolio
as of March 11, 2005, the asset coverage of the
AMPS, as measured pursuant to the 1940 Act, would
be approximately 299% if the Fund were to issue
AMPS representing approximately 33.5% of the
Fund's managed assets.
MANDATORY REDEMPTION........ If the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Share Asset Coverage is
not maintained or restored as specified herein,
the AMPS will be subject to mandatory redemption,
out of funds legally available therefore, at the
mandatory redemption price of $25,000 per share
plus an amount equal to dividends thereon (whether
or not earned or declared) accumulated but unpaid
to the date fixed for redemption. Any such
redemption will be limited to the minimum number
of AMPS necessary to restore the Preferred Shares
Basic Maintenance Amount or the 1940 Act Preferred
Share Asset Coverage, as the case may be. The
Fund's ability to make such a mandatory redemption
may be restricted by the provisions of the 1940
Act.
OPTIONAL REDEMPTION......... The AMPS are redeemable at the option of the Fund,
as a whole or in part, on any dividend payment
date (except on an initial dividend payment date
or a special dividend period with respect to which
the Fund has agreed not to redeem AMPS voluntarily
(a "Non-Call Period")) at the optional redemption
price of $25,000 per share, plus an amount equal
to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date fixed
for redemption plus the premium, if any, resulting
from the designation of a Premium Call Period. A
"Premium Call Period" is a period during which
AMPS are only redeemable at the option of the Fund
at a price per share equal to $25,000 plus
accumulated but unpaid dividends, plus a premium.
LIQUIDATION PREFERENCE...... The liquidation preference for shares of AMPS will
be $25,000 per share plus accumulated but unpaid
dividends, if any, whether or not declared. See
"Description of AMPS -- Liquidation."
VOTING RIGHTS............... The holders of preferred shares, including the
AMPS, voting as a separate class, have the right
to elect at least two Trustees of the Fund at all
times. Such holders also have the right to elect a
majority of the Trustees in the event that two
years' dividends on such preferred shares are
unpaid. In each case, the remaining Trustees will
be elected by holders of common shares and
preferred shares, including the AMPS, voting
together as a single class. The holders of
preferred shares, including the AMPS, will vote as
a separate class or classes on certain other
matters required under the Statement, the 1940 Act
and Delaware law. See "Description of
AMPS -- Voting Rights," and "Description of Common
Shares -- Certain Provisions of the Agreement and
Declaration of Trust and By-Laws."
26
AUCTION PROCEDURES.......... Separate auctions will be conducted for each
series of AMPS. Unless otherwise permitted by the
Fund, investors may only participate in auctions
through their Broker-Dealers. The process for
determining the applicable rate on the AMPS
described in this section is referred to as the
"Auction Procedures" and each setting of the
applicable rate is referred to as an "auction."
Prior to the submission deadline on each auction
date for shares of a series of AMPS, each customer
of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction
Agent) as a beneficial owner of such shares may
submit the following types of orders with respect
to shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold
shares of such series without regard to the
applicable rate for the next dividend period.
2. Bid -- indicating its desire to purchase or
hold the indicated number of shares of such
series at $25,000 per share if the applicable
rate for shares of such series for the next
dividend period is not less than the rate
specified in the bid. A bid order by an
existing holder will be deemed an irrevocable
offer to sell shares of such series at $25,000
per share if the applicable rate for shares of
such series for the next dividend period is
less than the rate or spread specified in the
bid.
3. Sell Order -- indicating its desire to sell
shares of such series at $25,000 per share
without regard to the applicable rate for
shares of such series for the next dividend
period.
A beneficial owner may submit different types of
orders to its Broker-Dealer with respect to
different shares of a series of AMPS then held by
the beneficial owner. A beneficial owner of shares
of such series that submits its bid with respect
to shares of such series to its Broker-Dealer
having a rate higher than the maximum applicable
rate for shares of such series on the auction date
will be treated as having submitted a sell order
to its Broker-Dealer. A beneficial owner of shares
of such series that fails to submit an order to
its Broker-Dealer with respect to such shares will
ordinarily be deemed to have submitted a hold
order with respect to such shares of such series
to its Broker-Dealer. However, if a beneficial
owner of shares of such series fails to submit an
order with respect to such shares of such series
to its Broker-Dealer for an auction relating to a
special dividend period of more than 91 days, such
beneficial owner will be deemed to have submitted
a sell order to its Broker-Dealer. A sell order
constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that
offers to become the beneficial owner of
additional AMPS is, for purposes of such offer, a
potential holder as discussed below.
A potential holder is either a customer of a
Broker-Dealer that is not a beneficial owner of a
series of AMPS but that wishes to
27
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. A potential holder may submit bids to its
Broker-Dealer in which it offers to purchase
shares of such series at $25,000 per share if the
applicable rate for shares of such series for the
next dividend period is not less than the
specified rate in such bid. A bid placed by a
potential holder of shares of such series
specifying a rate higher than the maximum rate for
shares of such 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 holders to the Auction Agent.
They will designate themselves (unless otherwise
permitted by the Fund) as existing holders of
shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will
designate themselves as potential holders of
shares subject to orders submitted to them by
potential beneficial owners. However, neither the
Fund nor the Auction Agent will be responsible for
a Broker-Dealer's failure to comply with these
Auction Procedures. 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 the same way 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 for any AMPS held by it or customers who are
beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an
order in respect of AMPS held by it. A
Broker-Dealer may also 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.
There are sufficient clearing bids for shares of a
series in an auction if the number of shares of
such series subject to bids submitted to the
Auction Agent by Broker-Dealers for potential
holders with rates or spreads equal to or lower
than the maximum applicable rate for such series
is at least equal to or exceeds the sum of the
number of shares of such series subject to sell
orders and the number of shares of such series
subject to bids specifying rates or spreads higher
than the maximum applicable rate for such series
submitted or deemed submitted to the Auction Agent
by Broker-Dealers for existing holders. If there
are sufficient clearing bids for shares of a
series, the applicable rate for shares of such
series for the next succeeding dividend period
thereof will be the lowest rate specified in the
submitted bids which, taking into account such
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 such series
available for purchase in the auction.
If there are not sufficient clearing bids for
shares of such series, the applicable rate for the
next dividend period will be the maximum
applicable rate on the auction date. However, if
the Fund has
28
declared a special dividend period and there are
not sufficient clearing bids, the election of a
special dividend period will not be effective and
the applicable rate for the next rate period will
be the same as during the current rate period. If
there are not sufficient clearing bids, beneficial
owners of AMPS that have submitted or are deemed
to have submitted sell orders may not be able to
sell in the auction all shares subject to such
sell orders. If all of the applicable outstanding
AMPS of a series are the subject of submitted hold
orders, then the dividend period following the
auction will automatically be the same length as
the minimum dividend period and the applicable
rate for the next dividend period will be 90% of
the Reference Rate on the date of the applicable
auction.
The auction procedures include a pro rata
allocation of shares for purchase and sale which
may result in an existing holder continuing to
hold or selling, or a potential holder purchasing,
a number of shares of a series of AMPS that is
different than the number of shares of such 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.
The following is a simplified example of how a
typical auction works. Assume that the Fund has
1,000 outstanding AMPS of any series and three
current holders. The three current holders and
three potential holders submit orders through
broker-dealers at the auction:
Current Holder A........ Owns 500 shares, Bid order of 4.1%
wants to sell all rate for all 500
500 shares if shares
auction rate is
less than 4.1%
Current Holder B........ Owns 300 shares, Hold order -- will
wants to hold take the auction
rate
Current Holder C........ Owns 200 shares, Bid order of 3.9%
wants to sell all rate for all 200
200 shares if shares
auction rate is
less than 3.9%
Potential Holder D...... Wants to buy 200 Places order to
shares buy at or above
4.0%
Potential Holder E...... Wants to buy 300 Places order to
shares buy at or above
3.9%
Potential Holder F...... Wants to buy 200 Places order to
shares buy at or above
4.1%
29
The lowest dividend rate that will result in all
1,000 AMPS in the above example continuing to be
held is 4.0% (the offer by D). Therefore, the
dividend rate will be 4.0%. Current holders B and
C will continue to own their shares. Current
holder A will sell its shares because A's dividend
rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and
potential holder E will buy 300 shares because
their bid rates were at or below the dividend
rate. Potential holder F will not buy any shares
because its bid rate was above the dividend rate.
FEDERAL INCOME TAXATION..... The Fund intends to take the position that under
present law, the AMPS will constitute stock of the
Fund. Distributions with respect to the AMPS
(other than distributions in redemption of the
AMPS that are treated as exchanges of stock under
Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current or
accumulated earnings and profits as calculated for
U.S. federal income tax purposes. The dividends
generally will be taxable as ordinary income.
Distributions of net capital gain that are
designated by the Fund as capital gain dividends,
if any, however, will be treated as long-term
capital gains without regarding to the length of
time the shareholder has held shares of the Fund.
ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT, REGISTRAR
AND DIVIDEND DISBURSING
AGENT..................... Pioneer Investment Management, Inc. serves as the
Fund's administrator and has appointed Princeton
Administrators, L.P. to serve as the Fund's
sub-administrator. Brown Brothers Harriman & Co.
serves as the Fund's custodian. Deutsche Bank
Trust Company Americas will serve as Auction
Agent, transfer agent, dividend paying agent and
registrar for the AMPS. Pioneer Investment
Management Shareholder Services, Inc. serves as
the Fund's transfer agent, registrar and dividend
disbursing agent for the Fund's common shares.
Mellon Investor Services LLC ("Mellon") serves as
the sub-transfer agent, sub-registrar and
sub-dividend paying agent for the Fund's common
shares.
30
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's operations on
December 23, 2004 through January 31, 2005. Since the Fund was recently
organized and commenced investment operations on December 23, 2004, the table
covers approximately one month of operations, during which a substantial portion
of the Fund's portfolio was held in temporary investments pending investment in
securities that meet the Fund's investment objectives and principal investment
strategies. Accordingly, the information presented does not provide a meaningful
picture of the Fund's future operating performance.
FOR THE PERIOD
FROM
DECEMBER 23, 2004(1)
THROUGH
JANUARY 31, 2005
(UNAUDITED)
----------------------------------------------------------------------------------
PER COMMON SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period........................ $ 19.10(5)
--------
Increase (decrease) from investment operations:
Net investment income..................................... 0.04
Net realized and unrealized gain on investments........... 0.08
Distributions to preferred shareowners from net investment
income................................................. --
--------
Net increase from investment operations................... $ 0.12
Capital charge with respect to issuance of common shares.... (0.04)
--------
Net increase in net asset value............................. $ 0.08
--------
Net asset value, end of period(3)........................... $ 19.18
--------
Market value, end of period(3).............................. $ 20.00
--------
Total return at market value(6)........................... 0.00%
Total return on NAV(7).................................... 0.42%
RATIOS TO AVERAGE NET ASSETS OF HOLDERS OF COMMON SHARES
Net expenses(8)........................................... 0.84%(4)
Net investment income before preferred share
dividends(8)........................................... 2.00%(4)
Preferred share dividends................................. --%(4)
Net investment income available to holders of Common
Shares................................................. 2.00%(4)
Portfolio turnover.......................................... 6.47%
Net assets of holders of Common Shares, end of period (in
thousands)................................................ $432,563
Preferred shares outstanding (in thousands)................. $ --
Asset coverage per preferred share, end of period........... $ --
Average market value per preferred share.................... $ --
Liquidation value per preferred share....................... $ --
Ratios to average net assets of holders of Common Shares
before reimbursement of organization expenses
Net Expenses(8)........................................... 0.94%(4)
Net investment income before preferred share
dividends(8)........................................... 1.90%(4)
Preferred share dividends................................. --%(4)
Net investment income available to holders of Common
Shares................................................. 1.90%(4)
31
---------------
(1) Trust common shares were first publicly offered on December 23, 2004.
(2) The per share data presented above is based upon the average common shares
outstanding for the period presented.
(3) Net asset value and market value are published in Barron's on Saturday, The
Wall Street Journal on Monday and The New York Times on Monday and Saturday.
(4) Annualized.
(5) Net asset value immediately after the closing of the first public offering
was $19.06.
(6) Total investment return is calculated assuming a purchase of common shares
at the current market value on the first day and a sale at the current
market value on the last day of the period reported. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions on the shares
of the Trust. Total investment returns less than a full period are not
annualized. Past performance is not a guarantee of future results.
(7) Total return on net asset value is calculated assuming a purchase at the
offering price of $20.00 less the sales load of $.90, and the ending net
asset value per share of $19.18.
(8) Ratios do not reflect the effect of dividend payments to preferred
shareowners.
The information above represents the unaudited operating performance data
for a common share outstanding, total investment return, ratios to average net
assets and other supplemental data for the period indicated. This information
has been determined based upon financial information provided in the financial
statements and market value data for the Fund's common shares.
32
THE FUND
Pioneer Floating Rate Trust is a recently organized, non-diversified,
closed-end management investment company. The Fund was organized under the laws
of the State of Delaware on October 6, 2004, and has registered under the 1940
Act. As a recently organized entity, the Fund has a limited operating history.
The Fund's principal office is located at 60 State Street, Boston, Massachusetts
02109, and its telephone number is (617) 742-7825.
On December 28, 2004, the Fund issued an aggregate of 22,550,000 common
shares of beneficial interest, no par value, pursuant to an initial public
offering. On February 4, 2005, the Fund issued an additional 1,775,000 common
shares of beneficial interest, no par value, pursuant to an overallotment
option. The Fund's common shares are traded on the New York Stock Exchange under
the symbol "PHD."
The following provides information about the Fund's outstanding shares as
of March 11, 2005.
AMOUNT HELD BY
AMOUNT THE FUND OR FOR ITS AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
-------------- ---------- ------------------- -----------
Common Shares.................... Unlimited 0 24,330,240
Preferred Shares
Series M7 AMPS................. Unlimited 0 0
Series W7 AMPS................. Unlimited 0 0
Series TH7 AMPS................ Unlimited 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $231,845,000 after
payment of the estimated offering costs and the deduction of the sales load. The
Fund will invest the net proceeds of the offering in accordance with the Fund's
investment objectives and principal investment strategies as stated below.
However, investments that, in the judgment of the Subadviser, are appropriate
investments for the Fund may not be immediately available. Therefore, there will
be an initial investment period of up to three months following the completion
of this offering before the Fund is required to be invested in accordance with
its principal investment strategies. During such period, all or a portion of the
proceeds may be invested in U.S. government securities or high grade, short-term
money market instruments. See "Investment Objectives and Principal Investment
Strategies."
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of the Fund as of March
11, 2005, and as adjusted to give effect to the issuance of the AMPS offered
hereby assuming the Fund issues 3,130 shares of Series M7 AMPS, 3,125 shares of
Series W7 AMPS and 3,125 shares of Series TH7 AMPS representing approximately
33.5% of the Fund's total assets (including estimated
33
offering expenses of $310,000 and a sales load of $250 per AMPS). The common
shareholders' paid in capital is charged with the cost of issuance of the AMPS.
ACTUAL AS ADJUSTED
------------ ------------
AMPS, $.0001 par value, $25,000 stated value
per share, at liquidation value, including
dividends payable; unlimited shares
authorized (no shares issued; 9,380 shares
issued, as adjusted)........................ $ -- $234,500,000
============ ============
Shareholder's Equity:
Common shares, no par value per share;
unlimited shares authorized, 24,330,240
shares outstanding(1).................... $463,734,584 $461,079,584
Undistributed net investment income......... 560,855 560,855
Accumulated net realized gain/loss on
investments.............................. 122,118 122,118
Net unrealized appreciation/depreciation on
investments.............................. 4,665,205 4,665,205
Net unrealized appreciation/depreciation on
foreign currency transactions............ (285,372) (285,372)
------------ ------------
Net assets attributable to common shares.... 468,797,390 466,142,390
------------ ------------
Net assets, plus liquidation preferences of
AMPS..................................... $468,797,390 $700,642,390
============ ============
------------
(1) None of these outstanding shares are held by or for the account of the
Fund.
PORTFOLIO COMPOSITION
As of March 11, 2005, approximately 94.3% of the market value of the
Fund's portfolio was invested in Senior Loans, approximately 1.5% of the market
value of the Fund's portfolio was invested in other fixed-income securities and
approximately 4.2% of the market value of the Fund's portfolio was invested in
short-term debt securities. The following table sets forth certain information
with respect to the composition of the Fund's investment portfolio as of March
11, 2005, based on the lowest rating assigned each investment.
VALUE++
CREDIT RATING+ (000) PERCENT
-------------- -------- -------
Senior Loans
Aaa/AAA............................................... -- --
Aa/AA................................................. -- --
A/A................................................... -- --
Baa/BBB............................................... -- --
Ba/BB................................................. $ 61,625 11.7%
B/B................................................... 295,626 56.0
Caa/CCC............................................... 36,623 6.9
Unrated+++............................................ 104,271 19.7
Other Fixed Income Securities
B/B................................................... 3,577 0.7
Caa/CCC............................................... 4,005 0.8
Short-Term
Unrated............................................... 22,000 4.2
-------- -----
TOTAL.............................................. $534,882 100.0%
======== =====
------------
+ Ratings assigned by Moody's and S&P, respectively. These ratings are an
assessment of the capacity and willingness of an issuer to pay the principal
and interest on the securities being rated. The ratings are not a
recommendation to purchase, hold or sell the securities being rated inasmuch
as the rating does not comment as to market price or suitability for a
particular investor. The meanings assigned by Moody's and S&P to their
ratings are attached as an appendix to the Statement of Additional
Information.
34
++ Value is determined using the Fund's valuation policies as described under
the heading "Net Asset Value."
+++ Refers to securities that have not been rated by Moody's or S&P. See
"Investment Objectives and Principal Investment Strategies."
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to provide a high level of
current income. As a secondary investment objective, the Fund seeks preservation
of capital to the extent consistent with its primary investment objective. The
Fund's investment objectives are fundamental policies and may not be changed
without the approval of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund. There can be no assurance that the Fund
will achieve its investment objectives.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund seeks to achieve its investment
objectives by investing at least 80% of its assets (net assets plus borrowings
for investment purposes) in senior floating rate loans ("Senior Loans"). Senior
Loans are made to corporations, partnerships and
other business entities that operate in various industries and geographical
regions, including non-U.S. borrowers. Senior Loans pay interest at rates that
are redetermined periodically on the basis of a floating base lending rate plus
a premium. The Fund also may invest in other floating and variable rate senior
instruments, including second lien loans, and high yield, high risk corporate
bonds, investment grade fixed-income debt securities, preferred stocks (many of
which have fixed maturities), convertible securities, securities that make
"in-kind" interest payments, bonds not paying current income, bonds that do not
make regular interest payments and money market instruments. The Fund may invest
up to 10% of its total assets in Senior Loans and other securities of non-U.S.
issuers, including emerging market issuers, and may engage in certain hedging
transactions.
The Fund may invest in Senior Loans and other securities of any credit
quality, including Senior Loans and other investments that are rated below
investment grade or are unrated but are determined by the Subadviser to be of
equivalent credit quality. Non-investment grade securities, commonly referred to
as "junk bonds," are obligations that are rated below investment grade by the
national rating agencies that cover the obligation (i.e., Ba and below by
Moody's or BB and below by S&P), or if unrated, are determined to be of
comparable quality by the Subadviser. Investment in securities of below
investment grade quality involves substantial risk of loss. "Junk bonds" are
considered predominantly speculative with respect to the issuer's ability to pay
interest and repay principal and are susceptible to default or decline in market
value due to adverse economic and business developments. Because Senior Loans
are senior in a borrower's capital structure and often are secured by specific
collateral, the Subadviser believes, based on its experience, that Senior Loans
generally have more favorable loss recovery rates compared to most other types
of below investment grade obligations. However, there can be no assurance that
the Fund's actual loss recovery experience will be consistent with the
Subadviser's prior experience or that the Senior Loans will achieve any specific
loan recovery rate.
The Subadviser's investment philosophy is based on the belief that
fundamental research and a disciplined asset acquisition/disposition process
will produce superior long-term results. The Subadviser's investment process
combines an economic and industry overlay with a disciplined securities
selection process. The Subadviser's economic and industry overlay utilizes a
variety of macro and
35
economic variables to identify broad market sectors that the Subadviser believes
have positive fundamentals. Within these broad sectors, the Subadviser targets
specific industries that appear to have, in the Subadviser's view, the most
promising prospects under current market conditions. Within a targeted industry,
the Subadviser engages in a disciplined securities selection process. In this
process, the Subadviser conducts an extensive analysis of issuers within the
targeted industry to identify issuers that appear to have the most favorable
prospects for improving financial condition. The Subadviser also reviews the
terms of the agreements documenting the Senior Loans to seek to identify those
Senior Loans that have the most favorable risk and return characteristics. Based
on this analysis, the Subadviser constructs and actively manages a portfolio of
Senior Loans. The Subadviser's goal is to achieve the highest potential level of
current income with the lowest potential volatility over long periods of time.
The Fund intends to manage the liquidity of the Fund so that, in the event the
Fund is required to redeem any AMPS because it has failed to meet the rating
agencies' guidelines, the Fund will be able to satisfy such redemption
obligations.
Duration Management. Interest rates on Senior Loans in which the Fund
invests adjust periodically. The interest rates are adjusted based on a base
rate plus a premium or spread over the base rate. The base rate usually is
LIBOR, the Federal Reserve federal funds rate, the Prime Rate or other base
lending rates used by commercial lenders. LIBOR usually is an average of the
interest rates quoted by several designated banks as the rates at which they pay
interest to major depositors in the London interbank market on U.S.
dollar-denominated deposits. The Subadviser believes that changes in short-term
LIBOR rates are closely related to changes in the Federal Reserve federal funds
rate, although the two are not technically linked. The Prime Rate quoted by a
major U.S. bank is generally the interest rate at which that bank is willing to
lend U.S. dollars to its most creditworthy borrowers, although it may not be the
bank's lowest available rate.
The Subadviser expects that the average effective duration of the Fund's
portfolio of Senior Loans will normally be between zero and 1.5 years,
reflecting the Fund's focus on floating rate instruments. As a measure of a
fixed-income security's cash flow, duration is an alternative to the concept of
"term to maturity" in assessing the price volatility associated with changes in
interest rates. Generally, the longer the duration, the more volatility an
investor should expect. For example, the market price of a fixed-income security
with a duration of three years would be expected to decline 3% if interest rates
rose 1%. Conversely, the market price of the same security would be expected to
increase 3% if interest rates fell 1%. The market price of a fixed-income
security with a duration of six years would be expected to increase or decline
twice as much as the market price of a security with a three-year duration.
Duration is a way of measuring a security's maturity in terms of the average
time required to receive the present value of all interest and principal
payments as opposed to its term to maturity. The maturity of a security measures
only the time until final payment is due; it does not take account of the
pattern of a security's cash flows over time, which would include how cash flow
is affected by prepayments and by changes in interest rates. Because the
interest rate on Senior Loans held by the Fund will reset at short-term
intervals, the duration of Senior Loans will be shorter than a fixed income
security with a comparable term to maturity. The Subadviser can manage the
duration of the portfolio by selecting Senior Loans with different interest rate
reset periods and final maturity dates. Incorporating a security's yield, coupon
interest payments, final maturity and option features into one measure, duration
is computed by determining the weighted average maturity of a fixed-income
security's cash flows, where the present values of the cash flows serve as
weights. In computing the duration of the Fund's portfolio, the Subadviser will
estimate the duration of obligations that are subject to features such as
prepayment or redemption by the issuer, put options retained by the investor or
other imbedded options, taking into account the influence of interest rates on
prepayments and coupon flows.
Loans in which the Fund invests typically have interest rates that reset
at least quarterly and may reset as frequently as daily. Because of prepayments,
the actual remaining maturity of a loan may be considerably less than its stated
maturity. Longer interest rate reset periods generally will increase
36
fluctuations in the Fund's net asset value as a result of changes in market
interest rates. The Fund may find it possible and appropriate to use interest
rate swaps and other investment practices to shorten the effective interest rate
adjustment period of a loan. If the Fund does so, it will consider the shortened
period to be the adjustment period of the loan. As short-term interest rates
rise, interest payable to the Fund should increase. As short-term interest rates
decline, interest payable to the Fund should decrease.
During normal market conditions, changes in market interest rates will
affect the Fund in certain ways. The principal effect will be that the yield on
the Fund's shares will tend to rise or fall as market interest rates rise and
fall. This is because the assets in which the Fund primarily invests pay
interest at rates which float in response to changes in market rates. However,
because the interest rates on the Fund's assets reset over time, there will be
an imperfect correlation between changes in market rates and changes to rates on
the portfolio as a whole. This means that changes to the rate of interest paid
on the portfolio as a whole will tend to lag behind changes in market rates. The
amount of time that will pass before the Fund experiences the effects of
changing short-term interest rates will depend on the dollar-weighted average
time until the next interest rate adjustment on the Fund's portfolio of loans.
Because the rates of interest paid on the loans in which the Fund invests have a
weighted average reset period that typically is less than 90 days, 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 market 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 loans of the type and quality in which the Fund
invests, the Fund's net asset value could be adversely affected. This is because
the value of a Senior Loan is partially a function of whether the Senior Loan is
paying what the market perceives to be a market rate of interest, given its
individual credit and other characteristics. However, unlike changes in market
rates of interest for which there is generally only a temporary lag before the
portfolio reflects those changes, changes in a loan's value based on changes in
the market spread on loans in the Fund's portfolio may be of longer duration.
Credit Management. The Subadviser's staff monitors the credit quality and
price of Senior Loans and other securities held by the Fund, as well as other
securities that are available to the Fund. The Fund may invest in Senior Loans
and other securities of any credit quality, including Senior Loans and other
investments that are rated below investment grade or are unrated but are
determined by the Subadviser to be of equivalent credit quality. The Fund does
not have a policy of maintaining a specific average credit quality of its
portfolio nor a minimum portion of its portfolio that must be rated investment
grade. Although the Subadviser considers ratings when making investment
decisions, it performs its own credit and investment analysis and does not rely
primarily on ratings assigned by rating services. In evaluating the
attractiveness of a particular Senior Loan or other security, whether rated or
unrated, the Subadviser generally gives equal weight to the security's yield and
the issuer's creditworthiness and will normally take into consideration, among
other things, the issuer's financial resources and operating history, its
sensitivity to economic conditions and trends, the availability of its
management, its debt maturity schedules and borrowing requirements, and relative
values based on anticipated cash flow, interest and asset coverage, and earnings
prospects.
OTHER INVESTMENTS
Normally, the Fund will invest substantially all of its assets to meet its
investment objectives. The Fund may invest the remainder of its assets in
securities with remaining maturities of less than one year or cash equivalents,
or it may hold cash. 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 or cash equivalents,
or it may hold cash. During such periods, the Fund may not be able to achieve
its investment objectives.
37
PORTFOLIO CONTENTS
SECURITIES RATINGS
Securities rated Baa by Moody's are considered by Moody's as medium to
lower medium investment grade securities; they are neither highly protected nor
poorly secured; interest payments and principal security appear to Moody's to be
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over time; and in the opinion of Moody's,
securities in this rating category lack outstanding investment characteristics
and in fact have speculative characteristics as well. Securities rated BBB by
S&P are regarded by S&P as having an adequate capacity to pay interest and to
repay principal; while such securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely, in the opinion of S&P, to lead to a weakened capacity to pay interest
and repay principal for securities in this category than in higher rating
categories. Fixed income securities of below-investment grade quality are
regarded as having predominantly speculative characteristics with respect to the
issuer's capacity to pay interest and to repay principal and are commonly
referred to as "junk bonds" or "high yield securities." Such securities 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 fixed income securities.
The descriptions of the rating categories by Moody's and S&P, including a
description of their speculative characteristics, are set forth in the Statement
of Additional Information. All references to securities ratings by Moody's and
S&P in this prospectus shall, unless otherwise indicated, include all securities
within each such rating category (that is, (1), (2) and (3) in the case of
Moody's and (+) and (-) in the case of S&P). All percentage and ratings
limitations on securities in which the Fund may invest shall apply at the time
of acquisition and shall not be considered violated if an investment rating is
subsequently downgraded to a rating that would have precluded the Fund's initial
investment in such security or the percentage limitation is exceeded as a result
of changes in the market value of the Fund's portfolio securities. The Fund is
not required to dispose of a security in the event a rating agency downgrades or
withdraws its rating of a security. In the event that the Fund disposes of a
portfolio security subsequent to its being downgraded, the Fund may experience a
greater risk of loss than if such security had been sold prior to such
downgrading. When a security is rated by more than one of these rating agencies,
the Subadviser will use the highest rating in applying its investment policies.
SENIOR LOANS
Senior Loans hold the most senior position in the capital structure of a
business entity, are typically secured with specific collateral and have a claim
on the general assets 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. These base
lending rates generally are LIBOR, the prime rate offered by one or more major
United States banks (Prime Rate) or the certificate of deposit (CD) rate or
other base lending rates used by commercial lenders.
The Fund also may purchase unsecured loans, other floating rate debt
securities such as notes, bonds and asset-backed securities (such as securities
issued by special purpose funds investing in bank loans), investment grade and
below investment grade fixed income debt obligations and money market
instruments, such as commercial paper. The Fund also may purchase obligations
issued in connection
38
with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code. While
these investments are not a primary focus of the Fund, the Fund does not have a
policy limiting such investments to a specific percentage of the Fund's assets.
Loans and other corporate debt obligations 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 net asset value of the Fund. There can be no
assurance that the liquidation of any collateral securing a Senior Loan would
satisfy a 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 bankruptcy of a borrower, the Fund could experience
delays or limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of the bankruptcy of a
borrower. Some Senior Loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate Senior Loans to
presently existing or future indebtedness of the borrower or take other action
detrimental to the holders of Senior Loans including, in certain circumstances,
invalidating such Senior Loans 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.
Many loans in which the Fund will invest may not be rated by a rating
agency, will not be registered with the Securities and Exchange Commission or
any state securities commission and will not be listed on any national
securities exchange. The amount of public information available with respect to
issuers of Senior Loans will generally be less extensive than that available for
issuers of registered or exchange listed securities. In evaluating the
creditworthiness of borrowers, the Subadviser will consider, and may rely in
part, on analyses performed by others. The Subadviser does not view ratings as
the determinative factor in its investment decisions and relies more upon its
credit analysis abilities than upon ratings. Borrowers may have outstanding debt
obligations that are rated below investment grade by a rating agency. A high
percentage of Senior Loans in the Fund may be rated below investment grade by
independent rating agencies. In the event Senior Loans are not rated, they are
likely to be the equivalent of below investment grade quality. Debt securities
which are unsecured and rated below investment grade (i.e., Ba and below by
Moody's or BB and below by S&P) and comparable unrated bonds, are viewed by the
rating agencies as having speculative characteristics and are commonly known as
"junk bonds." A description of the ratings of corporate bonds by Moody's and S&P
is included as Appendix A to the Statement of Additional Information. Because
Senior Loans are senior in a borrower's capital structure and are often secured
by specific collateral, the Subadviser believes that Senior Loans have more
favorable loss recovery rates as compared to most other types of below
investment grade debt obligations. However, there can be no assurance that the
Fund's actual loss recovery experience will be consistent with the Subadviser's
prior experience or that the Fund's Senior Loans will achieve any specific loss
recovery rates.
The Fund may hold securities that are unrated or in the lowest ratings
categories (rated C by Moody's or D by S&P). Debt securities rated C by Moody's
are regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt securities rated D by S&P are in payment default or a
bankruptcy petition has been filed and debt service payments are jeopardized. In
order to enforce its rights with defaulted securities, the Fund may be required
to retain legal counsel and/or a financial adviser. The Fund may have to pursue
legal remedies, the results of which are uncertain and expensive. This may
increase operating expenses and adversely affect net asset value. The credit
quality of most securities held by the Fund reflects a greater possibility that
adverse changes in the financial condition of an issuer, or in general economic
conditions, or both, may impair the ability of the issuer to make payments of
interest or principal. The inability (or perceived inability) of issuers to make
timely
39
payment of interest and principal would likely make the values of such
securities more volatile and could limit the ability to sell securities at
favorable prices. In the absence of a liquid trading market for securities held
by it, the Fund may have difficulties determining the fair market value of such
securities. Because of the greater number of investment considerations involved
in investing in high yield, high risk bonds, the achievement of the Fund's
objectives depends more on the Subadviser's judgment and analytical abilities
than would be the case if invested primarily in securities in the higher ratings
categories.
No active trading market may exist for many Senior Loans, and some Senior
Loans may be subject to restrictions on resale. The Fund is not limited in the
percentage of its assets that may be invested in Senior Loans and other
securities deemed to be illiquid. A secondary market may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods,
which may impair the ability to realize full value on the disposition of an
illiquid Senior Loan, and cause a material decline in the Fund's net asset
value.
The Fund may invest up to 10% of total assets in obligations of non-U.S.
issuers, predominantly in developed countries, but the Fund may also invest in
securities of emerging market issuers. The value of obligations of non-U.S.
issuers 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.
Use of Agents. Senior Loans generally are arranged through private
negotiations between a borrower and a group of financial institutions initially
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. In a typical Senior Loan, the agent administers the terms of the Loan
Agreement and is responsible for the collection of principal and interest and
fee payments from the borrower and the apportionment of those payments to the
credit of all lenders that are parties to the loan agreement. The Fund generally
will rely on the agent to collect its portion of the payments on a Senior Loan.
Furthermore, the Fund will rely on the agent to use appropriate creditor
remedies against the borrower. Typically, under a loan agreement, the agent is
given broad discretion in monitoring the borrower's performance under the loan
agreement and is obligated to use only the same care it would use in the
management of its own property. Upon an event of default, the agent typically
will act to enforce the loan agreement after instruction from lenders holding a
majority of the Senior Loan. The borrower compensates the agent for the agent's
services. This compensation may include special fees paid on structuring and
funding the Senior Loan and other fees paid on a continuing basis. The typical
practice of an agent in relying exclusively or primarily on reports from the
borrower may involve a risk of fraud by the borrower.
Credit agreements may provide for the termination of the agent's status in
the event that it fails to act as required under the relevant credit 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 inter-positioned 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 net asset value.
Form of Investment. 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
40
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 Subadviser to be
creditworthy.
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 credit 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
credit agreement. Actions subject to lender vote or consent generally require
the vote or consent of the majority of the holders of some specified percentage
of the outstanding principal amount of the Senior Loan. Certain decisions, such
as reducing the interest rate, or extending the maturity of a Senior Loan, or
releasing collateral securing a Senior Loan, among others, 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 credit agreement of the
assigning lender and becomes a lender under the credit 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 only a contractual relationship 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 credit 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 a senior secured creditor 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 Subadviser 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.
Investing in Senior Loans involves investment risk. Some borrowers default
on their Senior Loan payments. The Fund attempts to manage this credit risk
through portfolio diversification and ongoing analysis and monitoring of
borrowers. The Fund also is subject to market, liquidity, interest rate and
other risks. See "Risk Factors."
41
OTHER FIXED INCOME SECURITIES
The Fund also may purchase unsecured loans, other floating rate debt
securities such as notes, bonds and asset-backed securities (such as securities
issued by special purpose funds investing in bank loans), investment grade and
below investment grade fixed income debt obligations and money market
instruments, such as commercial paper. The high yield securities in which the
Fund invests are rated Ba or lower by Moody's or BB or lower by S&P or are
unrated but determined by the Subadviser to be of comparable quality. Debt
securities rated below investment grade are commonly referred to as "junk bonds"
and are considered speculative with respect to the issuer's capacity to pay
interest and repay principal. Below investment grade debt securities 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 securities. The Fund's fixed-income securities may have fixed or
variable principal payments and all types of interest rate and dividend payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features. The Fund may invest in
fixed-income securities with a broad range of maturities.
The Fund may invest in zero coupon bonds, deferred interest bonds and
bonds or preferred stocks on which the interest is payable in-kind (PIK bonds).
To the extent the Fund invests in such instruments, they will not contribute to
the Fund's primary goal of current income. Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations that provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments may experience greater volatility
in market value due to changes in interest rates. The Fund may be required to
accrue income on these investments for federal income tax purposes and is
required to distribute its net income each year in order to qualify for the
favorable federal income tax treatment potentially available to regulated
investment companies. The Fund may be required to sell securities to obtain cash
needed for income distributions at times and at prices that the Adviser believes
do not reflect the intrinsic value of such securities.
SECOND LIEN LOANS AND DEBT OBLIGATIONS
The Fund may invest in loans and other debt securities that have the same
characteristics as Senior Loans except that such loans are second in lien
property rather than first. Such "second lien" loans and securities, like Senior
Loans, typically have adjustable floating rate interest payments. Accordingly,
the risks associated with "second lien" loans are higher than the risk of loans
with first priority over the collateral. In the event of default on a "second
lien" loan, the first priority lien holder has first claim to the underlying
collateral of the loan. It is possible, that no collateral value would remain
for the second priority lien holder and therefore result in a loss of investment
to the Fund.
COLLATERALIZED LOAN OBLIGATIONS AND BOND OBLIGATIONS
The Fund may invest in certain asset-backed securities that are
securitizing certain financial assets by issuing securities in the form of
negotiable paper that are issued by a financing company (generally called a
Special Purpose Vehicle or "SPV"). These securitized assets are, as a rule,
corporate financial assets brought into a pool according to specific
diversification rules. The SPV is a company founded solely for the purpose of
securitizing these claims and its only asset is the diversified asset pool. On
this basis, marketable securities are issued which, due to the diversification
of the underlying risk, generally represent a lower level of risk than the
original assets. The redemption of the securities issued by the SPV takes place
at maturity out of the cash flow generated by the collected claims.
42
A collateralized loan obligation ("CLO") is a structured debt security
issued by an SPV that was created to reapportion the risk and return
characteristics of a pool of assets. The assets, typically Senior Loans, are
used as collateral supporting the various debt tranches issued by the SPV. The
key feature of the CLO structure is the prioritization of the cash flows from a
pool of debt securities among the several classes of securities issued by a CLO.
The Fund may also invest in collateralized bond obligations ("CBOs"),
which are structured debt securities backed by a diversified pool of high yield,
public or private fixed income securities. These may be fixed pools or may be
"market value" (or managed) pools of collateral. The CBO issues debt securities
that are typically separated into tranches representing different degrees of
credit quality. The top tranche of securities has the greatest collateralization
and pays the lowest interest rate. Lower CBO tranches have a lesser degree of
collateralization quality and pay higher interest rates intended to compensate
for the attendant risks. The bottom tranche specifically receives the residual
interest payments (i.e., money that is left over after the higher tranches have
been paid) rather than a fixed interest rate. The return on the lower tranches
of CBOs is especially sensitive to the rate of defaults in the collateral pool.
Under normal market conditions, the Fund expects to invest in the lower tranches
of CBOs.
CREDIT DEFAULT SWAP
The Fund may enter into credit default swap agreements. 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 "par value" (full notional value) of the reference
obligation in exchange for the reference obligation. The Fund may be either the
buyer or seller in the transaction. If the Fund is a buyer and no event of
default occurs, the Fund loses its investment and recovers nothing. However, if
an event of default occurs, the buyer receives full notional value for a
reference obligation that may have little or no value. As a seller, the Fund
receives income throughout the term of the contract, which typically is between
six months and three years, provided that there is no default event.
Credit default swaps involve greater risks than if the Fund had invested
in the reference obligation directly. In addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and
credit risks. The Fund will enter into swap agreements only with counterparties
that are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or
whose creditworthiness is believed by the Subadviser to be equivalent to such
rating. A buyer also will lose its investment and recover nothing should no
event of default occur. If an event of default were to occur, the value of the
reference obligation received by the seller, coupled with the periodic payments
previously received, may be less than the full notional value it pays to the
buyer, resulting in a loss of value to the seller. When the Fund acts as a
seller of a credit default swap agreement it is exposed to many of the same
risks of leverage described under "Risk Factors -- Leverage Risk" in this
prospectus since if an event of default occurs the seller must pay the buyer the
full notional value of the reference obligation.
SENIOR LOAN BASED DERIVATIVES
The Fund may obtain exposure to Senior Loans and baskets of Senior Loans
through the use of derivative instruments. Such derivative instruments have
recently become increasingly available. The Subadviser reserves the right to
utilize these instruments and similar instruments that may be available in the
future. For example, the Fund may invest in a derivative instrument known as the
Select Aggregate Market Index ("SAMI"), which provides investors with exposure
to a reference basket of Senior Loans. SAMIs are structured as floating rate
instruments. SAMIs consist of a basket of credit
43
default swaps whose underlying reference securities are Senior Loans. While
investing in SAMIs will increase the universe of floating rate debt securities
to which the Fund is exposed, such investments entail risks that are not
typically associated with investments in other floating rate debt securities.
The liquidity of the market for SAMIs will be subject to liquidity in the
secured loan and credit derivatives markets. Investment in SAMIs involves many
of the risks associated with investments in derivative instruments discussed
generally below. The Fund may also be subject to the risk that the counterparty
in a derivative transaction will default on its obligations. Derivative
transactions generally involve the risk of loss due to unanticipated adverse
changes in securities prices, interest rates, the inability to close out a
position, imperfect correlation between a position and the desired hedge, tax
constraints on closing out positions and portfolio management constraints on
securities subject to such transactions. The potential loss on derivative
instruments may be substantially greater than the initial investment therein.
CREDIT-LINKED NOTES
The Fund may invest in credit-linked notes ("CLNs") for risk management
purposes, including diversification. A CLN is a derivative instrument. It is a
synthetic obligation between two or more parties where the payment of principal
and/or interest is based on the performance of some obligation (a reference
obligation). In addition to credit risk of the reference obligations and
interest rate risk, the buyer/seller of the CLN is subject to counterparty risk.
COMMON STOCKS
The Fund may acquire an interest in common stocks upon the default of a
Senior Loan secured by such common stock. The Fund may also acquire warrants or
other rights to purchase a borrower's common stock in connection with the making
of a Senior Loan. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits, if any, of the
corporation without preference over any other shareholder or class of
shareholders, including holders of such entity's preferred stock and other
senior equity securities. Common stock usually carries with it the right to vote
and frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund generally expects to focus primarily on the security's
dividend paying capacity rather than on its potential for capital appreciation.
PREFERRED SECURITIES
The Fund may invest in preferred securities. Preferred securities are
equity securities, but they have many characteristics of fixed income
securities, such as a fixed dividend payment rate and/or a liquidity preference
over the issuer's common shares. However, because preferred shares are equity
securities, they may be more susceptible to risks traditionally associated with
equity investments than the Fund's fixed income securities.
Fixed rate preferred stocks have fixed dividend rates. They can be
perpetual, with no mandatory redemption date, or issued with a fixed mandatory
redemption date. Certain issues of preferred stock are convertible into other
equity securities. Perpetual preferred stocks provide a fixed dividend
throughout the life of the issue, with no mandatory retirement provisions, but
may be callable. Sinking fund preferred stocks provide for the redemption of a
portion of the issue on a regularly scheduled basis with, in most cases, the
entire issue being retired at a future date. The value of fixed rate preferred
stocks can be expected to vary inversely with interest rates.
Adjustable rate preferred stocks have a variable dividend rate which is
determined periodically, typically quarterly, according to a formula based on a
specified premium or discount to the yield on particular U.S. Treasury
securities, typically the highest base-rate yield of one of three U.S. Treasury
44
securities: the 90-day Treasury bill; the 10-year Treasury note; and either the
20-year or 30-year Treasury bond or other index. The premium or discount to be
added to or subtracted from this base-rate yield is fixed at the time of
issuance and cannot be changed without the approval of the holders of the
adjustable rate preferred stock. Some adjustable rate preferred stocks have a
maximum and a minimum rate and in some cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based on periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends on market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
the auction rate preferred stocks generally provide that they are redeemable by
the issuer at certain times or under certain conditions.
CONVERTIBLE SECURITIES
The Fund's investment in fixed income securities may include bonds and
preferred stocks that are convertible into the equity securities of the issuer
or a related company. Depending on the relationship of the conversion price to
the market value of the underlying securities, convertible securities may trade
more like equity securities than debt instruments.
OTHER DEBT SECURITIES
The Fund may invest in other debt securities. Other debt securities in
which the Fund may invest include: securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and custodial receipts therefor;
securities issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies or instrumentalities or by international or
supranational entities; corporate debt securities, including notes, bonds and
debentures; certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, banks (including U.S. or foreign
branches of U.S. banks or U.S. or foreign branches of foreign banks) having
total assets of more than $1 billion; commercial paper; and mortgage related
securities. These securities may be of any maturity. The value of debt
securities can be expected to vary inversely with interest rates.
MONEY MARKET INSTRUMENTS
Money market instruments include short-term U.S. government securities,
U.S. dollar-denominated, high quality commercial paper (unsecured promissory
notes issued by corporations to finance their short-term credit needs),
certificates of deposit, bankers' acceptances and repurchase agreements relating
to any of the foregoing. U.S. government securities include Treasury notes,
bonds and bills, which are direct obligations of the U.S. government backed by
the full faith and credit of the United States and securities issued by agencies
and instrumentalities of the U.S. government, which may be guaranteed by the
U.S. Treasury, may be supported by the issuer's right to borrow from the U.S.
Treasury or may be backed only by the credit of the federal agency or
instrumentality itself.
U.S. GOVERNMENT SECURITIES
U.S. government securities in which the Fund invests include debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the
45
U.S. government, including the Federal Housing Administration, Federal Financing
Bank, Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, Government National Mortgage Association (GNMA),
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust Corporation and various institutions
that previously were or currently are part of the Farm Credit System (which has
been undergoing reorganization since 1987). Some U.S. government securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States government. Others are supported
by (i) the right of the issuer to borrow from the U.S. Treasury, such as
securities of the Federal Home Loan Banks; (ii) the discretionary authority of
the U.S. government to purchase the agency's obligations, such as securities of
the FNMA; or (iii) only the credit of the issuer. No assurance can be given that
the U.S. government will provide financial support in the future to U.S.
government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States. Securities guaranteed as to
principal and interest by the U.S. government, its agencies, authorities or
instrumentalities include (i) securities for which the payment of principal and
interest is backed by an irrevocable letter of credit issued by the U.S.
government or any of its agencies, authorities or instrumentalities; and (ii)
participations in loans made to non-U.S. governments or other entities that are
so guaranteed. The secondary market for certain of these participations is
limited and therefore may be regarded as illiquid.
OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the Fund's investment
objectives and principal investment strategies and permissible under the 1940
Act. Under one provision of the 1940 Act, the Fund may not acquire the
securities of other investment companies if, as a result, (i) more than 10% of
the Fund's total assets would be invested in securities of other investment
companies, (ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being held by the
Fund or (iii) more than 5% of the Fund's total assets would be invested in any
one investment company. Other provisions of the 1940 Act are less restrictive
provided that the Fund is able to meet certain conditions. These limitations do
not apply to the acquisition of shares of any investment company in connection
with a merger, consolidation, reorganization or acquisition of substantially all
of the assets of another investment company. However, the Adviser has obtained
an exemptive order from the Securities and Exchange Commission that permits the
Fund to invest cash balances in money market funds managed by the Adviser.
The Fund, as a holder of the securities of other investment companies,
will bear its pro rata portion of the other investment companies' expenses,
including advisory fees. These expenses will be in addition to the direct
expenses incurred by the Fund.
EXCHANGE TRADED FUNDS
Subject to the limitations on investment in other investment companies,
the Fund may invest in exchange traded funds ("ETFs"). ETFs, such as SPDRs,
NASDAQ 100 Index Trading Stock (QQQs), iShares and various country index funds,
are funds whose shares are traded on a national exchange or the National
Association of Securities Dealers' Automatic Quotation System (NASDAQ). ETFs may
be based on underlying equity or fixed income securities. SPDRs, for example,
seek to provide investment
46
results that generally correspond to the performance of the component common
stocks of the S&P 500. ETFs do not sell individual shares directly to investors
and only issue their shares in large blocks known as "creation units." The
investor purchasing a creation unit may sell the individual shares on a
secondary market. Therefore, the liquidity of ETFs depends on the adequacy of
the secondary market. There can be no assurance that an ETF's investment
objective will be achieved. ETFs based on an index may not replicate and
maintain exactly the composition and relative weightings of securities in the
index. ETFs are subject to the risks of investing in the underlying securities.
The Fund, as a holder of the securities of the ETF, will bear its pro rata
portion of the ETF's expenses, including advisory fees. These expenses are in
addition to the direct expenses of the Fund's own operations.
ZERO COUPON SECURITIES
The securities in which the Fund invests may include zero coupon
securities, which are debt obligations that are issued or purchased at a
significant discount from face value. The discount approximates the total amount
of interest the security will accrue and compound over the period until maturity
or the particular interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon securities do
not require the periodic payment of interest. These investments benefit the
issuer by mitigating its need for cash to meet debt service but generally
require a higher rate of return to attract investors who are willing to defer
receipt of cash. These investments may experience greater volatility in market
value than securities that make regular payments of interest. The Fund accrues
income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations, in which case the Fund will forgo the
purchase of additional income producing assets with these funds.
STRATEGIC TRANSACTIONS
In addition to the credit default swaps and Senior Loan bond derivatives
discussed above the Fund may, but is not required to, use various strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Such strategic transactions are generally accepted under modern
portfolio management and are regularly used by many mutual funds and other
institutional investors. Although the Subadviser seeks to use the practices to
further the Fund's investment objectives, no assurance can be given that these
practices will achieve this result. While the Fund reserves the ability to use
these strategic transactions, the Subadviser does not anticipate that strategic
transactions other than credit default swaps and Senior Loan bond derivatives
will initially be a significant part of the Fund's investment approach. With
changes in the market or the Subadviser's strategy, it is possible that these
instruments may be a more significant part of the Fund's investment approach in
the future.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures or credit transactions and credit default swaps.
The Fund also may purchase derivative instruments that combine features of these
instruments. Collectively, all of the above are referred to as "Strategic
Transactions." The Fund generally seeks to use Strategic Transactions as a
portfolio management or hedging technique to seek to protect against possible
adverse changes in the market value of Senior Loans or other securities held in
or to be purchased for the Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain securities for
47
investment purposes, manage the effective interest rate exposure of the Fund,
protect against changes in currency exchange rates, manage the effective
maturity or duration of the Fund's portfolio, or establish positions in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Under normal market conditions, up to 20% of the Fund's
assets may be invested in instruments other than Senior Loans, including
derivative securities.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to use successfully Strategic Transactions
depends on the Subadviser's ability to predict pertinent market movements, which
cannot be assured. Thus, the use of Strategic Transactions may result in losses
greater than if they had not been used, may require the Fund to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold a security that it might otherwise
sell. The use of currency transactions can result in the Fund incurring losses
as a result of the imposition of exchange controls, suspension of settlements or
the inability of the Fund to deliver or receive a specified currency.
Additionally, amounts paid by the Fund as premiums and cash or other assets held
in margin accounts with respect to Strategic Transactions are not otherwise
available to the Fund for investment purposes.
A more complete discussion of Strategic Transactions and their risks is
contained in the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with broker-dealers, member
banks of the Federal Reserve System and other financial institutions. Repurchase
agreements are arrangements under which the Fund purchases securities and the
seller agrees to repurchase the securities within a specific time and at a
specific price. The repurchase price is generally higher than the Fund's
purchase price, with the difference being income to the Fund. Under the
direction of the Board of Trustees, the Subadviser reviews and monitors the
creditworthiness of any institution which enters into a repurchase agreement
with the Fund. The counterparty's obligations under the repurchase agreement are
collateralized with U.S. Treasury and/or agency obligations with a market value
of not less than 100% of the obligations, valued daily. Collateral is held by
the Fund's custodian in a segregated, safekeeping account for the benefit of the
Fund. Repurchase agreements afford the Fund an opportunity to earn income on
temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If the
court characterizes the transaction as a loan and the Fund has not perfected a
security interest in the security, the Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and interest involved in the transaction.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to registered broker-dealers or
other institutional investors deemed by the Subadviser to be of good standing
under agreements which require that the loans be secured continuously by
collateral in cash, cash equivalents or U.S. Treasury bills maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund continues to receive the equivalent of the interest or
dividends paid by the issuer on the securities
48
loaned as well as the benefit of an increase and the detriment of any decrease
in the market value of the securities loaned and would also receive compensation
based on investment of the collateral. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of consent on a
material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund will lend portfolio securities only to firms that
have been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms.
PORTFOLIO TURNOVER
It is the policy of the Fund not to engage in trading for short-term
profits, although portfolio turnover rate is not considered a limiting factor in
the execution of investment decisions for the Fund.
RISK FACTORS
Investing in the Fund involves risk, including the risk that you may
receive little or no return on your investment or that you may lose part or all
of your investment. Therefore, before investing you should consider carefully
the following risks that you assume when you invest in AMPS.
RISKS OF INVESTMENT IN AMPS
Leverage Risk. The Fund expects to use financial leverage on an ongoing
basis for investment purposes. Taking into account the AMPS being offered in
this prospectus, the amount of leverage would, as of March 11, 2005, represent
approximately 33.5% of the Fund's total assets. The Fund's leveraged capital
structure creates special risks not associated with unleveraged funds having a
similar investment objectives and policies. These include the possibility of
higher volatility of both the net asset value of the Fund and the value of
assets serving as asset coverage for the AMPS.
Because the fee paid to the Adviser will be calculated on the basis of the
Fund's managed assets (which equals the aggregate net asset value of the common
shares plus the liquidation preference of the AMPS), the fee will be higher when
leverage is utilized, giving the Adviser an incentive to utilize leverage.
Interest Rate Risk. The AMPS pay dividends based on shorter-term interest
rates. The Fund may invests the proceeds from the issuance of the AMPS in Senior
Loans which pay interest based upon rates that float with changes in interest
rates, similar to short-term rates. The interest rates on Senior Loans are
typically, although not always, higher than shorter-term interest rates of
issuers with AAA credit ratings that the Fund anticipates receiving from the
rating agencies. Shorter-term interest rates, including the floating rates paid
on the Fund's portfolio of Senior Loans, can be expected to fluctuate. If
shorter-term interest rates rise, dividend rates on the AMPS may also rise since
the auction setting the dividends on AMPS will compete for investors with other
short-term instruments. This rise in dividends rates could result in the amount
of dividends to be paid to holders of AMPS exceeding the income from the Senior
Loans purchased by the Fund with the proceeds from the sale of AMPS. Similarly,
the anticipated differential on the rate of interest paid on the AMPS and the
Fund's portfolio of Senior Loans would decline or be eliminated if, in the
future, the rating agencies lower the rating assigned to the AMPS. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the AMPS offering) is available to pay
dividends on the AMPS, however, dividend rates on the AMPS would need to exceed
the rate of return on the Fund's investment portfolio by a wide margin before
the Fund's ability to pay dividends on the AMPS would be jeopardized.
49
Auction Risk. The dividend rate for the AMPS normally is set through an
auction process. In the auction, holders of AMPS may indicate the dividend rate
at which they would be willing to hold or sell their AMPS or purchase additional
AMPS. The auction also provides liquidity for the sale of AMPS. An auction fails
if there are more AMPS offered for sale than there are buyers. You may not be
able to sell your AMPS at an auction if the auction fails. A holder of the AMPS
therefore can be given no assurance that there will be sufficient clearing bids
in any auction or that the holder will be able to sell its AMPS in an auction.
Also, if you place bid orders (orders to retain AMPS) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction, you
will not retain your AMPS. Additionally, if you buy AMPS or elect to retain AMPS
without specifying a dividend rate below which you would not wish to buy or
continue to hold those AMPS, you could receive a lower rate of return on your
AMPS than the market rate. Finally, the dividend periods for the AMPS may be
changed by the Fund, subject to certain conditions with notice to the holders of
AMPS, which could also effect the liquidation of your investment. See
"Description of AMPS" and "The Auction -- Auction Procedures."
As noted above, if there are more auction rate securities offered for sale
than there are buyers for those auction rate securities in any auction, the
auction will fail and you may not be able to sell some or all of your auction
rate securities at that time. The relative buying and selling interest of market
participants in your auction rate securities and in the auction rate securities
market as a whole will vary over time, and such variations may be affected by,
among other things, news relating to the issuer, the attractiveness of
alternative investments, the perceived risk of owning the security (whether
related to credit, liquidity or any other risk), the tax treatment accorded the
instruments, the accounting treatment accorded auction rate securities,
including recent clarifications of U.S. generally accepted accounting principles
relating to the treatment of auction rate securities, reactions to regulatory
actions or press reports, financial reporting cycles and market sentiment
generally. Shifts of demand in response to any one or simultaneous particular
events cannot be predicted and may be short-lived or exist for longer periods.
Secondary Market Risk. If you try to sell your AMPS between auctions you
may not be able to sell any or all of your AMPS or you may not be able to sell
them for $25,000 per share or $25,000 per share plus accumulated but unpaid
dividends. If the Fund has designated a special dividend period (a rate period
of more than seven days), changes in interest rates could affect the price you
would receive if you sold your AMPS in the secondary market. You may transfer
AMPS outside of auctions only to or through a Broker-Dealer that has entered
into a Broker-Dealer Agreement or such other person as the Fund permits. The
Fund does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a Broker-Dealer that has entered into a Broker-Dealer Agreement with the
Auction Agent, that person will not be able to submit bids at auctions with
respect to the AMPS. Broker-dealers that maintain a secondary trading market for
AMPS are not required to maintain this market, and the Fund is not required to
redeem AMPS either if an auction or an attempted secondary market sale fails
because of a lack of buyers. The AMPS will not be listed on a stock exchange or
the Nasdaq National Market. If you sell your AMPS to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially if
market interest rates have risen since the last auction. In addition, a
Broker-Dealer may, in its own discretion, decide to sell the AMPS in the
secondary market to investors at any time and at any price, including at prices
equivalent to, below or above the par value of the AMPS.
Securities and Exchange Commission Inquiries. The Underwriters have
advised the Fund that the Underwriters and various other broker-dealers and
other firms that participate in the auction rate securities market received
letters from the staff of the Securities and Exchange Commission last spring.
The letters requested that each of these firms voluntarily conduct an
investigation regarding its respective practices and procedures in that market.
Pursuant to these requests, each of the Underwriters conducted its own voluntary
review and reported its findings to the Securities and Exchange
50
Commission staff. At the Securities and Exchange Commission staff's request, the
Underwriters are engaging in discussions with the Securities and Exchange
Commission staff concerning its inquiry. Neither the Underwriters nor the Fund
can predict the ultimate outcome of the inquiry or how that outcome will affect
the market for the AMPS or the auctions.
Ratings and Asset Coverage Risk. While it is expected that Moody's will
assign a rating of Aaa to the AMPS and Fitch will assign a rating of AAA to the
AMPS, such ratings do not eliminate or necessarily mitigate the risks of
investing in AMPS. Moody's or Fitch could downgrade its rating of the AMPS or
withdraw its rating of the AMPS at any time, which may make your shares less
liquid at an auction or in the secondary market and may materially and adversely
affect the value of the AMPS if sold outside an auction. Moody's and Fitch are
not required to provide prior notice of a decision to downgrade the AMPS or to
withdraw their rating. If Moody's or Fitch downgrades the AMPS, the Fund may
alter its portfolio or redeem AMPS in an effort to improve the rating, although
there is no assurance that it will be able to do so to the extent necessary to
restore the prior rating. If the Fund fails to satisfy the asset coverage ratios
discussed under "Description of AMPS -- Rating Agency Guidelines and Asset
Coverage," the Fund will be required to redeem, at a time that is not favorable
to the Fund or its shareholders, a sufficient number of AMPS in order to return
to compliance with the asset coverage ratios. The Fund may be required to redeem
AMPS at a time when it is not advantageous for the Fund to make such redemption
or to liquidate portfolio securities in order to have available cash for such
redemption. The Fund may voluntarily redeem AMPS under certain circumstances in
order to meet asset maintenance tests. While a sale of substantially all the
assets of the Fund or the merger of the Fund into another entity would require
the approval of the holders of AMPS voting as a separate class as discussed
under "Description of AMPS -- Voting Rights," a sale of substantially all the
assets of the Fund or the merger of the Fund with or into another entity would
not be treated as a liquidation of the Fund nor require that the Fund redeem
AMPS, in whole or in part, provided that the Fund continued to comply with the
asset coverage ratios discussed under "Description of AMPS -- Rating Agency
Guidelines and Asset Coverage." See "Description of AMPS -- Rating Agency
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Fund must meet.
Restrictions on Dividends and Other Distributions. Restrictions imposed
on the declaration and payment of dividends or other distributions to the
holders of the Fund's common shares and AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund may redeem AMPS to enable the Fund to distribute
its income as required to maintain its qualification as a regulated investment
company under the Code, there can be no assurance that such redemptions can be
effected in time to meet the requirements of the Code. See "Federal Income Tax
Matters."
GENERAL RISKS OF INVESTING IN THE FUND
Limited Operating History. The Fund is a recently organized,
non-diversified, closed-end management investment company and has a limited
operating history and history of public trading.
Non-Diversified Status Risk. The Fund is classified as "non-diversified"
under the 1940 Act. As a result, it can invest a greater portion of its assets
in obligations of a single issuer than a "diversified" fund. The Fund will
therefore be more susceptible than a diversified fund to being adversely
affected by any single corporate, economic, political or regulatory occurrence.
The Fund intends to diversify its investments to the extent necessary to
qualify, and maintain its status, as a regulated investment company under U.S.
federal income tax laws. See "Federal Income Tax Matters."
Interest Rate Risk. The Fund's net asset value will usually change in
response to interest rate fluctuations. When interest rates decline, the value
of fixed-rate securities already held by the Fund can be expected to rise.
Conversely, when interest rates rise, the value of existing fixed-rate portfolio
51
securities can be expected to decline. Because market interest rates are
currently near their lowest levels in many years, there is a greater than normal
risk that the Fund's portfolio will decline in value due to rising interest
rates. The Fund will primarily invest in floating rate obligations, including
Senior Loans, the rate on which periodically adjusts with changes in interest
rates.
Until the interest rates on the floating rate obligations in the Fund's
portfolio reset, the Fund's income also would likely be affected adversely when
prevailing short term interest rates increase and the Fund is using leverage.
To the extent that changes in market 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 loans of the type and quality in which the Fund
invests, the Fund's net asset value could be adversely affected. This is because
the value of a Senior Loan asset in the Fund is partially a function of whether
it is paying what the market perceives to be a market rate of interest for the
particular loan, given its individual credit and other characteristics. However,
unlike changes in market rates of interest for which there is generally only a
temporary lag before the portfolio reflects those changes, changes in a loan's
value based on changes in the market spread on loans in the Fund's portfolio may
be of longer duration.
Reinvestment Risk. Income from the Fund's portfolio will decline if the
Fund invests the proceeds on repayment or sale of Senior Loans or other
obligations into lower yielding instruments or Senior Loans with a lower spread
over the base lending rate. A decline in income could affect the common shares'
distribution rate and their overall return.
Senior Loans Risk. The Fund's investments in Senior Loans are typically
below investment grade, commonly referred to as "junk bonds," and are considered
speculative because of the credit risk of their issuers. Economic and other
events, whether real or perceived, can reduce the demand for certain Senior
Loans or Senior Loans generally, which may reduce market prices and cause the
Fund's net asset value per share to fall. The frequency and magnitude of such
changes cannot be predicted.
In order to borrow money pursuant to a collateralized Senior Loan, a
borrower will typically, for the term of the Senior Loan, pledge as collateral
assets, which may include one or more of the following: accounts receivable,
inventory, buildings, other real estate, trademarks, franchises and common and
preferred stock in its subsidiaries. In addition, in the case of some Senior
Loans, there may be additional collateral pledged in the form of guarantees by
and/or securities of affiliates of the borrowers. In some instances, a
collateralized Senior Loan may be secured only by stock in the borrower or its
subsidiaries. Collateral may consist of assets that are not readily liquidated,
and there is no assurance that the liquidation of such assets would satisfy
fully a borrower's obligations under a Senior Loan. Although a Senior Loan may
be senior to equity and other debt securities in a borrower's capital structure,
such obligations may be structurally subordinated to obligations of the
borrower's subsidiaries. For example, if a holding company were to issue a
Senior Loan, even if that borrower pledges the capital stock of its subsidiaries
to secure the obligations under the Senior Loan, the assets of the operating
companies are available to the direct creditors of an operating company before
they would be available to the holders of the Senior Loan issued by the holding
company. Similarly, in the event of bankruptcy proceedings involving the
borrower, the Lenders may be delayed or prevented from liquidating collateral or
may choose not to do so as part of their participation in a plan of
reorganization of the borrower. The Fund does not have a policy limiting the
Fund's investment in Senior Loans that may be secured by similar types of
collateral. Nor does the Fund have a policy requiring that any specific Senior
Loan have a minimum ratio of the value of the collateral to the value of the
Senior Loan. Moreover, any specific collateral used to secure a loan may decline
in value or lose all its value or become illiquid, which would adversely affect
the loan's value. In certain circumstances, it is possible that the Fund or the
agent bank of the Senior Loan may receive actual possession of the collateral
and the Fund would incur the cost of maintaining and disposing of the
collateral. The Fund may also invest in Senior Loans that are not secured by
collateral.
52
Senior Loans and other debt securities are also subject to the risk of
price declines and to increases in prevailing interest rates. Conversely, the
floating rate feature of Senior Loans means the Senior Loans will not generally
experience capital appreciation in a declining interest rate environment.
Declines in interest rate may also increase prepayments of debt obligations and
require the Fund to invest assets at lower yields. No active trading market may
exist for certain Senior Loans, which may impair the ability of the Fund to
realize full value in the event of the need to liquidate such assets. Adverse
market conditions may impair the liquidity of some actively traded Senior Loans.
Although Senior Loans in which the Fund will invest will often be secured
by collateral, there can be no assurance that liquidation of such collateral
would satisfy the borrower's obligation in the event of a default or that such
collateral could be readily liquidated. In the event of bankruptcy of a
borrower, the Fund could experience delays or limitations in its ability to
realize the benefits of any collateral securing a Senior Loan. The Fund may also
invest in Senior Loans that are not secured.
Credit Risk and Junk Bond Risk. Credit risk is the risk that an issuer of
Senior Loans and other debt obligations will become unable to meet its
obligation to make interest and principal payments.
The Fund may invest all or a substantial portion of its assets in
securities that are rated below investment grade (commonly referred to as "junk
bonds" or "high yield securities"), that is, rated Ba or below by Moody's or BB
or lower by S&P, or unrated securities determined by the Subadviser to be of
comparable credit quality. Investment in securities of below-investment grade
quality involves substantial risk of loss. "Junk bonds" are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
fixed income securities tend to be more volatile, and these securities are less
liquid, than investment grade debt securities. For these reasons, an investment
in the Fund is subject to the following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
- greater risk of loss due to default or declining credit quality;
- adverse issuer-specific events are more likely to render the issuer
unable to make interest and/or principal payments; and
- if a negative perception of the high yield market develops, the price
and liquidity of high yield securities may be depressed, and this
negative perception could last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. The principal amount of high yield
securities outstanding has proliferated in the past decade as an increasing
number of issuers have used high yield securities for corporate financing. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
If the national economy enters into a recessionary phase during 2005, or
interest rates rise sharply, increasing the interest cost on variable rate
instruments and negatively impacting economic activity, the number of defaults
by high yield issuers is likely to increase. The market values of lower quality
debt securities tend to reflect individual developments of the issuer to a
greater extent than do higher quality securities, which react primarily to
fluctuations in the general level of interest rates. Factors having an adverse
impact on the market value of lower quality securities may have an adverse
effect on the Fund's net asset value and the market value of its shares. In
addition, the Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in payment of principal or interest on its
portfolio holdings. In certain circumstances, the Fund may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such
53
circumstances, the Fund would incur additional costs in disposing of such assets
and potential liabilities from operating any business acquired.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor that may have an
adverse effect on the Fund's ability to dispose of a particular security. There
are fewer dealers in the market for high yield securities than investment grade
obligations. The prices quoted by different dealers may vary significantly, and
the spread between the bid and asked price is generally much larger than for
higher quality instruments. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer, and
these instruments may become illiquid. 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 such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value.
Issuers of such high yield securities often are highly leveraged and may
not have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities (other
than Senior Loans) because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. Prices and yields of high yield
securities will fluctuate over time and, during periods of economic uncertainty,
volatility of high yield securities may adversely affect the Fund's net asset
value. In addition, investments in high yield zero coupon or pay-in-kind bonds,
rather than income-bearing high yield securities, may be more speculative and
may be subject to greater fluctuations in value due to changes in interest
rates.
Issuer Risk. The value of corporate income-producing securities may
decline for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage and reduced demand for the issuer's
goods and services.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investments will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Fund's
portfolio can decline.
Convertible Securities Risk. Convertible securities generally offer lower
interest or dividend yields than non-convertible securities of similar quality.
As with all fixed income securities, the market values of convertible securities
tend to decline as interest rates increase and, conversely, to increase as
interest rates decline. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price, the convertible
security tends to reflect the market price of the underlying common stock. As
the market price of the underlying common stock declines, the convertible
security tends to trade increasingly on a yield basis and thus may not decline
in price to the same extent as the underlying common stock. Convertible
securities rank senior to common stocks in an issuer's capital structure.
Special Risks Related to Preferred Securities. There are special risks
associated with the Fund's investments in preferred securities:
- Limited Voting Rights. Generally, holders of preferred securities
have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a
54
specified number of periods, at which time the preferred security
holders may elect a number of directors to the issuer's board.
Generally, once the issuer pays all the arrearages, the preferred
security holders no longer have voting rights.
- Special Redemption Rights. In certain varying circumstances, an
issuer of preferred securities may redeem the securities after a
specified date. For instance, for certain types of preferred
securities, a redemption may be triggered by a change in federal
income tax or securities laws. As with call provisions, a special
redemption by the issuer may negatively impact the return of the
security held by the Fund.
- Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period
without any adverse consequences to the issuer. If the Fund owns a
preferred security that is deferring its distributions, the Fund may
be required to report income for federal income tax purposes although
it has not yet received such income in cash.
- Subordination. Preferred securities are subordinated to bonds and
other debt instruments in a company's capital structure in terms of
priority to corporate income and liquidation payments and therefore
will be subject to greater credit risk than those debt instruments.
- Liquidity. Preferred securities may be substantially less liquid than
many other securities, such as common stocks or U.S. government
securities.
Foreign Securities Risk. The Fund's investments in non-U.S. issuers may
involve unique risks compared to investing 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. investment in one region or in the securities of
emerging market issuers. These risks may include:
- Less information about non-U.S. issuers or markets may be available
due to less rigorous disclosure, accounting standards or regulatory
practices.
- Many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the Subadviser may not be able to sell the Fund's
portfolio securities at times, in amounts and at prices it considers
reasonable.
- Currency exchange rates or controls may adversely affect the value of
the Fund's investments.
- The economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession.
- Withholdings and other non-U.S. taxes may decrease the Fund's return.
There may be less publicly available information about non-U.S. markets
and issuers than is available with respect to U.S. securities and issuers.
Non-U.S. companies generally are not subject to accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. The trading markets for most non-U.S. securities
are generally less liquid and subject to greater price volatility than the
markets for comparable securities in the U.S. The markets for securities in
certain emerging markets are in the earliest stages of their development. Even
the markets for relatively widely traded securities in certain non-U.S. markets,
including emerging market countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the U.S. Additionally,
market making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity.
Economies and social and political climates in individual countries may
differ unfavorably from the U.S. Non-U.S. economies may have less favorable
rates of growth of gross domestic product, rates of inflation, currency
valuation, capital reinvestment, resource self-sufficiency and balance of
payments
55
positions. Many countries have experienced substantial, and in some cases
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Unanticipated political or social developments may also affect the
values of the Fund's investments and the availability to the Fund of additional
investments in such countries.
Currency Risk. A portion of the Fund's assets may be quoted or
denominated in non-U.S. currencies. These securities may be adversely affected
by fluctuations in relative currency exchange rates and by exchange control
regulations. The Fund's investment performance may be negatively affected by a
devaluation of a currency in which the Fund's investments are quoted or
denominated. Further, the Fund's investment performance may be significantly
affected, either positively or negatively, by currency exchange rates because
the U.S. dollar value of securities quoted or denominated in another currency
will increase or decrease in response to changes in the value of such currency
in relation to the U.S. dollar.
Sovereign Debt Risk. An investment in debt obligations of non-U.S.
governments and their political subdivisions ("sovereign debt") involves special
risks that are not present in corporate debt obligations. The non-U.S. issuer of
the sovereign debt or the non-U.S. governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due, and the Fund may have limited recourse in the event of a default.
During periods of economic uncertainty, the market prices of sovereign debt may
be more volatile than prices of debt obligations of U.S. issuers. In the past,
certain non-U.S. countries have encountered difficulties in servicing their debt
obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient non-U.S. exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from non-U.S. governments, multilateral agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Liquidity Risk. Some Senior Loans are not readily marketable and may be
subject to restrictions on resale. Senior Loans generally are not listed on any
national securities exchange or automated quotation system and no active trading
market may exist for some of the Senior Loans in which the Fund will invest.
Where a secondary market exists, such market for some Senior Loans may be
subject to irregular trading activity, wide bid/ask spreads and extended trade
settlement periods. Senior Loans that are illiquid may be more difficult to
value or may impair the Fund's ability to realize the full value of its assets
in the event of a voluntary or involuntary liquidation of such assets and thus
may cause a decline in the Fund's net asset value. The Fund has no limitation on
the amount of its assets that may be invested in securities which are not
readily marketable or are subject to restrictions on resale. In certain
situations, the Fund could find it more difficult to sell such securities at
desirable times and/or prices. Most Senior Loans are valued by an independent
pricing service that uses market quotations of investors and traders in Senior
Loans. In other cases, Senior Loans are valued at their fair value in accordance
with procedures approved by the Board of Trustees.
Derivatives Risk. Strategic Transactions, such as the use of derivatives,
have risks, including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of the other party
to the transaction or illiquidity of the derivative instruments. Furthermore,
the ability to
56
successfully use Strategic Transactions depends on the Subadviser's ability to
predict pertinent market movements, which cannot be assured. Thus, the use of
Strategic Transactions may result in losses greater than if they had not been
used, may require the Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the
amount of appreciation the Fund can realize on an investment or may cause the
Fund to hold a security that it might otherwise sell. Additionally, amounts paid
by the Fund as premiums and cash or other assets held in margin accounts with
respect to Strategic Transactions are not otherwise available to the Fund for
investment purposes. Although the Subadviser does not anticipate that Strategic
Transactions will represent a significant component of the Fund's investment
strategy, the Fund does not have a policy limiting the portion of the Fund's
assets that may be subject to such transactions or invested in such instruments.
There are several risks associated with the use of futures contracts and
futures options. A purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. While the Fund may
enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of loss. The degree of imperfection of
correlation depends on circumstances such as variations in market demand for
futures, futures options and the related securities, including technical
influences in futures and futures options trading, and differences between the
securities markets and the securities underlying the standard contracts
available for trading. Further, the Fund's use of futures contracts and options
on futures contracts to reduce risk involves costs and will be subject to the
Subadviser's ability to predict correctly changes in interest rate relationships
or other factors.
Under an interest rate swap or cap agreement (whether entered into in
connection with any preferred shares or other forms of leverage or for portfolio
management purposes), the payment obligations, if any, of the Fund and the
counterparty are netted against each other, resulting in a net payment due
either from the Fund or the counterparty. Depending on whether the Fund would be
entitled to receive net payments from the counterparty on the swap or cap, which
in turn would depend on the general state of short-term interest rates at that
point in time, a default by a counterparty could negatively impact the Fund's
overall performance. In addition, at the time an interest rate swap or cap
transaction reaches its scheduled termination date, there is a risk that the
Fund would not be able to obtain a replacement transaction or that the terms of
the replacement would not be as favorable as on the expiring transaction. If
this occurs, it could have a negative impact on the Fund's performance. If the
Fund fails to maintain a required 200% asset coverage of the liquidation value
of outstanding preferred shares, including the AMPS, or if the Fund loses its
expected rating on any preferred shares, including the AMPS, or fails to
maintain other covenants, the Fund may be required to redeem some or all of the
AMPS. Similarly, the Fund could be required to prepay the principal amount of
any borrowings. Such redemption or prepayment would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of a swap could result in a termination payment by or to the
Fund. Early termination of a cap could result in a termination payment to the
Fund. The Fund intends to maintain in a segregated account cash or liquid
securities having a value at least equal to the Fund's net payment obligations
under any swap transaction, marked to market daily. The Fund will not enter into
interest rate swap or cap transactions having a notional amount that exceeds the
outstanding amount of the Fund's leverage.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the Fund's overall performance. To the extent there is a decline
in interest rates, the value of the interest rate swap or cap could decline, and
could result in a decline in the Fund's net asset
57
value. In addition, if short-term interest rates are lower than the Fund's fixed
rate of payment on the interest rate swap, the swap will reduce the Fund's net
earnings. If, on the other hand, short-term interest rates are higher than the
fixed rate of payment on the interest rate swap, the swap will enhance the
Fund's net earnings. Buying interest rate caps could enhance the Fund's
performance by providing a maximum leverage expense. Buying interest rate caps
could also decrease the Fund's net earnings in the event that the premium paid
by the Fund to the counterparty exceeds the additional amount the Fund would
have been required to pay had it not entered into the cap agreement.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make and any termination payments
potentially owed by the Fund. If the counterparty defaults, the Fund would not
be able to use the anticipated net receipts under the swap or cap to offset the
dividend payments on the Fund's preferred shares or interest payments on
borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of short-term interest rates at that point in time, such a
default could negatively impact the Fund's performance.
Regulatory Risk. To the extent that legislation or federal regulators
that regulate certain financial institutions impose additional requirements or
restrictions with respect to the ability of such institutions to make loans,
particularly in connection with highly leveraged transactions, the availability
of Senior Loans for investment may be adversely affected. In addition, such
legislation could depress the market value of Senior Loans.
Market Disruption Risk. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets. The Fund
cannot predict the effects of similar events in the future on the U.S. economy.
These terrorist attacks and related events, including the war in Iraq, its
aftermath, and continuing occupation of Iraq by coalition forces, have led to
increased short-term market volatility and may have long-term effects on U.S.
and world economies and markets. A similar disruption of the financial markets
could impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the common shares. In particular, junk
bonds and Senior Loans tend to be more volatile than higher rated fixed income
securities so that these events and any actions resulting from them may have a
greater impact on the prices and volatility of junk bonds and Senior Loans than
on higher rated fixed income securities.
Anti-Takeover Provisions Risk. The Fund's Agreement and Declaration of
Trust and By-Laws include provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to change the composition
of its Board of Trustees. Such provisions could limit the ability of
shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. These
provisions include staggered terms of office for the Trustees, advance notice
requirements for shareholder proposals, super-majority voting requirements for
certain transactions with affiliates, open-ending the Fund and a merger,
liquidation, asset sale or similar transaction.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the affairs
of the Fund. The officers of the Fund are responsible for the Fund's operations.
The Trustees and officers of the Fund, together with their principal occupations
and other affiliations during the past five years, are listed in the
58
Statement of Additional Information. Each of the Trustees serves as a Trustee of
each of the U.S. registered investment portfolios for which the Adviser serves
as investment adviser.
INVESTMENT ADVISER AND SUBADVISER
The Fund has contracted with the Adviser to act as its investment adviser.
The Adviser is an indirect subsidiary of UniCredito. The Adviser is part of the
global asset management group providing investment management and financial
services to mutual funds and other clients. As of December 31, 2004, assets
under management by the Adviser and its affiliates were approximately $175
billion worldwide, including over $42 billion in assets under management by the
Adviser. Certain Trustees or officers of the Fund are also directors and/or
officers of certain of UniCredito's subsidiaries, including the Adviser. The
address of the Adviser is 60 State Street, Boston, Massachusetts 02109. The
Adviser has engaged Highland Capital Management, L.P. to act as the Fund's
investment subadviser to manage the Fund's assets. The Subadviser is a Delaware
limited partnership 100% owned by its employees. The Subadviser has one general
partner, Strand Advisors, Inc. Strand Advisors, Inc. is a Delaware corporation.
As of December 31, 2004, the Subadviser had approximately $11.9 billion in
assets under management. The address of the Subadviser is 13455 Noel Road, Suite
1300, Dallas, Texas 75240. The Adviser supervises the Subadviser's investments
on behalf of the Fund, supervises the Fund's compliance program and provides for
the general management of the business affairs of the Fund.
In its capacity as subadviser to the Fund, the Subadviser is responsible
for the selection and on-going monitoring of the assets in the Fund's investment
portfolio. The Subadviser provides the Fund with investment research, advice and
supervision and furnishes the Fund with an investment program consistent with
the Fund's investment objectives and principal investment strategies, subject to
the supervision of the Adviser and Fund's Board of Trustees. The Subadviser,
under the supervision of the Adviser, is responsible for the day-to-day
management of the Fund's portfolio. Except as otherwise provided under
"Subadvisory Agreement" below, the Adviser also maintains books and records with
respect to the Fund's securities transactions, and reports to the Board of
Trustees on the Fund's investments and performance. The Subadviser's expertise
in managing portfolios of Senior Loans and structured finance assets is
particularly suited to the Fund's focus on Senior Loans. The Subadviser has
experience in managing portfolios of syndicated loans, high yield bonds and
distressed investments.
ADVISORY AGREEMENT
Under the terms of the advisory agreement (the "Advisory Agreement"), the
Fund will pay to the Adviser monthly, as compensation for the services rendered
and expenses paid by it, a fee equal on an annual basis to .70% of the Fund's
average daily managed assets. "Managed assets" means the total assets of the
Fund (including any assets attributable to financial leverage that may be
outstanding) minus the sum of the accrued liabilities (other than liabilities
representing financial leverage). The liquidation preference on any preferred
shares, including the AMPS, is not a liability. Because the fee paid to the
Adviser is determined on the basis of the Fund's managed assets, the Adviser's
interest in determining whether to leverage the Fund may differ from the
interests of the Fund. The Board of Trustees intends to monitor the spread
between the dividend yield on any preferred shares and the total return on the
Fund's portfolio. If in the future that spread narrows materially, the Board of
Trustees intends to evaluate whether employing preferred shares as a means of
leverage remains in the best interest of the holders of the common shares. The
Fund's average daily managed assets are determined for the purpose of
calculating the management fee by taking the average of all of the daily
determinations of total assets during a given calendar month. The fees are
payable for each calendar month as soon as practicable after the end of that
month.
59
Under the terms of the Advisory Agreement, the Adviser pays all of the
operating expenses, including executive salaries and the rental of office space,
relating to its services for the Fund, with the exception of the following,
which are to be paid by the Fund: (a) charges and expenses for fund accounting,
pricing and appraisal services and related overhead, including, to the extent
such services are performed by personnel of the Adviser or its affiliates,
office space and facilities and personnel compensation, training and benefits;
(b) the charges and expenses of auditors; (c) the charges and expenses of any
administrator, custodian, transfer agent, plan agent, dividend disbursing agent
and registrar appointed by the Fund; (d) issue and transfer taxes chargeable to
the Fund in connection with securities transactions to which the Fund is a
party; (e) insurance premiums, interest charges, expenses in connection with any
preferred shares, organizational and offering expenses, dues and fees for
membership in trade associations and all taxes and corporate fees payable by the
Fund to federal, state or other governmental agencies; (f) fees and expenses
involved in registering and maintaining registrations of the Fund and/or its
shares with federal regulatory agencies, state or blue sky securities agencies
and foreign jurisdictions, including the preparation of prospectuses and
statements of additional information for filing with such regulatory
authorities; (g) all expenses of shareholders' and Trustees' meetings and of
preparing, printing and distributing prospectuses, notices, proxy statements and
all reports to shareholders and to governmental agencies; (h) charges and
expenses of legal counsel to the Fund and the Board of Trustees; (i)
compensation of those Trustees of the Fund who are not affiliated with or
interested persons of the Adviser or the Fund (other than as Trustees); (j) the
cost of preparing and printing share certificates; (k) interest on borrowed
money, if any; (l) the fees and other expenses of listing the Fund's shares on
the New York Stock Exchange or any other national stock exchange; and (m) any
other expense that the Fund, the Adviser or any other agent of the Fund may
incur (I) as a result of a change in the law or regulations, (II) as a result of
a mandate from the Board of Trustees with associated costs of a character
generally assumed by similarly structured investment companies or (III) that is
similar to the expenses listed above, and that is approved by the Board of
Trustees (including a majority of the Trustees who are not affiliates of the
Adviser) as being an appropriate expense of the Fund. In addition, the Fund will
pay all brokers' and underwriting commissions or other fees chargeable to the
Fund in connection with securities transactions to which the Fund is a party or
the origination of any Senior Loan in which the Fund invests.
The Adviser has agreed for the first three years of the Fund's investment
operations to limit the Fund's total annual expenses (excluding offering costs
for common and preferred shares, interest expense, the cost of defending or
prosecuting any claim or litigation to which the Fund is a party (together with
any amount in judgment or settlement), indemnification expenses or taxes
incurred due to the failure of the Fund to qualify as a regulated investment
company under the Code or any other nonrecurring or non-operating expenses) to
.95% of the Fund's average daily managed assets. The dividend on any preferred
shares is not an expense.
SUBADVISORY AGREEMENT
Under the terms of the subadvisory agreement (the "Subadvisory Agreement")
between the Adviser and the Subadviser, the Subadviser will, among other things,
(a) regularly provide the Fund with investment research, advice and supervision
and furnish continuously an investment program for the Fund; (b) subject to the
supervision of the Adviser, manage the investment and reinvestment of the Fund's
assets; (c) comply with the provisions of the Fund's Agreement and Declaration
of Trust and By-Laws, the 1940 Act, the Investment Advisers Act of 1940, as
amended and the investment objectives, policies and restrictions of the Fund;
(d) not take any action to cause the Fund to fail to comply with the
requirements of Subchapter M of the Code for qualification as a regulated
investment company; (e) comply with any policies, guidelines, procedures and
instructions as the Adviser may from time to time establish; (f) be responsible
for voting proxies and acting on other corporate actions if instructed to do so
by the Board of Trustees or the Adviser; (g) maintain separate books and
detailed
60
records of all matters pertaining to the portion of the Fund's assets advised by
the Subadviser required by Rule 31a-1 under the 1940 Act relating to its
responsibilities provided under the Subadvisory Agreement with respect to the
Fund; and (h) furnish reports to the Trustees and the Adviser.
Under the terms of the Subadvisory Agreement, for its services the
Subadviser is entitled to a subadvisory fee from the Adviser at an annual rate
of .35% the Fund's average daily managed assets. The fee will be paid monthly in
arrears. The Fund does not pay a fee to the Subadviser.
ADMINISTRATION AGREEMENT
The Fund has entered into an administration agreement with the Adviser,
pursuant to which the Adviser will provide certain administrative and accounting
services to the Fund. The Adviser has appointed Princeton Administrators, L.P.
as the sub-administrator to the Fund to perform certain of the Adviser's
administration and accounts obligations to the Fund. Under the administration
agreement, the Fund will pay the Adviser a monthly fee equal to .07% of the
Fund's average daily managed assets up to $500 million and .03% for average
daily managed assets in excess of $500 million. The Adviser, and not the Fund,
is responsible for paying the fees of Princeton Administrators, L.P.
Pursuant to a separate agreement, the Fund may compensate the Adviser for
providing certain legal and accounting services. The compensation is provided
solely as reimbursement for such legal and accounting services provided by the
Adviser to the Fund at cost.
PORTFOLIO MANAGER
Day-to-day management of the Fund's portfolio is the responsibility of
Mark Okada and Joe Dougherty.
Mark Okada -- Mr. Okada has over 19 years of experience in the leveraged
finance market. He is responsible for overseeing the Subadviser's investment
activities for its various funds. Formerly, Mr. Okada served as Manager of Fixed
Income for a subsidiary of Protective Life Insurance Company ("Protective") that
managed Protective's portfolio supporting its guaranteed investment contracts
from 1990 to 1993. He was primarily responsible for the bank loan portfolio and
other risk assets. Protective was one of the first non-bank entrants into the
syndicated loan market. From 1986 to 1990 he served as Vice-President, managing
over $1 billion of high yield bank loans, for Hibernia National Bank. Mr. Okada
is an honors graduate of the University of California Los Angeles with degrees
in Economics and Psychology. He completed his credit training at Mitsui. Mr.
Okada is a Chartered Financial Analyst.
Joe Dougherty -- Mr. Dougherty is a Senior Portfolio Manager at the
Subadviser. Mr. Dougherty heads the Subadviser's retail funds effort and serves
as Senior Vice President of the Subadviser's two NYSE-listed bond funds, which
invest in both investment grade and high yield debt. In this capacity, Mr.
Dougherty oversees investment decisions for the retail funds, alongside several
other Portfolio Managers, and manages the team dedicated to their day-to-day
administration. Prior to his current duties, Mr. Dougherty served as Portfolio
Analyst for the Subadviser from 1998 to 1999. As a Portfolio Analyst, Mr.
Dougherty also helped follow companies within the chemical, retail, supermarket
and restaurant sectors. Prior to joining the Subadviser, Mr. Dougherty served as
an Investment Analyst with Sandera Capital Management from 1997 to 1998.
Formerly, he was a Business Development Manager at Akzo Nobel from 1994 to 1996
and a Senior Accountant at Deloitte and Touche, LLP from 1992 to 1994. He
received a BS in Accounting from Villanova University and an MBA from Southern
Methodist University. Mr. Dougherty is a Chartered Financial Analyst and a
Certified Public Accountant.
61
DESCRIPTION OF AMPS
The following is a brief description of the material terms of AMPS. For
the complete terms of AMPS, please refer to the detailed description of AMPS in
the Statement (Appendix C to the Statement of Additional Information).
GENERAL
The Fund's Agreement and Declaration of Trust authorizes the issuance of
an unlimited number of preferred shares 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 an unlimited
number of Series M7 AMPS, Series W7 AMPS and Series TH7 AMPS. All AMPS will have
a liquidation preference of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared).
The AMPS are preferred shares of beneficial interest that entitle their
holders to receive dividends when, as and if declared by the Board of Trustees,
out of funds legally available therefor, at a rate per annum that may vary for
successive dividend periods for each series of AMPS. The applicable rate for a
particular dividend period for the AMPS will be determined by an auction
conducted on the business day before the start of such dividend period.
Beneficial owners and potential beneficial owners of AMPS may participate in
auctions, although, except in the case of special dividend periods of longer
than 91 days, beneficial owners desiring to continue to hold all of their AMPS
regardless of the applicable rate resulting from auctions need not participate
in order to continue to hold the AMPS. For an explanation of auctions and the
method of determining the applicable rate, see "-- Dividends and Dividend
Periods" below and "The Auction."
The nominee of the Securities Depository is expected to be the sole holder
of record of the AMPS. Accordingly, each purchase of AMPS must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member (as defined below),
to receive dividends, distributions and notices and to exercise voting rights
(if and when applicable) and (ii) the records of the Securities Depository and,
if such purchase is not a member of the Securities Depository, such purchaser's
Agent Member, to evidence its beneficial ownership of the AMPS.
Each series of AMPS will rank on parity with each other and any other
series of preferred shares of the Fund as to the payment of dividends and the
distribution of assets upon liquidation. Each share of AMPS carries one vote on
matters on which AMPS can be voted. When issued and sold, the AMPS will have a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not declared) and will be fully paid and
non-assessable. See "-- Liquidation." The AMPS, when issued, will be fully paid
and non-assessable and have no preemptive, conversion or cumulative voting
rights. The AMPS will not be convertible into common shares or other shares of
beneficial interest of the Fund, and the holders thereof will have no preemptive
rights. The AMPS will not be subject to any sinking fund but will be subject to
redemption at the option of the Fund on any dividend payment date for the AMPS
(except during the initial dividend period and during a Non-Call Period) or such
series at a redemption price generally equal to $25,000 per share plus
accumulated and unpaid dividends. In certain circumstances, the AMPS will be
subject to mandatory redemption by the Fund at a redemption price of $25,000 per
share plus accumulated and unpaid dividends. See "-- Redemption."
62
DIVIDENDS AND DIVIDEND PERIODS
The holders of AMPS will be entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available therefor, cumulative
cash dividends on their AMPS, at the applicable rate determined as set forth
below under "-- Calculation of Dividend Payment," payable on the dates set forth
below. Dividends on the AMPS so declared and payable will be paid in preference
to and in priority over any dividends so declared and payable on the common
shares.
The following is a general description of dividends and rate periods for
the AMPS.
Dividend Periods. The initial dividend period for the AMPS is as set
forth below:
SERIES INITIAL DIVIDEND PERIOD
------ -----------------------
M7..................................................... 8 days
W7..................................................... 10 days
TH7.................................................... 11 days
Any subsequent dividend periods of the Series M7 AMPS, Series W7 AMPS and
Series TH7 AMPS will generally be seven days. The Fund, subject to certain
conditions, may change the length of subsequent dividend periods by designating
them as special dividend periods. See "-- Designation of Special Dividend
Periods" below.
Dividend Payment Dates. Dividends are scheduled to be paid for the AMPS
as follows (each, a Dividend Payment Date):
INITIAL DIVIDEND SUBSEQUENT DIVIDEND
SERIES PAYMENT DATE PAYMENT DAY
------ ---------------- -------------------
M7......................................... April 5, 2005 Tuesday
W7......................................... April 7, 2005 Thursday
TH7........................................ April 8, 2005 Friday
Following the initial Dividend Payment Date, dividends on each series of
AMPS will be payable (i) with respect to any seven-day or any short-term
dividend period of 35 or fewer days, on the next business day following the last
day of the dividend period or (ii) with respect to any short-term dividend
period of more than 35 days and with respect to any long-term dividend period,
monthly on the first business day of each calendar month during such short-term
dividend period or long-term dividend period and on the next business day
following the last day of the dividend period. If dividends are payable on a day
that is not a business day, then dividends will generally be payable on the next
day if such day is a business day or as otherwise specified in the Statement.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository, in accordance with its current
procedures, is expected to distribute dividends received from the Fund in
next-day funds on each Dividend Payment Date to Agent Members. "Agent Members"
are members of, or participants in, the Securities Depository that will act on
behalf of a beneficial owner or a potential beneficial owner of AMPS. These
Agent Members are in turn expected to distribute such dividends to the persons
for whom they are acting as agents. However, each of the current Broker-Dealers
has indicated to the Fund that dividend payments will be available in same-day
funds on each Dividend Payment Date to customers that use such Broker-Dealer or
that Broker-Dealer's designee as Agent Member.
63
If a Dividend Payment Date is not a business day because the New York
Stock Exchange is closed due to an act of God, natural disaster, act of war,
civil or military disturbance, act of terrorism, sabotage, riots or a loss or
malfunction of utilities or communications services, or the dividend payable on
such date can not be paid for any such reason, then:
- the Dividend Payment Date for the affected dividend period will be the
next business day on which the Fund and its paying agent, if any, can
pay the dividend;
- the affected dividend period will end on the day it otherwise would have
ended; and
- the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
Calculation of Dividend Payment. The calculation of cash dividends per
share payable on shares of a series of AMPS (if declared) on any date on which
dividends shall be payable will be computed by (i) multiplying the applicable
rate for shares of such series in effect for such dividend period by a fraction,
the numerator of which will be the number of days in such dividend period or
part thereof that such share was outstanding and for which dividends are payable
on such dividend payment date, and the denominator of which will be 360, (ii)
applying the rate obtained against $25,000, and (iii) rounding the amount to the
nearest cent.
Dividends on shares of each series of AMPS will accumulate from the date
of their original issue, which is March 28, 2005. The initial dividend rate for
the Series M7 AMPS is 3.00%, for Series W7 AMPS is 3.00% and for Series TH7 AMPS
is 3.00%. For each dividend payment period after the initial dividend period,
the dividend rate will be the dividend rate determined at auction, except that
the dividend rate that results from an auction will not be greater than the
maximum applicable rate described below.
Determination of Maximum Applicable Rate. The maximum applicable rate for
any regular dividend period will be the higher of the applicable percentage of
the Reference Rate or the Reference Rate plus the applicable spread. The
Reference Rate will be the applicable LIBOR Rate (as defined below) for a
dividend period of fewer than 365 days or the Treasury Index Rate (as defined
below) for a dividend period of 365 days or more. The applicable percentage and
the applicable spread for any regular dividend period will be determined based
on the credit ratings assigned to the AMPS by Moody's and Fitch on the auction
date for such period (as set forth in the table on the next page). If Moody's
and/or Fitch do not make such rating available, the rate shall be determined by
reference to equivalent ratings issued by a substitute rating agency. In the
case of a special dividend period, (1) the maximum applicable rate will be
specified by the Fund in the notice of special rate period for such dividend
payment period, (2) the applicable percentage and applicable spread will be
determined on the date two business days before the first day of such special
dividend period, and (3) the reference rate will be the applicable LIBOR Rate
for a dividend period of fewer than 365 days or the Treasury Index Rate for a
dividend period of 365 days or more.
The Fund will take all reasonable action necessary to enable Moody's and
Fitch to provide ratings for each series of AMPS. If such ratings are not made
available by Moody's or Fitch, the Fund, after consultation with the lead
Broker-Dealer, initially Merrill Lynch, will select one or more other rating
agencies to act as substitute rating agencies.
The "LIBOR Rate," as described in greater detail in the Statement, is the
applicable London Inter-Bank Offered Rate for deposits in U.S. dollars for the
period most closely approximating the applicable dividend period for a series of
AMPS.
64
The "Treasury Index Rate," as described in greater detail in the
Statement, is the average yield to maturity for certain U.S. Treasury securities
having substantially the same length to maturity as the applicable dividend
period for a series of AMPS.
APPLICABLE PERCENTAGE PAYMENT TABLE
--------------------------------------------------------------------------
CREDIT RATINGS APPLICABLE PERCENTAGE APPLICABLE SPREAD
------------------------------- --------------------- -----------------
MOODY'S FITCH
------------- ----------------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
Assuming the Fund maintains an Aaa/AAA rating on the AMPS, the practical
effect of the different methods used to calculate the maximum applicable rate is
shown in the table below:
MAXIMUM APPLICABLE MAXIMUM APPLICABLE METHOD USED TO
RATE USING THE RATE USING THE DETERMINE THE MAXIMUM
REFERENCE RATE APPLICABLE PERCENTAGE APPLICABLE SPREAD APPLICABLE RATE
-------------- --------------------- ------------------ ---------------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
The Fund's Board of Trustees may amend the maximum applicable rate to
increase the percentage amount by which the reference rate described above is
multiplied, or to increase the spread added to the reference rate, to determine
the maximum applicable rate shown without the vote or consent of the holders of
AMPS, including each series, or any other shareholder of the Fund, but only with
confirmation from each rating agency then rating the AMPS that such action will
not impair such agency's then-current rating of the AMPS, provided that
immediately following any such increase the Fund could meet the Preferred Shares
Basic Maintenance Amount test discussed below under "-- Rating Agency Guidelines
and Asset Coverage."
Prior to each dividend payment date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will result in the cancellation of any auction and
the dividend rate will be the maximum applicable rate until such failure to
deposit is cured or, if not timely cured, a non-payment rate of 300% of the
applicable Reference Rate. The Fund does not intend to establish any reserves
for the payment of dividends.
Restrictions on Dividends and Other Distributions. While any of the AMPS
are outstanding, the Fund, except as provided below, may not declare, pay or set
apart for payment, any dividend or other distribution in respect of its common
shares. In addition, the Fund may not call for redemption or redeem any of its
common shares. However, the Fund is not confined by the above restrictions if:
- immediately after such transaction, the discounted value of the Fund's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the value of the Fund's portfolio would be equal
to or greater than the 1940 Act Preferred Share Asset Coverage (see
"Rating Agency Guidelines and Asset Coverage" below);
65
- full cumulative dividends on each series of AMPS due on or prior to the
date of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
Auction Agent; and
- the Fund has redeemed the full number of AMPS required to be redeemed by
any provision for mandatory redemption contained in the Statement.
The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the payment
of dividends, on a parity with AMPS unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on each series of
AMPS through its most recent dividend payment date. However, when the Fund has
not paid dividends in full upon the shares of each series of AMPS through the
most recent dividend payment date or upon any other class or series of shares of
the Fund ranking, as to the payment of dividends, on a parity with AMPS through
their most recent respective dividend payment dates, the amount of dividends
declared per share on AMPS and such other class or series of shares will in all
cases bear to each other the same ratio that accumulated dividends per share of
AMPS and such other class or series of shares bear to each other.
Designation of Special Dividend Periods. The Fund, at its option and to
the extent permitted by law, by telephonic and written notice (a "request for
special dividend period") to the Auction Agent and to each Broker-Dealer, may
request that the next succeeding dividend period for a series of AMPS will be a
number of days (other than seven days) evenly divisible by seven, and not more
than 364 in the case of a short-term dividend period or one whole year or more
but not greater than five years in the case of a long-term dividend period,
specified in such notice, provided that the Fund may not give a request for
special dividend period (and any such request will be null and void) unless, for
any auction occurring after the initial auction, (i) an auction for shares of
such series is held on the auction date immediately preceding the first day of
such proposed special dividend period, (ii) sufficient clearing bids were made
in such auction, and (iii) full cumulative dividends and any amounts due with
respect to redemptions have been paid in full and so long as the lead
Broker-Dealer, initially Merrill Lynch, shall not have objected to such request.
Such request for special dividend period, in the case of a short-term dividend
period, shall be given on or prior to the second business day but not more than
seven business days prior to an auction date for the AMPS of that series and, in
the case of a long-term dividend period, shall be given on or prior to the
second business day but not more than 28 days prior to an auction date for the
AMPS of that series. Upon receiving such request for special dividend period,
the Broker-Dealers jointly shall determine the optional redemption price of the
AMPS of that series during such special dividend period and the specific
redemption provisions and shall give the Fund and the Auction Agent written
notice (a "response") of such determination by no later than the second business
day prior to such auction date. In making such determination, the Broker-Dealers
will consider (i) existing short-term and long-term market rates and indices of
such short-term and long-term rates, (ii) existing market supply and demand for
short-term and long-term securities, (iii) existing yield curves for short-term
and long-term securities comparable to the AMPS, (iv) industry and financial
conditions, which may affect the AMPS of that series, (v) the investment
objectives of the Fund and (vi) the dividend periods and dividend rates at which
current and potential beneficial owners of the AMPS would likely remain or
become beneficial owners.
After providing the request for special dividend period to the Auction
Agent and each Broker-Dealer as set forth above, the Fund, by no later than the
second business day prior to such auction date, may give a notice (a "notice of
special dividend period") to the Auction Agent, the Securities Depository, each
Broker-Dealer and the rating agencies, which notice will specify the duration of
the special dividend period. The Fund has agreed to provide a copy of such
notice of special dividend period to the applicable rating agencies. The Fund
will not give a notice of special dividend period and, if such notice of special
dividend period was given already, will give telephonic and written notice of
its
66
revocation (a "notice of revocation") to the Auction Agent, each Broker-Dealer,
the Securities Depository and the rating agencies on or prior to the business
day prior to the relevant auction date if (x) either the 1940 Act Preferred
Share Asset Coverage or the Preferred Shares Basic Maintenance Amount is not
satisfied on each of the two business days immediately preceding the business
day prior to the relevant auction date or (y) sufficient funds for the payment
of 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 Auction Date immediately preceding such
dividend payment date. If the Fund is prohibited from giving a notice of special
dividend period as a result of the factors enumerated in clause (x) or (y) above
or if the Fund gives a notice of revocation with respect to a notice of special
dividend period, the next succeeding dividend period will be a seven-day
dividend period. In addition, in the event sufficient clearing bids are not made
in an auction, or if an auction is not held for any reason, the next succeeding
dividend period will be a seven-day dividend period, and the Fund may not again
give a notice of special dividend period (and any such attempted notice will be
null and void) until sufficient clearing bids have been made in an auction with
respect to a seven-day dividend period.
NON-PAYMENT PERIOD AND LATE CHARGE
A "failure to deposit," with respect to shares of a series of AMPS, means
a failure by the Fund to pay to the Auction Agent, not later than 12:00 noon,
New York City time, (A) on the business day next preceding any dividend payment
date for shares of such series, in funds available on such dividend payment date
in the City of New York, New York, the full amount of any dividend (whether or
not earned or declared) to be paid on such dividend payment date on any share of
such series or (B) on the business day next preceding any redemption date in
funds available on such redemption date for shares of such series in the City of
New York, New York, the redemption price to be paid on such redemption date for
any share of such series after notice of redemption is mailed; provided,
however, that the foregoing clause (B) shall not apply to the Fund's failure to
pay the redemption price in respect of AMPS when the related notice of
redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such notice of
redemption. If a failure to deposit occurs with respect to a series of AMPS but,
prior to 12:00 noon, New York City time, on the third business day next
succeeding the date on which such failure to deposit occurred, such failure to
deposit shall have been cured and the Fund shall have paid to the Auction Agent
a late charge ("Late Charge") equal to the sum of (1) if such failure to deposit
consisted of the failure timely to pay to the Auction Agent the full amount of
dividends with respect to any dividend period of the shares of such series, an
amount computed by multiplying (x) 300% of the Reference Rate for the dividend
period during which such failure to deposit occurs on the dividend payment date
for such dividend period by (y) a fraction, the numerator of which shall be the
number of days for which such failure to deposit has not been cured (including
the day such failure to deposit occurs and excluding the day such failure to
deposit is cured) and the denominator of which shall be 360, and applying the
rate obtained against the aggregate liquidation preference of the outstanding
shares of such series and (2) if such failure to deposit consisted of the
failure timely to pay to the Auction Agent the redemption price of the shares,
if any, of such series for which notice of redemption has been mailed by the
Fund, an amount computed by multiplying (x) 300% of the Reference Rate for the
dividend period during which such failure to deposit occurs on the redemption
date by (y) a fraction, the numerator of which shall be the number of days for
which such failure to deposit is not cured (including the day such failure to
deposit occurs and excluding the day such failure to deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against the
aggregate liquidation preference of the outstanding shares of such series to be
redeemed, then no auction will be held in respect of shares of such series for
the subsequent dividend period thereof and the dividend rate for shares of such
series for such subsequent
67
dividend period will be the maximum applicable rate for shares of such series on
the auction date for such subsequent dividend period. If any failure to deposit
shall have occurred with respect to the AMPS of such series during any dividend
period thereof, and, prior to 12:00 noon, New York City time, on the third
business day next succeeding the date on which such failure to deposit occurred,
such failure to deposit shall not have been cured or the Fund shall not have
paid the applicable Late Charge to the Auction Agent, no auction will be held in
respect of AMPS of such series for the first subsequent dividend period
thereafter (or for any dividend period thereafter to and including the dividend
period during which (1) such failure to deposit is cured and (2) the Fund pays
the applicable Late Charge to the Auction Agent (the condition set forth in this
clause (2) to apply only in the event Moody's is rating such shares at the time
the Fund cures such failure to deposit), in each case no later than 12:00 noon,
New York City time, on the fourth business day prior to the end of such dividend
period) (a "non-payment period") and the dividend rate for shares of such series
for each such subsequent dividend period shall be a rate per annum (the
"non-payment period rate") equal to 300% of the applicable Reference Rate,
provided that the Board of Trustees shall have the authority to adjust, modify,
alter or change from time to time such initial rate if the Board of Trustees
determines and the rating agencies (or any substitute rating agency) advise the
Fund in writing that such adjustment, modification, alteration or change will
not adversely affect the then-current ratings on the AMPS.
REDEMPTION
Mandatory Redemption. The Fund is required to maintain (a) a discounted
value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) asset coverage of at least 200% with respect to
senior securities which are equity shares, including AMPS ("1940 Act Preferred
Share Asset Coverage"). Eligible portfolio securities for purposes of the
Preferred Shares Basic Maintenance Amount will be determined from time to time
by the rating agencies then rating the AMPS. If the Fund fails to maintain such
asset coverage amounts and does not timely cure such failure in accordance with
the requirements of the rating agencies that rate the AMPS, the Fund must redeem
all or a portion of the AMPS. This mandatory redemption will take place on a
date that the Board of Trustees specifies out of legally available funds, in
accordance with the Agreement and Declaration of Trust, the Statement and
applicable law, at the redemption price of $25,000 per share plus accumulated
but unpaid dividends (whether or not declared) to (but not including) the date
fixed for redemption. The number of AMPS that must be redeemed in order to cure
such failure will be allocated pro rata among the outstanding AMPS. The
mandatory redemption will be limited to the number of AMPS necessary, after
giving effect to such redemption, in order that the discounted value of the
Fund's portfolio equals or exceeds the Preferred Shares Basic Maintenance
Amount, and the value of the Fund's portfolio equals or exceeds the 1940 Act
Preferred Share Asset Coverage. In determining the number of AMPS required to be
redeemed in accordance with the foregoing, the Fund will allocate the number of
shares required to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Share Asset Coverage, as the case may be, pro
rata among each series of AMPS and any other preferred shares of the Fund
subject to redemption or retirement. If fewer than all outstanding shares of any
series are, as a result, to be redeemed, the Fund may redeem such shares by lot
or other method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the 1940 Act and
Delaware law, the Fund at its option may, without the consent of the holders of
AMPS, redeem AMPS having a dividend period of one year or less, in whole or in
part, on the business day after the last day of such dividend period upon not
less than 15 calendar days' and not more than 40 calendar days' prior notice.
The optional redemption price per share will 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 plus the premium, if any,
resulting from the designation of a Premium Call Period. AMPS having a dividend
68
period of more than one year are redeemable at the option of the Fund, in whole
or in part, prior to the end of the relevant dividend period, subject to any
specific redemption provisions, which may include the payment of redemption
premiums to the extent required under any applicable specific redemption
provisions. The Fund will not make any optional redemption unless, after giving
effect thereto, (i) the Fund has available certain deposit securities with
maturities or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to holders of AMPS by reason of the redemption of AMPS
on such date fixed for the redemption and (ii) the Fund has eligible assets with
an aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount. Notwithstanding the foregoing, AMPS may not be redeemed at
the option of the Fund unless all dividends in arrears on the outstanding AMPS,
including all outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment. This would not prevent the
lawful purchase or exchange offer for AMPS made on the same terms to holders of
all outstanding preferred shares.
LIQUIDATION
If the Fund is liquidated, the holders of any series of outstanding AMPS
will receive the liquidation preference on such series, plus all accumulated but
unpaid dividends, before any payment is made to the holders of common shares.
The holders of AMPS will be entitled to receive these amounts from the assets of
the Fund available for distribution to its shareholders. In addition, the rights
of holders of AMPS to receive these amounts are subject to the rights of holders
of any series or class of shares, including other series of preferred shares,
ranking on a parity with the AMPS with respect to the distribution of assets
upon liquidation of the Fund. After the payment to the holders of AMPS of the
full preferential amounts as described, the holders of AMPS will have no right
or claim to any of the remaining assets of the Fund.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Fund does not include:
- the sale of all or substantially all the property or business of the
Fund;
- the merger or consolidation of the Fund into or with any other business
trust or corporation; or
- the merger or consolidation of any other business trust or corporation
into or with the Fund.
In addition, none of the foregoing would result in the Fund being required
to redeem any AMPS if after such transaction the Fund continued to comply with
the rating agency guidelines and asset coverage ratios.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under guidelines of Moody's and Fitch to maintain
assets having in the aggregate a discounted value at least equal to the
Preferred Shares Basic Maintenance Amount. Moody's and Fitch have each
established separate guidelines for calculating discounted value. To the extent
any particular portfolio holding does not satisfy a rating agency's guidelines,
all or a portion of the holding's value will not be included in the rating
agency's calculation of discounted value. The Moody's and Fitch guidelines also
impose certain diversification requirements on the Fund's portfolio. The Moody's
and Fitch guidelines do not impose any limitations on the percentage of the
Fund's assets that may be invested in holdings not eligible for inclusion in the
calculation of the discounted value of the Fund's portfolio. The amount of
ineligible 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 Preferred Shares Basic
Maintenance Amount is the sum of (a) the aggregate
69
liquidation preference of the AMPS then outstanding, together with the aggregate
liquidation preference on any other series of preferred shares (plus redemption
premium, if any), and (b) certain accrued and projected dividend and other
payment obligations of the Fund.
The Fund is also required under the 1940 Act to maintain the 1940 Act
Preferred Share Asset Coverage. The Fund's 1940 Act Preferred Share Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required 1940 Act Preferred Share
Asset Coverage amount of 200% may be increased or decreased if the 1940 Act is
amended. Based on the composition of the portfolio of the Fund and market
conditions as of March 11, 2005, the 1940 Act Preferred Share Asset Coverage
with respect to all of the Fund's preferred shares, assuming the issuance on
that date of all AMPS offered hereby and giving effect to the deduction of
related sales load and related offering costs estimated at approximately
$310,000 would have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $700,642,390
---------------------------------------- = ------------ = 299%
Senior securities representing $234,500,000
indebtedness plus liquidation value of
the preferred shares
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio at least equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Share Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the AMPS, the Fund will be required to redeem Preferred Shares as
described under "Redemption -- Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or Fitch. Failure to adopt any
such modifications, however, may result in a change in the ratings assigned to
the AMPS or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the AMPS may, at any time, change or withdraw any such
rating. The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions which have been
adopted by the Fund pursuant to the rating agency guidelines in the event such
rating agency is no longer rating the AMPS or the Fund receives written
confirmation from Moody's or Fitch, as the case may be, that any such amendment,
alteration or repeal would not impair the rating then assigned to the AMPS.
As recently described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the AMPS is not a recommendation to purchase, hold or
sell those shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of AMPS will be able to
sell such shares in an auction or otherwise. The rating is based on current
information furnished to Moody's and Fitch by the Fund and the Adviser and
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
The common shares have not been rated by a nationally recognized statistical
rating organization.
The rating agency's guidelines will apply to the AMPS only so long as the
rating agency is rating the shares. The Fund will pay certain fees to Moody's
and Fitch for rating the AMPS.
70
VOTING RIGHTS
Except as otherwise provided in this prospectus or as otherwise required
by law, holders of AMPS will have equal voting rights with holders of common
shares and any other preferred shares (one vote per share) and will vote
together with holders of common shares and any preferred shares as a single
class.
Holders of outstanding preferred shares, including AMPS, voting as a
separate class, are entitled to elect two of the Fund's Trustees. The remaining
Trustees are elected by holders of common shares and preferred shares, including
AMPS, voting together as a single class. In addition, if at any time dividends
(whether or not earned or declared) on outstanding preferred shares, including
AMPS, are due and unpaid in an amount equal to two full years of dividends, and
sufficient cash or specified securities have not been deposited with the Auction
Agent for the payment of such dividends, then, the sole remedy of holders of
outstanding preferred shares, including AMPS, is that the number of Trustees
constituting the Board will be automatically increased by the smallest number
that, when added to the two Trustees elected exclusively by the holders of
preferred shares, including AMPS, as described above, would constitute a
majority of the Board. The holders of preferred shares, including AMPS, will be
entitled to elect that smallest number of additional Trustees at a special
meeting of shareholders as soon as possible and at all subsequent meetings at
which Trustees are to be elected. 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 AMPS, the special voting rights
stated above will cease, and the terms of office of the additional Trustees
elected by the holders of preferred shares, including AMPS, will automatically
terminate.
As long as any AMPS are outstanding, the Fund will not, without the
affirmative vote or consent of the holders of at least a majority of the AMPS
outstanding at the time (voting together as a separate class):
(a) authorize, create or issue any class or series of shares ranking prior
to or on a parity with the AMPS with respect to payment of dividends
or the distribution of assets on dissolution, liquidation or winding
up the affairs of the Fund, or authorize, create or issue additional
shares of any series of AMPS or any other preferred shares, unless, in
the case of preferred shares on a parity with the AMPS, the Fund
obtains written confirmation from Moody's (if Moody's is then rating
preferred shares), Fitch (if Fitch is then rating preferred shares) or
any substitute rating agency (if any such substitute rating agency is
then rating preferred shares) that the issuance of a class or series
would not impair the rating then assigned by such rating agency to the
AMPS and the Fund continues to comply with Section 13 of the 1940 Act,
the 1940 Act Preferred Share Asset Coverage requirements and the
Preferred Shares Basic Maintenance Amount requirements, in which case
the vote or consent of the holders of the AMPS is not required;
(b) amend, alter or repeal the provisions of the Agreement and Declaration
of Trust, or the Statement, by merger, consolidation or otherwise, so
as to adversely affect any preference, right or power of the AMPS or
holders of AMPS; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of AMPS will be deemed
to affect such preferences, rights or powers only if the terms of such
division adversely affect the holders of AMPS and (iii) the
authorization, creation and issuance of classes or series of shares
ranking junior to the AMPS with respect to the payment of dividends
and the distribution of assets upon
71
dissolution, liquidation or winding up of the affairs of the Fund will
be deemed to affect such preferences, rights or powers only if Moody's
or Fitch is then rating the AMPS and such issuance would, at the time
thereof, cause the Fund not to satisfy the 1940 Act Preferred Share
Asset Coverage or the Preferred Shares Basic Maintenance Amount;
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company;
(d) amend the provisions of the Agreement and Declaration of Trust, which
provide for the classification of the Board of Trustees of the Fund
into three classes, each with a term of office of three years with
only one class of Trustees standing for election in any year; or
(e) approve any reorganization (as such term is used in the 1940 Act)
adversely affecting the AMPS.
So long as any shares of the AMPS are outstanding, the Fund shall not,
without the affirmative vote or consent of the holders of at least 66 2/3% of
the AMPS outstanding at the time, in person or by proxy, either in writing or at
a meeting, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
To the extent permitted under the 1940 Act, the Fund will not approve any
of the actions set forth in (a) or (b) above which adversely affects the rights
expressly set forth in the Agreement and Declaration of Trust, or the Statement,
of a holder of shares of a series of preferred shares differently than those of
a holder of shares of any other series of preferred shares without the
affirmative vote or consent of the holders of at least a majority of the shares
of each series adversely affected. Unless a higher percentage is provided for
under the Agreement and Declaration of Trust, or the Statement, the affirmative
vote of the holders of a majority of the outstanding AMPS, voting together as a
single class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act. However, to the
extent permitted by the Agreement and Declaration of Trust, or the Statement, no
vote of holders of common shares, either separately or together with holders of
preferred shares as a single class, is necessary to take the actions
contemplated by (a) and (b) above. The holders of common shares will not be
entitled to vote in respect of such matters unless, in the case of the actions
contemplated by (b) above, the action would adversely affect the contract rights
of the holders of common shares expressly set forth in the Agreement and
Declaration of Trust.
The foregoing voting provisions will not apply with respect to AMPS if, at
or prior to the time when a vote is required, such shares have been (i) redeemed
or (ii) called for redemption and sufficient funds have been deposited in the
Fund to effect such redemption.
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of AMPS for each
dividend period after the initial dividend period will be the rate that results
from an auction conducted as set forth in the Statement, the material terms of
which are summarized below. In such an auction, persons determine to hold or
offer to sell or, based on dividend rates bid by them, offer to purchase or sell
shares of a series of AMPS. See the Statement
72
included as Appendix C in the statement of additional information for a more
complete description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the Auction Agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the Auction Agent will follow
the auction procedures to determine the applicable rate for shares of each
series of AMPS, so long as the applicable rate for shares of such series of AMPS
is to be based on the results of an auction.
The Auction Agent will act 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 shall have been negligent in ascertaining the
pertinent facts. Pursuant to the auction agency agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection with
the performance of its duties under such agreement.
The Auction Agent may terminate the auction agency agreement upon notice
to the Fund no earlier than 60 days after delivery of said notice. If the
Auction Agent should resign or its appointment is terminated during any period
that any AMPS are outstanding, 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 removal, the Fund has entered into a
replacement agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one
or more Broker-Dealers. The Auction Agent will enter into agreements with
several Broker-Dealers selected by the Fund, which provide for the participation
of those Broker-Dealers in auctions for AMPS.
The Auction Agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge: (i) for any seven-day dividend
period, at the annual rate of 1/4 of 1% of the liquidation preference (such
liquidation preference being $25,000 per share) of the AMPS held by a
Broker-Dealer's customer upon settlement in an auction (equal to $62.50 per AMPS
per year) and (ii) for any special dividend period, as determined by mutual
consent of the Fund and any such Broker-Dealer or Broker-Dealers and which shall
be based upon a selling concession that would be applicable to an underwriting
of fixed or variable rate preferred shares with a similar fixed maturity or
variable rate dividend period, respectively, at the commencement of the dividend
period with respect to such auction. This service charge applies to AMPS held on
account of the Broker-Dealer's clients as well as to AMPS held for the
Broker-Dealer's own account. A Broker-Dealer may share a portion of any such
fees with non-participating broker-dealers that submit orders to the
Broker-Dealer for an auction that are placed by that Broker-Dealer at such
auction.
The Fund may request that the Auction Agent terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after termination of the
agreement.
AUCTION PROCEDURES
The following is a brief summary of the material terms of the procedures
to be used in conducting auctions. This summary is qualified by reference to the
Auction Procedures set forth in the
73
Statement, which is attached as Appendix C to the statement of additional
information. The settlement procedures to be used with respect to auctions are
set forth in Appendix D to the statement of additional information.
Prior to the submission deadline on each auction date for shares of a
series of AMPS, each customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of AMPS or
a Broker-Dealer that holds AMPS for its own account may submit the following
types of orders with respect to shares of such series of AMPS to that Broker-
Dealer:
1. Hold Order -- indicating its desire to hold shares of such series
without regard to the applicable rate for the next dividend period.
2. Bid -- indicating its desire to purchase or hold the indicated number
of shares of such series at $25,000 per share if the applicable rate
for shares of such series for the next dividend period is not less than
the rate specified in the bid. A bid order by an existing holder will
be deemed an irrevocable offer to sell shares of such series at $25,000
per share if the applicable rate for shares of such series for the next
dividend period is less than the rate or spread specified in the bid.
3. Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the applicable rate for shares of
such series for the next dividend period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to different shares of a series of AMPS then held by
the beneficial owner. A beneficial owner for shares of such series that submits
its bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the maximum applicable rate for shares of such series on the auction
date will be treated as having submitted a sell order to its Broker-Dealer. A
beneficial owner of shares of such series that fails to submit an order to its
Broker-Dealer with respect to such shares will ordinarily be deemed to have
submitted a hold order with respect to such shares of such series to its
Broker-Dealer. However, if a beneficial owner of shares of such series fails to
submit an order with respect to such shares of such series to its Broker-Dealer
for an auction relating to a special dividend period of more than 91 days such
beneficial owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for purposes of such offer, a potential
holder as discussed below.
A potential beneficial owner is either a customer of a Broker-Dealer that
is not a beneficial owner of a series of AMPS 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. A potential beneficial
owner may submit bids to its Broker-Dealer in which it offers to purchase shares
of such series at $25,000 per share if the applicable rate for shares of such
series for the next dividend period is not less than the specified rate in such
bid. A bid placed by a potential holder of shares of such series specifying a
rate higher than the maximum rate for shares of such 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 holders to the Auction Agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares
74
subject to orders submitted to them by potential beneficial owners. However,
neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's
failure to comply with these Auction Procedures. 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 the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the Auction Agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A Broker-Dealer may also submit orders to the Auction Agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Fund. If a Broker-Dealer submits an order for its own account
in any auction, it may have knowledge of orders placed through it in that
auction and therefore have an advantage over other bidders, but such
Broker-Dealer would not have knowledge of orders submitted by other
Broker-Dealers in that auction. As a result of bidding by the Broker-Dealer in
an auction, the auction rate may be higher or lower than the rate that would
have prevailed had the Broker-Dealer not bid.
There are sufficient clearing bids for shares of a series in an auction if
the number of shares of such series subject to bids submitted or deemed
submitted to the Auction Agent by Broker-Dealers for potential holders with
rates or spreads equal to or lower than the maximum applicable rate for such
series is at least equal to or exceeds the sum of the number of shares of such
series subject to sell orders and the number of shares of such series subject to
bids specifying rates or spreads higher than the maximum applicable rate for
such series submitted or deemed submitted to the Auction Agent by Broker-Dealers
for existing holders of such series. If there are sufficient clearing bids for
shares of a series, the applicable rate for shares of such series for the next
succeeding dividend period thereof will be the lowest rate specified in the
submitted bids which, taking into account such 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 such
series available for purchase in the auction.
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next dividend period will be the maximum applicable rate
on the auction date. If the Fund has declared a special dividend period and
there are not sufficient clearing bids, the election of a special dividend
period will not be effective and the applicable rate for the next rate period
will be the same as during the current dividend period. If there are not
sufficient clearing bids, beneficial owners of AMPS that have submitted or are
deemed to have submitted sell orders may not be able to sell in the auction all
shares subject to such sell orders. If all of the applicable outstanding AMPS
are the subject of submitted hold orders, then the dividend period following the
auction will automatically be the same length as the minimum dividend period and
the applicable rate for the next dividend period will be 90% of the Reference
Rate.
A Broker-Dealer may bid in an auction in order to prevent what would
otherwise be (i) a failed auction, (ii) an "all-hold" auction or (iii) an
applicable rate that the Broker-Dealer believes, in its sole discretion, does
not reflect the market rate for the AMPS at the time of the auction. A
Broker-Dealer, may, but is not obligated to, advise beneficial owners of AMPS
that the applicable rate that would apply in an "all-hold" auction may be lower
than the rate that would apply if owners submit bids and such advice, if given,
may facilitate the submission of bids by owners that would avoid the occurrence
of an "all-hold" auction.
The auction procedures include a pro rata allocation of shares for
purchase and sale which may result in an existing holder continuing to hold or
selling, or a potential holder purchasing, a number of shares of a series of
AMPS that is different than the number of shares of such series specified in its
75
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
(which is 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 DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same day funds.
If an auction date is not a business day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services, or the Auction Agent is
not able to conduct an auction in accordance with the auction procedures for any
such reason, then the auction rate for the next dividend period will be the
auction rate determined on the previous auction date.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding shares of AMPS of any series and
three current holders. The three current holders and three potential holders
submit orders through broker-dealers at the auction:
Current Holder A............ Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate is 500 shares
less than 4.1%
Current Holder B............ Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Holder C............ Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares if auction rate is 200 shares
less than 3.9%
Potential Holder D.......... Wants to buy 200 shares Places order to buy at or above
4.0%
Potential Holder E.......... Wants to buy 300 shares Places order to buy at or above
3.9%
Potential Holder F.......... Wants to buy 200 shares Places order to buy at or above
4.1%
The lowest dividend rate that will result in all 1,000 AMPS in the above
example continuing to be held is 4.0% (the offer by D). Therefore, the dividend
rate will be 4.0%. Current holders B and C will continue to own their shares.
Current holder A will sell its shares because A's dividend rate bid was higher
than the dividend rate. Potential holder D will buy 200 shares and potential
holder E will buy 300 shares because their bid rates were at or below the
dividend rate. Potential holder F will not buy any shares because its bid rate
was above the dividend rate.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., New York City time, on each auction date, or such
other time on the auction date as may be specified by the Auction Agent (the
"submission deadline"), each Broker-Dealer will submit to the Auction Agent in
writing or through the Auction Agent's auction processing system all orders
obtained by it for the auction for a series of AMPS to be conducted on such
auction date, designating itself (unless otherwise permitted by the Fund) as the
existing holder or potential holder in respect of the AMPS subject to such
orders. 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 for any auction date, shall be irrevocable.
76
If the rate per annum specified in any bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of one-percent. If
one or more orders of an existing holder are submitted to the Auction Agent and
such orders cover in the aggregate more than the number of outstanding shares of
AMPS held by such existing holder, such orders will be considered valid in the
following order of priority:
(i) any hold order will be considered valid up to and including the
number of outstanding AMPS held by such existing holder, provided
that if more than one hold order is submitted by such existing
holder and the number of AMPS subject to such hold orders exceeds
the number of outstanding AMPS held by such existing holder, the
number of AMPS subject to each of such hold orders will be reduced
pro rata so that such hold orders, in the aggregate, will cover
exactly the number of outstanding AMPS held by such existing holder;
(ii) any bids will be considered valid, in the ascending order of their
respective rates per annum if more than one bid is submitted by such
existing holder, up to and including the excess of the number of
outstanding AMPS held by such existing holder over the number of
outstanding AMPS subject to any hold order referred to in clause (i)
above (and if more than one bid submitted by such existing holder
specifies the same rate per annum and together they cover more than
the remaining number of shares that can be the subject of valid bids
after application of clause (i) above and of the foregoing portion
of this clause (ii) to any bid or bids specifying a lower rate or
rates per annum, the number of shares subject to each of such bids
will be reduced pro rata so that such bids, in the aggregate, cover
exactly such remaining number of outstanding shares); and the number
of outstanding shares, if any, subject to bids not valid under this
clause (ii) shall be treated as the subject of a bid by a potential
holder; and
(iii) any sell order will be considered valid up to and including the
excess of the number of outstanding AMPS held by such existing
holder over the sum of the number of AMPS subject to hold orders
referred to in clause (i) above and the number of AMPS subject to
valid bids by such existing holder referred to in clause (ii) above;
provided that, if more than one sell order is submitted by any
existing holder and the number of AMPS subject to such sell orders
is greater than such excess, the number of AMPS subject to each of
such sell orders will be reduced pro rata so that such sell orders,
in the aggregate, will cover exactly the number of AMPS equal to
such excess.
If more than one bid of any potential holder is submitted in any auction,
each bid submitted in such auction will be considered a separate bid with the
rate per annum and number of AMPS therein specified.
NOTIFICATION OF RESULTS AND SETTLEMENT
The Auction Agent will advise each Broker-Dealer who submitted a bid or
sell order in an auction whether such bid or sell order was accepted or rejected
in whole or in part and of the applicable rate for the next dividend period for
the related AMPS by telephone or through the Auction Agent's auction processing
system at approximately 3:00 p.m., New York City time, on the auction date for
such auction. Each such Broker-Dealer that submitted an order for the account of
a customer then will advise such customer whether such bid or sell order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling AMPS as a result of the auction and will advise each
customer purchasing or selling AMPS to give instructions to its agent member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor as appropriate. If a
customer selling AMPS as a result of an auction fails to instruct
77
its agent member to deliver such shares, the Broker-Dealer that submitted such
customer's bid or sell order will instruct such agent member to deliver such
shares against payment therefor. Each Broker-Dealer that submitted a hold order
in an auction on behalf of a customer also will advise such customer of the
applicable rate for the next dividend period for the AMPS. The Auction Agent
will record each transfer of AMPS on the record book of existing holders to be
maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
day after each auction date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective agent
members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of AMPS as determined in such auction.
Purchasers will make payment through their agent members in same-day funds to
the Securities Depository against delivery through their agent members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment in same-day funds. If the procedures
of the Securities Depository applicable to AMPS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the AMPS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the Auction
Agent against delivery of such certificates.
If any existing holder selling AMPS in an auction fails to deliver such
AMPS, the Broker-Dealer of any person that was to have purchased AMPS in such
auction may deliver to such person a number of whole AMPS that is less than the
number of AMPS that otherwise was to be purchased by such person. In such event,
the number of AMPS to be so delivered will be determined by such Broker-Dealer.
Delivery of such lesser number of AMPS will constitute good delivery. Each
Broker-Dealer Agreement also will provide that neither the Fund nor the Auction
Agent will have responsibility or liability with respect to the failure of a
beneficial owner, potential beneficial owner or their respective agent members
to deliver AMPS or to pay for AMPS purchased or sold pursuant to an auction or
otherwise.
SECONDARY MARKET TRADING AND TRANSFERS OF AMPS
The Broker-Dealers are expected to maintain a secondary trading market in
AMPS outside of auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that any secondary trading
market in AMPS will provide owners with liquidity of investment. The AMPS will
not be registered on any stock exchange or on the Nasdaq National Market.
Investors who purchase AMPS in an auction (particularly if the Fund has
declared a special dividend period) should note that because the dividend rate
on such shares will be fixed for the length of that dividend period, the value
of such shares may fluctuate in response to the changes in interest rates, and
may be more or less than their original cost if sold on the open market in
advance of the next auction thereof, depending on market conditions. In
addition, a Broker-Dealer may, in its own discretion, decide to sell AMPS in the
secondary trading market to investors at any time and at any price, including at
prices equivalent to, below or above the par value of the AMPS.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of AMPS only in whole shares and only:
- pursuant to a bid or sell order placed with the Auction Agent in
accordance with the auction procedures;
- to a Broker-Dealer; or
- to such other persons as may be permitted by the Fund; provided,
however, that a sale, transfer or other disposition of AMPS from a
customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or
78
another customer of that Broker-Dealer shall not be deemed to be a
sale, transfer or other disposition if such Broker-Dealer remains the
existing holder of the shares; and in the case of all transfers other
than pursuant to auctions, the Broker-Dealer (or other person, if
permitted by the Fund) to whom such transfer is made will advise the
Auction Agent of such transfer.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of AMPS of the Fund. This discussion addresses only U.S. federal
income tax consequences to U.S. shareholders that hold their shares as capital
assets and does not address all of the U.S. federal income tax consequences that
may be relevant to particular shareholders in light of their individual
circumstances. This discussion also does not address the tax consequences to
shareholders who are subject to special rules, including, without limitation,
banks and financial institutions, insurance companies, dealers in securities or
foreign currencies, foreign shareholders, shareholders who hold their shares as
or in a hedge against currency risk, a constructive sale, or a conversion
transaction, shareholders who are subject to the alternative minimum tax, or
tax-exempt or tax-deferred plans, accounts, or entities. In addition, the
discussion does not address any state, local, or foreign tax consequences, and
it does not address any U.S. federal tax consequences other than U.S. federal
income tax consequences. The discussion reflects applicable tax laws of the
United States as of the date of this prospectus, which tax laws may be changed
or subject to new interpretations by the courts, Treasury or the Internal
Revenue Service (the "IRS") retroactively or prospectively. No attempt is made
to present a detailed explanation of all U.S. federal income tax concerns
affecting the Fund and its shareholders, and the discussion set forth herein
does not constitute tax advice. Investors are urged to consult their own tax
advisers to determine the specific tax consequences to them of investing in the
Fund, including the applicable federal, state, local and foreign tax
consequences to them and the effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code and to comply with
applicable distribution requirements so that it generally will not pay U.S.
federal income tax on income and capital gains distributed to shareholders. In
order to qualify as a regulated investment company, which qualification the
following discussion assumes, the Fund must satisfy certain tests regarding the
sources of its income and the diversification of its assets. If the Fund
qualifies as a regulated investment company and, for each taxable year, it
distributes to its shareholders an amount equal to or exceeding the sum of (i)
90% of its "investment company taxable income" as that term is defined in the
Code (which includes, among other things, dividends, taxable interest, and the
excess of any net short-term capital gains over net long-term capital losses, as
reduced by certain deductible expenses) without regard to the deduction for
dividends paid and (ii) 90% of the excess of its gross tax-exempt interest over
certain disallowed deductions, the Fund generally will be relieved of U.S.
federal income tax on any income of the Fund, including "net capital gain" (the
excess of net long-term capital gain over net short-term capital loss),
distributed to shareholders. However, if the Fund meets such distribution
requirements but chooses to retain some portion of investment company taxable
income or net capital gain, it generally will be subject to U.S. federal income
tax at regular corporate rates on the amount retained. The Fund intends to
distribute at least annually all or substantially all of its investment company
taxable income, net tax exempt interest and net capital gain. If for any taxable
year the Fund did not qualify as a regulated investment company, it would be
treated as a corporation subject to U.S. federal income tax thereby subjecting
any income earned by the Fund to tax at the corporate level and, when such
income is distributed, to a further tax at the shareholder level.
79
Under the Code, the Fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gain
net income if it fails to meet certain distribution requirements with respect to
each calendar year. The Fund intends to make distributions in a timely manner
and accordingly does not expect to be subject to the excise tax, but there can
be no assurance that the Fund's distributions will be sufficient to avoid this
tax entirely.
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund intends to
take the position that under present law the AMPS will constitute stock of the
Fund and distributions with respect to the AMPS (other than distributions in
redemption of the AMPS that are treated as exchanges under Section 302(b) of the
Code) will constitute dividends to the extent of the Fund's current or
accumulated earnings and profits as calculated for U.S. federal income tax
purposes. This view relies in part on a published ruling of the IRS stating that
certain preferred stock similar in many material respects to the AMPS represents
equity. It is possible, however, that the IRS might take a contrary position
asserting, for example, that the AMPS constitute debt of the Fund. If this
position were upheld, the discussion of the treatment of distributions below
would not apply. Instead distributions by the Fund to holders of AMPS would
constitute interest, whether or not such distributions exceeded the earnings and
profits of the Fund, would be included in the income of the recipient and would
be taxed as ordinary income.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared.
In general, assuming the Fund has sufficient current or accumulated
earnings and profits, dividends from investment company taxable income are
taxable as ordinary income and dividends from net capital gain that are
designated as capital gain dividends are taxable as long-term capital gains for
U.S. federal income tax purposes without regard to the length of time the
shareholder has held shares of the Fund. Since the Fund's income is derived
primarily from interest, dividends of the Fund from its investment company
taxable income generally will not constitute "qualified dividend income" for
federal income tax purposes and thus will not be eligible for the favorable
federal long-term capital gain tax rates on qualified dividend income. Capital
gain dividends distributed by the Fund to individual shareholders generally will
qualify for the maximum 15% U.S. federal income tax rate on long-term capital
gains. Under current law, the maximum 15% U.S. federal income tax rate on
long-term capital gains will cease to apply to taxable years beginning after
December 31, 2008.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in its shares and any such
amount in excess of that basis will be treated as gain from the sale of shares,
as discussed below. The U.S. federal income tax status of all distributions will
be reported to shareholders annually.
If the Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
80
The IRS has taken the position that if a regulated investment company has
two or more classes of shares, it must designate distributions made to each
class in any year as consisting of no more than such class's proportionate share
of particular types of income, including ordinary income and capital gains. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares and AMPS are
outstanding, the Fund intends to designate distributions made to the classes of
particular types of income in accordance with each such class's proportionate
share of such income. The Fund will designate dividends qualifying as capital
gain dividends and other taxable dividends in a manner that allocates such
income between the holders of common shares and AMPS in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law.
Sales and other dispositions of the Fund's shares generally are taxable
events for shareholders that are subject to tax. Shareholders should consult
their own tax advisers with reference to their individual circumstances to
determine whether any particular transaction in the Fund's shares is properly
treated as a sale for tax purposes (including a redemption of AMPS), as the
following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if shares of the Fund are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares
sold. Such gain or loss generally will be treated as long-term gain or loss if
the shares were held for more than one year and otherwise generally will be
treated as short-term gain or loss. Any loss recognized by a shareholder upon
the sale or other disposition of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gains with respect to such shares.
Losses on sales or other dispositions of shares may be disallowed under "wash
sale" rules in the event substantially identical shares of the Fund are
purchased (including those made pursuant to reinvestment of dividends and/or
capital gains distributions) within a period of 61 days beginning 30 days before
and ending 30 days after a sale or other disposition of shares.
If, in connection with the selection of a long-term dividend period, (i)
the Fund provides that a Premium Call Period will follow a Non-Call Period, (ii)
based on all the facts and circumstances at the time of the designation of the
long-term dividend period the Fund is more likely than not to redeem the AMPS
during the Premium Call Period, and (iii) the premium to be paid upon redemption
during the Premium Call Period exceeds a reasonable penalty for early
redemption, it is possible that the holder of AMPS will be required to accrue
such premium as a dividend (to the extent of the Fund's earnings and profits)
over the term of the Non-Call Period.
The Fund is required in certain circumstances to backup withhold on
reportable payments, including dividends, capital gains distributions, and
proceeds of sales or other dispositions of the Fund's shares paid to certain
holders of the Fund's shares who do not furnish the Fund with their correct
Social Security number or other taxpayer identification number and make certain
other certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
a shareholder may be refunded or credited against such shareholder's U.S.
federal income tax liability, if any, provided that the required information is
furnished to the IRS.
The foregoing is a general and abbreviated summary of the provisions of
the Code and the Treasury regulations currently in effect as they generally
affect the taxation of the Fund and its shareholders. As noted above, these
provisions are subject to change by legislative, judicial or administrative
action, and any such change may be retroactive. A further discussion of the U.S.
federal income tax rules applicable to the Fund can be found in the Statement of
Additional Information which
81
is incorporated by reference into this prospectus. Shareholders are urged to
consult their tax advisers regarding specific questions as to U.S. federal,
foreign, state, and local income or other taxes.
NET ASSET VALUE
The Fund calculates a net asset value for its common shares every day the
New York Stock Exchange is open when regular trading closes (normally 4:00 p.m.
Eastern time). For purposes of determining the net asset value of a common
share, the value of the securities held by the Fund plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses and indebtedness) and the aggregate liquidation
value of any outstanding preferred shares is divided by the total number of
common shares outstanding at such time. Expenses, including the fees payable to
the Adviser, are accrued daily. Currently, the net asset values of shares of
publicly traded closed-end investment companies are published in Barron's, the
Monday edition of The Wall Street Journal and the Monday and Saturday editions
of The New York Times.
The Fund uses an independent pricing service to value most Senior Loans at
their market value. If market quotations for them are not readily available or
are deemed unreliable, or if events occurring after the close of a securities
market and before the Fund values its assets would materially affect net asset
value, the Fund will value Senior Loans at fair value pursuant to procedures
adopted by the Board of Trustees. A Senior Loan that is fair valued may be
valued at a price higher or lower than actual market quotations or the value
determined by other funds using their own fair valuation procedures. The Fund
may, with the approval of the Board of Trustees, implement new fair value
pricing methodologies of Senior Loans in the future, which may result in a
change in the Fund's net asset value per share. The Fund's net asset value per
share will also be affected by fair value pricing decisions and by changes in
the market for Senior Loans. In determining the fair value of a Senior Loan, the
Fund will consider relevant factors, data, and information, such as: (i) the
characteristics of and fundamental analytical data relating to the Senior Loan,
including the cost, size, current interest rate, period until next interest rate
reset, maturity and base lending rate of the Senior Loan, the terms and
conditions of the Senior Loan and any related agreements, and the position of
the Senior Loan in the borrower's debt structure; (ii) the nature, adequacy and
value of the collateral, including the Fund's rights, remedies and interests
with respect to the collateral; (iii) the creditworthiness of the borrower,
based on an evaluation of its financial condition, financial statements and
information about the borrower's business, cash flows, capital structure and
future prospects; (iv) information relating to the market for the Senior Loan,
including price quotations for and trading in the Senior Loan and interests in
similar Senior Loans and the market environment and investor attitudes towards
the Senior Loan and interests in similar Senior Loans; (v) the experience,
reputation, stability and financial condition of the agent and any intermediate
participants in the Senior Loan; and (vi) general economic and market conditions
affecting the fair value of the Senior Loan.
With respect to other securities, the Fund generally values securities
using closing market prices or readily available market quotations. The Fund may
use a pricing service or a pricing matrix to value some of its assets. When
closing market prices or market quotations of assets other than Senior Loans are
not available or are considered by the Fund to be unreliable, the Fund may use a
security's fair value. Fair value is the valuation of a security determined on
the basis of factors other than market value in accordance with procedures
approved by the Fund's Board of Trustees. The Fund also may use the fair value
of a security, including a non-U.S. security, when the Fund determines that the
closing market price on the primary exchange where the security is traded no
longer accurately reflects the value of the security due to factors affecting
one or more relevant securities markets or the specific issuer. The use of fair
value pricing by the Fund may cause the net asset value of its shares to differ
from the net asset value that would be calculated using closing market prices.
International securities
82
markets may be open on days when the U.S. markets are closed. For this reason,
the value of any international securities owned by the Fund could change on a
day you cannot buy or sell shares of the Fund. Debt securities with remaining
maturities of 60 days or less are valued at amortized cost, which is a method of
estimating their fair value. The value of interest rate swaps, caps and floors
is determined in accordance with a formula and then confirmed periodically by
obtaining a bank quotation. Positions in options are valued at the last sale
price on the market where any such option is principally traded. Positions in
futures contracts are valued at closing prices for such contracts established by
the exchange on which they are traded. Repurchase agreements are valued at cost
plus accrued interest. This is a method, approved by the Board of Trustees, of
determining such repurchase agreement's fair value.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue an unlimited number of common shares,
without par value. The Fund is also authorized to issue preferred shares. The
Board of Trustees is authorized to classify and reclassify any unissued shares
into one or more additional classes or series of shares. The Board of Trustees
may establish such series or class, including preferred shares, from time to
time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares and, pursuant to such classification or reclassification, to
increase or decrease the number of authorized shares of any existing class or
series. The Board of Trustees, without shareholder approval, is authorized to
amend the Fund's Agreement and Declaration of Trust (the "Declaration of Trust")
and By-Laws to reflect the terms of any such class or series, including any
class of preferred shares. The Fund is also authorized to issue other
securities, including debt securities.
COMMON SHARES
Common shareholders are entitled to share pro rata in the net assets of
the Fund available for distribution to common shareholders upon liquidation of
the Fund. Common shareholders are entitled to one vote for each share held.
So long as any shares of the Fund's preferred shares, including the AMPS,
are outstanding, holders of common shares will not be entitled to receive any
net income of or other distributions from the Fund unless all accumulated
dividends on preferred shares have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to preferred shares would be at least 200%
after giving effect to such distributions.
The Fund will send unaudited semi-annual reports and audited annual
financial statements to all of its shareholders.
CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
The Declaration of Trust includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Trustees and could have the effect
of depriving shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund.
83
The Board of Trustees is divided into three classes of approximately equal
size. The terms of the Trustees of the different classes are staggered so that
approximately one-third of the Board of Trustees is elected by shareholders each
year.
A Trustee may be removed from office with or without cause by a vote of at
least a majority of the Trustees if such removal is approved by a vote of the
holders of at least 75% of the shares entitled to be voted on the matter.
The Declaration of Trust requires the favorable vote of the holders of at
least 75% of the Fund's shares to approve, adopt or authorize the following:
- a merger or consolidation or statutory share exchange of the Fund with
any other corporations;
- a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities); or
- a liquidation or dissolution of the Fund;
unless such action has been approved, adopted or authorized by the affirmative
vote of at least 75% of the total number of Trustees fixed in accordance with
the By-Laws, in which case the affirmative vote of a majority of the Fund's
shares is required. Following any issuance of preferred shares by the Fund, it
is anticipated that the approval, adoption or authorization of the foregoing
also would require the favorable vote of a majority of the Fund's preferred
shares then entitled to be voted, voting as a separate class.
Conversion of the Fund to an open-end investment company would require an
amendment to the Fund's Declaration of Trust. The amendment would have to be
declared advisable by the Board of Trustees prior to its submission to
shareholders. Such an amendment would require the favorable vote of the holders
of at least 75% of the Fund's outstanding shares (including any preferred
shares) entitled to vote on the matter, voting as a single class (or a majority
of such shares if the amendment was previously approved, adopted or authorized
by 75% of the total number of Trustees fixed in accordance with the By-Laws),
and, assuming preferred shares are issued, the affirmative vote of a majority of
outstanding preferred shares, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
or net asset value per share less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If the
Fund is converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption, and the common
shares would no longer be listed on the New York Stock Exchange.
Conversion to an open-end investment company would also require changes in
certain of the Fund's investment policies and restrictions, such as those
relating to the leverage and the purchase of illiquid securities.
The Declaration of Trust requires the favorable vote of a majority of the
Trustees followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of the Fund, voting
separately as a class or series, to approve, adopt or authorize certain
transactions with 5% or greater holders of a class or series of shares and their
associates, unless the transaction has been approved by at least 75% of the
Trustees, in which case "a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Fund shall be required. For purposes of these
provisions, a 5% or greater holder of a class or series of shares (a "Principal
Shareholder")
84
refers to any person who, whether directly or indirectly and whether alone or
together with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class or series of shares of beneficial interest of
the Fund. The 5% holder transactions subject to these special approval
requirements are:
- the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
- the issuance of any securities of the Fund to any Principal
Shareholder for cash, other than pursuant to any automatic dividend
reinvestment plan;
- the sale, lease or exchange of all or any substantial part of the
assets of the Fund to any Principal Shareholder, except assets having
an aggregate fair market value of less than $1,000,000, aggregating
for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a 12-month
period; and
- the sale, lease or exchange to the Fund or any subsidiary of the Fund,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of
less than $1,000,000, aggregating for purposes of such computation all
assets sold, leased or exchanged in any series of similar transactions
within a 12-month period.
The Declaration of Trust and By-Laws provide that the Board of Trustees
has the power, to the exclusion of shareholders, to make, alter or repeal any of
the By-Laws (except for any By-Law specified not to be amended or repealed by
the Board), subject to the requirements of the 1940 Act. Neither this provision
of the Declaration of Trust, nor any of the foregoing provisions thereof
requiring the affirmative vote of 75% of outstanding shares of the Fund, can be
amended or repealed except by the vote of such required number of shares. The
Fund's By-Laws generally require that advance notice be given to the Fund in the
event a shareholder desires to nominate a person for election to the Board of
Trustees or to transact any other business at an annual meeting of shareholders.
With respect to an annual meeting following the first annual meeting of
shareholders, notice of any such nomination or business must be delivered to or
received at the principal executive offices of the Fund not less than 90
calendar days nor more than 120 calendar days prior to the anniversary date of
the prior year's annual meeting (subject to certain exceptions). In the case of
the first annual meeting of shareholders, the notice must be given no later than
the tenth calendar day following public disclosure of the date of the meeting,
as specified in the By-Laws. Any notice by a shareholder must be accompanied by
certain information as provided in the By-Laws.
85
UNDERWRITING
Subject to the terms and conditions stated in the purchase agreement dated
March 23, 2005, each underwriter named below, for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
AMPS set forth opposite the name of such underwriter.
NUMBER OF AMPS
----------------------------------
SERIES M7 SERIES W7 SERIES TH7
UNDERWRITER --------- --------- ----------
-----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................. 1,878 1,875 1,875
UBS Securities LLC......................... 939 938 937
Citigroup Global Markets Inc............... 313 312 313
------ ------ ------
Total......................... 3,130 3,125 3,125
====== ====== ======
The purchase agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions, including
without limitation the receipt by the underwriters of customary closing
certificates, opinions and other documents, and the receipt by the Fund of Aaa
and AAA ratings on the AMPS by Moody's and Fitch, respectively, as of the time
of the offering. The underwriters are obligated to purchase all the AMPS if they
purchase any of the AMPS. In the purchase agreement, the Fund, the Adviser and
the Subadviser have jointly agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended, or to contribute payments the underwriters may be required to make for
any of those liabilities.
The underwriters propose to initially offer some of the AMPS directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price of the
AMPS. After this offering, the underwriters may change the public offering price
and the concession. Investors must pay for any AMPS purchased in this offering
on or before March 28, 2005.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
underwriters, or their affiliates, may act as counterparties in connection with
the interest rate transactions described herein after they have ceased to be
underwriters. The underwriters are active underwriters of, and dealers in,
securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.
The Underwriters have advised the Fund that the Underwriters and various
other broker-dealers and other firms that participate in the auction rate
securities market received letters from the staff of the Securities and Exchange
Commission last spring. The letters requested that each of these firms
voluntarily conduct an investigation regarding its respective practices and
procedures in that market. Pursuant to these requests, each of the Underwriters
conducted its own voluntary review and reported its findings to the Securities
and Exchange Commission staff. At the Securities and Exchange Commission staff's
request, the Underwriters are engaging in discussions with the Securities and
Exchange Commission staff concerning its inquiry. Neither the Underwriters nor
the Fund can predict the ultimate outcome of the inquiry or how that outcome
will affect the market for the AMPS or the auctions.
The Fund anticipates that the underwriters or their respective affiliates
may, from time to time, act in auctions as Broker-Dealers and receive fees as
set forth under "The Auction" and in the Statement of Additional Information.
86
The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York, 10080.
In connection with this offering, certain of the underwriters or dealers
may distribute prospectuses electronically.
The settlement date for the purchase of the AMPS will be March 28, 2005,
as agreed upon by the underwriters, the Fund and the Adviser pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934, as amended.
In connection with the offering of its common shares, the Adviser and the
Sub-Adviser have agreed to pay out of their own assets to certain underwriters
of the Fund's common shares, including Merrill Lynch and UBS Securities LLC,
additional compensation based upon the percentage of the Fund's managed assets.
In addition, the Adviser pays Princeton Administrator, L.P., an affiliate of
Merrill Lynch, a fee for acting as administrator to the Fund.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
Pioneer Investment Management, Inc. will serve as the Fund's
administrator. Pioneer Investment Management, Inc. has appointed Princeton
Administrators, L.P. as a sub-administrator to the Fund. Princeton
Administrators, L.P., is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, one of the underwriters of this offering. The Fund's securities
and cash are held under a custodian agreement with Brown Brothers Harriman & Co.
located at 40 Water Street, Boston, Massachusetts 02109. Deutsche Bank Trust
Company Americas, located at 60 Wall Street, New York, New York 10005, serves as
Auction Agent, transfer agent, dividend paying agent and registrar for the AMPS.
Pioneer Investment Management Shareholder Services, Inc. located at 60 State
Street, Boston, Massachusetts 02109, serves as the transfer agent, registrar and
dividend disbursing agent for the Fund's common shares. Mellon Investor Services
LLC, located at 85 Challenger Road, Ridgefield Park, New Jersey 07660, serves as
the sub-transfer agent, sub-registrar and sub-dividend disbursing agent for the
Fund's common shares.
VALIDITY OF SHARES
Certain legal matters in connection with the AMPS offered hereby have been
passed upon for the Fund by Wilmer Cutler Pickering Hale and Dorr LLP, Boston,
Massachusetts. Certain matters have been passed upon for the underwriters by
Clifford Chance US LLP, New York, New York. Clifford Chance US LLP may rely on
the opinion of Wilmer Cutler Pickering Hale and Dorr LLP as to certain matters
of Delaware Law.
87
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds............................................. 2
Investment Objectives and Policies.......................... 2
Investment Restrictions..................................... 20
Management of the Fund...................................... 22
Portfolio Transactions...................................... 35
Additional Information Concerning the Auctions for AMPS..... 36
Rating Agency Guidelines.................................... 37
Federal Income Tax Matters.................................. 38
Performance-Related, Comparative and Other Information...... 43
Independent Registered Public Accounting Firm............... 44
Additional Information...................................... 44
Financial Statements and Report of Independent Registered
Public Accounting Firm.................................... 45
Appendix A -- Description of Ratings........................ A-1
Appendix B -- Proxy Voting Policies and Procedures.......... B-1
Appendix C -- Statement of Preferences of Auction Market
Preferred Shares.......................................... C-1
Appendix D -- Settlement Procedures......................... D-1
88
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$234,500,000
(PIONEER LOGO)
PIONEER FLOATING RATE TRUST
AUCTION MARKET PREFERRED SHARES ("AMPS")
3,130 SHARES, SERIES M7
3,125 SHARES, SERIES W7
3,125 SHARES, SERIES TH7
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
CITIGROUP
MARCH 23, 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
17010-00-0205
PIONEER FLOATING RATE TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pioneer Floating Rate Trust (the "Fund") is a recently organized,
non-diversified, closed-end management investment company. The Auction Market
Preferred Shares (the "AMPS") are series of preferred shares of the Fund. This
statement of additional information relating to the Fund's Series, and AMPS
does not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto, dated March 23, 2005 (the "prospectus"). This
statement of additional information does not include all information that a
prospective investor should consider before purchasing AMPS, and investors
should obtain and read the prospectus prior to purchasing such shares. A copy of
the prospectus may be obtained without charge by calling 1-800-225-6292. You may
also obtain a copy of the prospectus on the Securities and Exchange Commission's
web site (http://www.sec.gov). Capitalized terms used but not defined in this
statement of additional information shall have the meanings given to such terms
in the Fund's Statement of Preferences of AMPS (the "Statement") attached as
Appendix C to this statement of additional information.
TABLE OF CONTENTS
USE OF PROCEEDS............................................................ 2
INVESTMENT OBJECTIVES AND POLICIES......................................... 2
INVESTMENT RESTRICTIONS.................................................... 20
MANAGEMENT OF THE FUND..................................................... 22
PORTFOLIO TRANSACTIONS..................................................... 35
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES........ 36
RATING AGENCY GUIDELINES................................................... 37
FEDERAL INCOME TAX MATTERS................................................. 38
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION..................... 43
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.............................. 44
ADDITIONAL INFORMATION..................................................... 44
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM......................................................... 45
APPENDIX A--DESCRIPTION OF RATINGS......................................... A-1
APPENDIX B--PROXY VOTING POLICIES AND PROCEDURES........................... B-1
APPENDIX C -- STATEMENT OF PREFERENCE OF AUCTION MARKET PREFERRED SHARES... C-1
APPENDIX D -- SETTLEMENT PROCEDURES........................................ D-1
This statement of additional information is dated March 23, 2005.
1
USE OF PROCEEDS
The net proceeds will be invested in accordance with the Fund's investment
objectives and policies during a period not to exceed three months from the
closing of this offering. Pending such investment, the net proceeds may be
invested in U.S. government securities or high grade, short-term money market
instruments. If necessary, the Fund may also purchase, as temporary investments,
securities of other open-end and closed-end investment companies that invest in
equity and fixed-income securities.
INVESTMENT OBJECTIVES AND POLICIES
The prospectus presents the investment objectives and the principal investment
strategies and risks of the Fund. This section supplements the disclosure in the
Fund's prospectus and provides additional information on the Fund's investment
policies or restrictions. Restrictions or policies stated as a maximum
percentage of the Fund's assets are only applied immediately after a portfolio
investment to which the policy or restriction is applicable (other than the
limitations on borrowing). Accordingly, any later increase or decrease resulting
from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Fund's
restrictions and policies.
PRIMARY INVESTMENTS
As a fundamental policy, under normal market conditions, the Fund seeks to
achieve its investment objectives by investing at least 80% of its assets (net
assets plus borrowing for investment purposes) in senior floating rate loans
("Senior Loans"). Senior Loans are made to corporations, partnerships and other
business entities that operate in various industries and geographical regions,
including non-U.S. borrowers. Senior Loans pay interest at rates that are
redetermined periodically on the basis of a floating base lending rate plus a
premium. The Fund also may invest in other floating and variable rate
instruments and loans, including second lien loans, high yield, high risk
corporate bonds, investment grade fixed-income debt securities, preferred stocks
(many of which have fixed maturities), convertible securities, securities that
make "in-kind" interest payments, bonds not paying current income, bonds that do
not make regular interest payments and money market instruments. The Fund may
invest in Senior Loans and other securities of any credit quality, including
Senior Loans and other investments that are rated below investment grade, or are
unrated but are determined by the investment subadviser to be of equivalent
credit quality, commonly referred to as "junk bonds." The Fund may invest all or
a portion of its assets in securities of issuer that are in default or that are
in bankruptcy. The Fund does not have a policy of maintaining a specific average
credit quality of its portfolio or a minimum portion of its portfolio that must
be rated investment grade. The Fund may invest up to 10% of its total assets in
Senior Loans and other securities of non-U.S. issuers, including emerging market
issuers, and may engage in certain hedging transactions.
SENIOR LOANS
STRUCTURE OF SENIOR LOANS. A Senior Loan is typically originated, negotiated and
structured by a U.S. or foreign commercial bank, insurance company, finance
company or other financial institution (the "Agent") for a group of loan
investors ("Loan Investors"). The Agent typically administers and enforces the
Senior Loan on behalf of the other Loan Investors in the syndicate. In addition,
an institution, typically but not always the Agent, holds any collateral on
behalf of the Loan Investors.
Senior Loans primarily include senior floating rate loans to corporations and
secondarily institutionally traded senior floating rate debt obligations issued
by an asset-backed pool, and interests therein. Loan interests primarily take
the form of assignments purchased in the primary or secondary market. Loan
interests may also take the form of participation interests in a Senior Loan.
Such loan interests may be acquired from U.S. or foreign commercial banks,
insurance companies, finance companies or other financial institutions who have
made loans or are Loan Investors or from other investors in loan interests.
The Fund typically purchases "Assignments" from the Agent or other Loan
Investors. The purchaser of an Assignment typically succeeds to all the rights
and obligations under the Loan Agreement of the assigning Loan Investor and
becomes a Loan Investor under the Loan Agreement with the same rights and
obligations as the assigning Loan Investor. Assignments may, however, be
arranged through private negotiations between potential
2
assignees and potential assignors, and the rights and obligations acquired by
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Loan Investor.
The Fund also may invest in "Participations." Participations by the Fund in a
Loan Investor's portion of a Senior Loan typically will result in the Fund
having a contractual relationship only with such Loan Investor, not with the
Borrower. As a result, the Fund may have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Loan
Investor selling the Participation and only upon receipt by such Loan Investor
of such payments from the Borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement, nor any rights with respect
to any funds acquired by other Loan Investors through set-off against the
Borrower and the Fund may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Fund may assume the credit risk of both the Borrower and the Loan Investor
selling the Participation. In the event of the insolvency of the Loan Investor
selling a Participation, the Fund may be treated as a general creditor of such
Loan Investor. The selling Loan Investors and other persons interpositioned
between such Loan Investors and the Fund with respect to such Participations
will likely conduct their principal business activities in the banking, finance
and financial services industries. Persons engaged in such industries may be
more susceptible to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
RANKING IN CAPITAL STRUCTURE; LOAN COLLATERAL. Senior Loans typically have the
most senior position in a Borrower's capital structure, although some Senior
Loans may hold an equal ranking with the Borrower's other senior securities. The
capital structure of a Borrower may include Senior Loans, senior unsecured
loans, senior and junior subordinated debt, preferred stock and common stock,
typically in descending order of seniority with respect to claims on the
Borrower's assets. Although Senior Loans typically have the most senior position
in a Borrower's capital structure, they remain 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 net asset value of the Fund. There can be no
assurance that the liquidation of any collateral securing a Senior Loan would
satisfy a 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 bankruptcy of a borrower, the Fund could experience
delays or limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. Although a Senior Loan may be senior to
equity and other debt securities in an issuer's capital structure, such
obligations may be structurally subordinated to obligations of the issuer's
subsidiaries. For example, if a holding company were to issue a Senior Loan,
even if that issuer pledges the capital stock of its subsidiaries to secure the
obligations under the Senior Loan, the assets of the operating companies are
available to the direct creditors of an operating company before they would be
available to the holders of the Senior Loan issued by the holding company.
In order to borrow money pursuant to a Senior Loan, a Borrower will frequently,
for the term of the Senior Loan, pledge collateral, including but not limited
to, (i) working capital assets, such as accounts receivable and inventory; (ii)
tangible fixed assets, such as real property, buildings and equipment; (iii)
intangible assets, such as trademarks and patent rights (but excluding
goodwill); and (iv) security interests in shares of stock of subsidiaries or
affiliates. In the case of Senior Loans made to non-public companies, the
company's shareholders or owners may provide collateral in the form of secured
guarantees and/or security interests in assets that they own. In many instances,
a Senior Loan may be secured only by stock in the Borrower or its subsidiaries.
Collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan. Some Senior Loans are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate Senior Loans to presently existing or future indebtedness of
the borrower or take other action detrimental to the holders of Senior Loans
including, in certain circumstances, invalidating Senior Loans or causing
interest previously paid to be refunded to the borrower. If interest were
required to be refunded, it could result in a loss to the Fund negatively
affecting the Fund's performance
CERTAIN FEES PAID TO THE FUND. In the process of buying, selling and holding
Senior Loans, the Fund may receive and/or pay certain fees. Any fees received
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
3
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 or note purchase agreement between the Borrower
and the holders of the Senior Loan (the "Loan Agreement"). Such 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 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 Loan Investors directly, as the case may be,
is normally an event of acceleration, i.e., the Agent, or the Loan Investors
directly, as the case may be, has the right to call the outstanding Senior Loan.
The typical practice of an Agent or a Loan Investor in relying exclusively or
primarily on reports from the Borrower may involve a risk of fraud by the
Borrower. In the case of a Senior Loan in the form of a Participation, the
agreement between the buyer and seller may limit the rights of the holder of the
Participation 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.
OBLIGATIONS TO MAKE ADDITIONAL LOANS. A Loan Investor may have certain
obligations pursuant to loan agreements documenting Senior Loans, which may
include the obligation to make additional loans in certain circumstances. The
Fund generally will reserve against these contingent obligations by segregating
or otherwise designating a sufficient amount of permissible liquid assets. The
Fund will not purchase interests in Senior Loans that would require the Fund to
make additional loans if these additional loan commitments in the aggregate
would cause the Fund to fail to meet its federal tax diversification
requirements.
ADMINISTRATION OF LOANS. In a typical Senior Loan, the Agent administers the
terms of the Loan Agreement. In such 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 that 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 Loan Investors 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 participants in the Senior Loan.
The Agent is compensated by the Borrower for providing these services under a
Loan Agreement, and such compensation may include special fees paid upon
structuring and funding the Senior Loan and other fees paid on a continuing
basis. With respect to Senior Loans for which the Agent does not perform such
administrative and enforcement functions, the Fund will perform such tasks on
its own behalf, although a collateral bank will typically hold any collateral on
behalf of the Fund and the other Loan Investors pursuant to the applicable Loan
Agreement.
A financial institution's appointment as Agent may usually 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
intermediate participants, similar risks may arise.
4
PREPAYMENTS. Senior Loans will usually require, in addition to scheduled
payments of interest and principal, the prepayment of the Senior Loan from a
portion of free cash flow, as defined above. The degree to which Borrowers
prepay Senior Loans, whether as a contractual requirement or at their election,
may be affected by general business conditions, the financial condition of the
Borrower and competitive conditions among Loan Investors, among other factors.
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 typically is able to reinvest prepayments in other Senior Loans that
have similar yields and because receipt of such fees may mitigate any adverse
impact on the Fund's yield.
OTHER INFORMATION REGARDING SENIOR LOANS. From time to time, Highland Capital
Management, L.P., the Fund's subadviser ("Highland"), and its affiliates may
borrow money from various banks in connection with their business activities.
Such banks may also sell interests in Senior Loans to or acquire them from the
Fund or may be intermediate participants with respect to Senior Loans in which
the Fund owns interests. Such banks may also act as Agents for Senior Loans held
by the Fund. Neither Highland nor its affiliates will be an obligor of any
Senior Loan or obligation underlying a participation in which the Fund may
invest.
The Fund may acquire interests in Senior Loans that 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 may also invest in Senior Loans of Borrowers that 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.
The Fund will be subject to the risk that collateral securing a loan will
decline in value or have no 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 secured by assets of, shareholders or owners,
even if the Senior Loans are not otherwise collateralized by assets of the
Borrower; provided, however, that such 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 such 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 such securities, other than in connection
with such pledge or replacement, will be strictly limited for the protection of
the holders of Senior Loans and, indirectly, Senior Loans themselves.
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 or cause interest previously paid to be refunded to the Borrower. If a
court required interest to be refunded, it could negatively affect the Fund's
performance. 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 Senior 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 that 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, the Fund would have substantially lower
recovery, and perhaps no recovery on the full amount of the principal and
interest due on the Senior Loan.
The Fund may acquire warrants and other equity securities as part of a unit
combining a Senior Loan and equity securities of a Borrower or its affiliates.
The acquisition of such equity securities will only be incidental to the Fund's
purchase of a Senior Loan. The Fund may also acquire equity securities or debt
securities (including non-dollar-denominated debt securities) issued in exchange
for a Senior Loan, issued in connection with the debt
5
restructuring or reorganization of a Borrower, if such acquisition, in the
judgment of Highland, may enhance the value of a Senior Loan or if such
acquisition would otherwise be consistent with the Fund's investment policies.
INTEREST RATES; PORTFOLIO MATURITY AND DURATION. Interest rates on Senior Loans
in which the Fund invests adjust periodically. The interest rates are adjusted
based on a base rate plus a premium or spread over the base rate. The base rate
usually is London Interbank Offered Rate ("LIBOR"), the Federal Reserve federal
funds rate, the Prime Rate or other base lending rates used by commercial
lenders. LIBOR usually is an average of the interest rates quoted by several
designated banks as the rates at which they pay interest to major depositors in
the London interbank market on U.S. dollar-denominated deposits. The Fund's
subadviser believes that changes in short-term LIBOR rates are closely related
to changes in the Federal Reserve federal funds rate, although the two are not
technically linked. The Prime Rate quoted by a major U.S. bank is generally the
interest rate at which that bank is willing to lend U.S. dollars to its most
creditworthy Borrowers, although it may not be the bank's lowest available rate.
Highland expects that the average effective duration of the Fund's portfolio of
Senior Loans will normally be between zero and 1.5 years, reflecting the Fund's
focus on floating rate instruments. As a measure of a fixed-income security's
cash flow, duration is an alternative to the concept of "term to maturity" in
assessing the price volatility associated with changes in interest rates.
Generally, the longer the duration, the more volatility an investor should
expect. For example, the market price of a fixed-income security with a duration
of three years would be expected to decline 3% if interest rates rose 1%.
Conversely, the market price of the same security would be expected to increase
3% if interest rates fell 1%. The market price of a fixed-income security with a
duration of six years would be expected to increase or decline twice as much as
the market price of a security with a three-year duration. Duration is a way of
measuring a security's maturity in terms of the average time required to receive
the present value of all interest and principal payments as opposed to its term
to maturity. The maturity of a security measures only the time until final
payment is due; it does not take account of the pattern of a security's cash
flows over time, which would include how cash flow is affected by prepayments
and by changes in interest rates. Because the interest on Senior Loans held by
the Fund will reset at short-term intervals, the duration of Senior Loans will
be shorter than a fixed income security with a comparable term to maturity.
Highland can manage the duration of the portfolio by selecting Senior Loans with
different interest rates, reset periods and final maturity dates. Incorporating
a security's yield, coupon interest payments, final maturity and option features
into one measure, duration is computed by determining the weighted average
maturity of a fixed-income security's cash flows, where the present values of
the cash flows serve as weights. In computing the duration of the Fund's
portfolio, Highland will estimate the duration of obligations that are subject
to features such as prepayment or redemption by the issuer, put options retained
by the investor or other imbedded options, taking into account the influence of
interest rates on prepayments and coupon flows.
Loans in which the Fund invests typically have interest rates that reset at
least quarterly and may reset as frequently as daily. Because of prepayments,
the actual remaining maturity of a loan may be considerably less than its stated
maturity. Longer interest rate reset periods generally will increase
fluctuations in the Fund's net asset value as a result of changes in market
interest rates. The Fund may find it possible and appropriate to use interest
rate swaps and other investment practices to shorten the effective interest rate
adjustment period of loans. If the Fund does so, it will consider the shortened
period to be the adjustment period of the loan. As short-term interest rates
rise, interest payable to the Fund should increase. As short-term interest rates
decline, interest payable to the Fund should decrease.
During normal market conditions, changes in market interest rates will affect
the Fund in certain ways. The principal effect will be that the yield on the
Fund's shares will tend to rise or fall as market interest rates rise and fall.
This is because almost all of the assets in which the Fund invests pay interest
at rates which float in response to changes in market rates. However, because
the interest rates on the Fund's assets reset over time, there will be an
imperfect correlation between changes in market rates and changes to rates on
the portfolio as a whole. This means that changes to the rate of interest paid
on the portfolio as a whole will tend to lag behind changes in market rates. The
amount of time that will pass before the Fund experiences the effects of
changing short-term interest rates will depend on the dollar-weighted average
time until the next interest rate adjustment on the Fund's portfolio of loans.
Because the rates of interest paid on the loans in which the Fund invests have a
weighted average reset period that typically is less than 90 days, 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.
6
To the extent that changes in market 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 loans of the type and quality in which the Fund
invests, the Fund's net asset value could be adversely affected. This is because
the value of a loan asset in the Fund is partially a function of whether it is
paying what the market perceives to be a market rate of interest for the
particular loan, given its individual credit and other characteristics. However,
unlike changes in market rates of interest for which there is generally only a
temporary lag before the portfolio reflects those changes, changes in a loan's
value based on changes in the market spread on loans in the Fund's portfolio may
be of longer duration.
DEBTOR-IN-POSSESSION FINANCING. The Fund may invest in debtor-in-possession
financings (commonly called "DIP financings"). DIP financings are arranged when
an entity seeks the protections of the bankruptcy court under Chapter 11 of the
U.S. Bankruptcy Code. These financings allow the entity to continue its business
operations while reorganizing under Chapter 11. Such financings are senior liens
on unencumbered security (i.e., security not subject to other creditors claims).
There is a risk that the entity will not emerge from Chapter 11 and be forced to
liquidate its assets under Chapter 7 of the Bankruptcy Code. In such event, the
Fund's only recourse will be against the property securing the DIP financing.
REGULATORY CHANGES. To the extent that legislation or state or federal
regulators that regulate certain financial institutions impose additional
requirements or restrictions with respect to the ability of such institutions to
make loans, particularly in connection with highly leveraged transactions, the
availability of Senior Loans for investment may be adversely affected. Further,
such legislation or regulation could depress the market value of Senior Loans.
CREDIT QUALITY. Many Senior Loans in which the Fund may invest are of below
investment grade credit quality. Accordingly, these Senior Loans are subject to
similar or identical risks and other characteristics described below in relation
to non-investment grade securities.
OTHER PERMISSIBLE PORTFOLIO INVESTMENTS
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements (the
purchase of a security coupled with an agreement to resell at a higher price)
with respect to its permitted investments. In the event of the bankruptcy of the
other party to a repurchase agreement, the Fund might experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities the Fund purchased may have decreased, the Fund could experience a
loss. Repurchase agreements which mature in more than seven days will be treated
as illiquid. The Fund's repurchase agreements will provide that the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including any accrued interest earned on the agreement,
and will be marked to market daily.
FIXED-INCOME SECURITIES. In addition to corporate debt securities, which include
corporate bonds, debentures and notes, fixed-income securities also include
preferred, preference and convertible securities, equipment lease certificates,
equipment trust certificates and conditional sales contracts. Preference stocks
are stocks that have many characteristics of preferred stocks, but are typically
junior to an existing class of preferred stocks. Equipment lease certificates
are debt obligations secured by leases on equipment (such as railroad cars,
airplanes or office equipment), with the issuer of the certificate being the
owner and lessor of the equipment. Equipment trust certificates are debt
obligations secured by an interest in property (such as railroad cars or
airplanes), the title of which is held by a trustee while the property is being
used by the borrower. Conditional sales contracts are agreements under which the
seller of property continues to hold title to the property until the purchase
price is fully paid or other conditions are met by the buyer.
Fixed-rate bonds may have a demand feature allowing the holder to redeem the
bonds at specified times. These bonds are more defensive than conventional
long-term bonds (protecting to some degree against a rise in interest rates)
while providing greater opportunity than comparable intermediate term bonds,
since they may be retained if interest rates decline. Acquiring these kinds of
bonds provides the contractual right to require the issuer of the bonds to
purchase the security at an agreed upon price, which right is contained in the
obligation itself rather than in a separate agreement or instrument. Since this
right is assignable only with the bond, it will not be assigned any separate
value. Floating or variable rate obligations may be acquired as short-term
investments pending longer term investment of funds.
7
Certain securities may permit the issuer at its option to "call," or redeem, the
securities. If an issuer were to redeem securities during a time of declining
interest rates, the Fund may not be able to reinvest the proceeds in securities
providing the same investment return as the securities redeemed.
The rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate. The rate of
return or return of principal on some debt obligations may be linked or indexed
to the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
HIGH YIELD SECURITIES
Investments in below investment grade debt securities generally provide greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and principal and income risk, including the possibility of issuer
default and bankruptcy. High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Debt securities in the lowest investment grade category
also may be considered to possess some speculative characteristics by certain
rating agencies. In addition, analysis of the creditworthiness of issuers of
non-investment grade bonds may be more complex than for issuers of higher
quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in prices of high yield securities because the
advent of recession could lessen the ability of an issuer to make principal and
interest payments on its debt obligations. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Fund may incur additional expenses to seek recovery. In the case
of high yield securities structured as zero-coupon, step-up or payment-in-kind
securities, their market prices will normally be affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
that pay interest currently and in cash. Highland seeks to reduce these risks
through diversification, credit analysis and attention to current developments
in both the economy and financial markets.
The secondary market on which non-investment debt securities are traded may be
less liquid than the market for investment grade securities. Less liquidity in
the secondary trading market could adversely affect the net asset value of the
shares. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of non-investment
grade bonds, especially in a thinly traded market. When secondary markets for
non-investment grade debt securities are less liquid than the market for
investment grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is no reliable, objective
data available. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Fund
may have greater difficulty selling these securities. The Fund will be more
dependent on Highland's research and analysis when investing in non-investment
grade debt securities. Highland seeks to minimize the risks of investing in all
securities through in-depth credit analysis and attention to current
developments in interest rate and market conditions.
A general description of the ratings of securities by Standard & Poor's Ratings
Group ("S&P") and Moody's Investors Service ("Moody's") is set forth in Appendix
A to this statement of additional information. Such ratings represent these
rating organizations' opinions as to the quality of the securities they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, debt obligations with the same maturity,
coupon and rating may have different yields while obligations with the same
maturity and coupon may have the same yield. For these reasons, the use of
credit ratings as the sole method of evaluating non-investment grade debt
securities can involve certain risks. For example, credit ratings evaluate the
safety or principal and interest payments, not the market value risk of
non-investment grade debt securities. Also, credit rating agencies may fail to
change credit ratings in a timely fashion to reflect events since the security
was last rated. Highland does not rely solely on credit ratings when selecting
securities for the Fund, and develops its own independent analysis of issuer
credit quality.
In the event that a rating agency or Highland downgrades its assessment of the
credit characteristics of a particular issue, the Fund is not required to
dispose of such security. In determining whether to retain or sell a downgraded
8
security, Highland may consider such factors as Highland's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by other rating
agencies. However, analysis of the creditworthiness of issuers of non-investment
grade bonds may be more complex than for issuers of high quality debt
securities.
ZERO-COUPON BONDS, DEFERRED INTEREST BONDS AND PAYMENT-IN-KIND SECURITIES
Zero-coupon securities are debt obligations that do not entitle the holder to
any periodic payments of interest either for the entire life of the obligation
or for an initial period after the issuance of the obligations. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Payment-in-kind securities ("PIKs") pay dividends or interest in the
form of additional securities of the issuer, rather than in cash. To the extent
the Fund invests in such instruments, they will not contribute to the Fund's
primary goal of current income. Each of these instruments is typically issued
and traded at a deep discount from its face amount. The amount of the discount
varies depending on such factors as the time remaining until maturity of the
securities, prevailing interest rates, the liquidity of the security and the
perceived credit quality of the issuer. The market prices of zero-coupon bonds,
deferred interest bonds and PIKs generally are more volatile than the market
prices of debt instruments that pay interest currently and in cash and are
likely to respond to changes in interest rates to a greater degree than do other
types of securities having similar maturities and credit quality. In order to
satisfy a requirement for qualification as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), an investment
company, such as the Fund, must distribute each year at least 90% of its net
investment income, including the original issue discount accrued on zero-coupon
bonds, deferred interest bonds and PIKs. Because the Fund will not, on a current
basis, receive cash payments from the issuer of these securities in respect of
any accrued original issue discount, in some years the Fund may have to
distribute cash obtained from selling other portfolio holdings of the Fund. In
some circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the Fund to sell securities at such time. Under many
market conditions, investments in zero-coupon bonds, deferred interest bonds and
PIKs may be illiquid, making it difficult for the Fund to dispose of them or
determine their current value.
HYBRID INSTRUMENTS
The Fund may invest in "hybrid" instruments that combine the characteristics of
securities, futures, and options. For example, the principal amount or interest
of a hybrid could be tied (positively or negatively) to the price of some
securities index or another interest rate (each a "benchmark"). The interest
rate or (unlike many debt obligations) the principal amount payable at maturity
of a hybrid security may be increased or decreased, depending on changes in the
value of the benchmark. Hybrids can be used as an efficient means of pursuing a
variety of investment goals, including duration management and increased total
return. Hybrids may not bear interest or pay dividends. The value of a hybrid or
its interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events that cannot
be readily foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the Fund to the credit risk of the issuer of
the hybrids. These risks may cause significant fluctuations in the net asset
value of the Fund.
SECOND LIEN LOANS AND DEBT OBLIGATIONS
The Fund may invest in loans and other debt securities that have the same
characteristics as Senior Loans except that such loans are second in lien
property rather than first. Such "second lien" loans and securities, like Senior
Loans, typically have adjustable floating rate interest payments. Accordingly,
the risks associated with "second lien" loans are higher than the risk of loans
with first priority over the collateral. In the event of default on a "second
lien" loan, the first priority lien holder has first claim to the underlying
collateral of the loan. It is possible, that no collateral value would remain
for the second priority lien holder and therefore result in a loss of investment
to the Fund.
9
COLLATERALIZED LOAN OBLIGATIONS AND BOND OBLIGATIONS
The Fund may invest in certain asset-backed securities that are secured by
certain financial assets. A financing company (generally called a Special
Purpose Vehicle or "SPV") issues commercial paper or other short-term
instruments to finance the purchase of the financial assets. These securitized
assets are, as a rule, corporate financial assets brought into a pool according
to specific diversification rules. The SPV is a company founded solely for the
purpose of securitizing these claims and its only asset is the diversified asset
pool. On this basis, marketable securities are issued which, due to the
diversification of the underlying risk, generally represent a lower level of
risk than the original assets. The redemption of the securities issued by the
SPV takes place at maturity out of the cash flow generated by the collected
claims.
A collateralized loan obligation ("CLO") is a structured debt security issued by
an SPV that was created to reapportion the risk and return characteristics of a
pool of assets. The assets, typically Senior Loans, are used as collateral
supporting the various debt tranches issued by the SPV. The key feature of the
CLO structure is the prioritization of the cash flows from a pool of debt
securities among the several classes of securities issued by a CLO.
The Fund may also invest in collateralized bond obligations ("CBOs"), which are
structured debt securities backed by a diversified pool of high yield, public or
private fixed income securities. These may be fixed pools or may be "market
value" (or managed) pools of collateral. The CBO issues debt securities that are
typically separated into tranches representing different degrees of credit
quality. The top tranche of securities has the greatest collateralization and
pays the lowest interest rate. Lower CBO tranches have a lesser degree of
collateralization quality and pay higher interest rates intended to compensate
for the attendant risks. The bottom tranche specifically receives the residual
interest payments (i.e., money that is left over, if any, after the higher
tranches have been paid) rather than a fixed interest rate. The return on the
lower tranches of CBOs is especially sensitive to the rate of defaults in the
collateral pool. Under normal market conditions, the Fund expects to invest in
the lower tranches of CBOs.
DEBT SECURITIES SELECTION
In selecting fixed income securities for the Fund, Highland gives primary
consideration to the Fund's investment objective, the attractiveness of the
market for debt securities given Highland's outlook for the equity markets and
the Fund's liquidity requirements. Once Highland determines to allocate a
portion of the Fund's assets to debt securities, Highland generally focuses on
short-term instruments to provide liquidity and may invest in a range of fixed
income securities if the Fund is investing in such instruments for income or
capital gains. Highland selects individual securities based on broad economic
factors and issuer specific factors including the terms of the securities (such
as yields compared to U.S. Treasuries or comparable issues), liquidity and
rating, sector and issuer diversification.
CONVERTIBLE DEBT SECURITIES
The Fund may invest in convertible debt securities, which are debt obligations
convertible at a stated exchange rate or formula into common stock or other
equity securities of or owned by the issuer. Convertible securities rank senior
to common stocks in an issuer's capital structure and consequently may be of
higher quality and entail less risk than the issuer's common stock. As with all
debt securities, the market values of convertible securities tend to increase
when interest rates decline and, conversely, tend to decline when interest rates
increase.
DEBT SECURITIES RATING CRITERIA
Investment grade debt securities are those rated "BBB" or higher by Standard &
Poor's or the equivalent rating of other nationally recognized statistical
rating organizations. Debt securities rated BBB are considered medium grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken the issuer's ability to pay interest and repay
principal. If the rating of an investment grade debt security falls below
investment grade, Highland will consider if any action is appropriate in light
of the Fund's investment objectives and policies.
10
Below investment grade debt securities are those rated "BB" and below by
Standard & Poor's or the equivalent rating of other nationally recognized
statistical rating organizations. See Appendix A for a description of rating
categories.
Below investment grade debt securities or comparable unrated securities are
commonly referred to as "junk bonds" and are considered predominantly
speculative and may be questionable as to principal and interest payments.
Changes in economic conditions are more likely to lead to a weakened capacity to
make principal payments and interest payments. The amount of high yield
securities outstanding has proliferated as an increasing number of issuers have
used high yield securities for corporate financing. An economic downturn could
severely affect the ability of highly leveraged issuers to service their debt
obligations or to repay their obligations upon maturity. Factors having an
adverse impact on the market value of lower quality securities will have an
adverse effect on the Fund's net asset value to the extent that it invests in
such securities. In addition, the Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in payment of principal or
interest on its portfolio holdings.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. Under adverse market or economic
conditions, the secondary market for high yield securities 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 such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the Fund's net asset value.
Since investors generally perceive that there are greater risks associated with
lower quality debt securities of the type in which the Fund may invest a portion
of its assets, the yields and prices of such securities may tend to fluctuate
more than those for higher rated securities. In the lower quality segments of
the debt securities market, changes in perceptions of issuers' creditworthiness
tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the debt securities market, resulting in greater
yield and price volatility.
Lower rated and comparable unrated debt securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
financial condition of the issuers of such securities may not have been as
strong as that of other issuers. However, lower rated securities generally
involve greater risks of loss of income and principal than higher rated
securities. Highland will attempt to reduce these risks through portfolio
diversification and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends and corporate
developments.
U.S. GOVERNMENT SECURITIES
U.S. government securities in which the Fund may invest include debt obligations
of varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. government, including the Federal Housing
Administration, Federal Financing Bank, Farmers Home Administration,
Export-Import Bank of the U.S., Small Business Administration, Government
National Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association, Resolution Trust Corporation and
various institutions that previously were or currently are part of the Farm
Credit System (which has been undergoing reorganization since 1987). Some U.S.
government securities, such as U.S. Treasury bills, Treasury notes and Treasury
bonds, which differ only in their interest rates, maturities and times of
issuance, are supported by the full faith and credit of the United States.
Others are supported by (i) the right of the issuer to borrow from the U.S.
Treasury, such as securities of the Federal Home Loan Banks; (ii) the
discretionary authority of the U.S. government to purchase the agency's
obligations, such as securities of the FNMA; or (iii) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States. Securities guaranteed as to principal and interest by the U.S.
government, its agencies, authorities or instrumentalities include (i)
securities for which the payment of principal and interest is backed by an
irrevocable
11
letter of credit issued by the U.S. government or any of its agencies,
authorities or instrumentalities; and (ii) participations in loans made to
non-U.S. governments or other entities that are so guaranteed. The secondary
market for certain of these participations is limited and, therefore, may be
regarded as illiquid.
U.S. government securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity. Zero
coupon U.S. government securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. government securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but generally require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. government securities
that make regular payments of interest. The Fund accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations, in which case the Fund will forgo the purchase of
additional income producing assets with these funds. Zero coupon U.S. government
securities include STRIPS and CUBES, which are issued by the U.S. Treasury as
component parts of U.S. Treasury bonds and represent scheduled interest and
principal payments on the bonds.
FOREIGN INVESTMENTS
The Fund may invest in securities of non-U.S. issuers. Because foreign companies
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies, there may be less publicly available information about a foreign
company than about a domestic company. Volume and liquidity in most foreign debt
markets is less than in the United States and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. There is generally less government supervision and regulation of
securities exchanges, broker-dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Payment for securities before delivery may be required. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments that could affect investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Foreign securities markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") may be purchased. ADRs, EDRs and GDRs are
certificates evidencing ownership of shares of a foreign issuer and are
alternatives to purchasing directly the underlying foreign securities in their
national markets and currencies. However, they continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of the
underlying issuer's country. ADRs, EDRs and GDRs may be sponsored or
unsponsored. Unsponsored receipts are established without the participation of
the issuer. Unsponsored receipts may involve higher expenses, they may not pass-
through voting or other shareholder rights, and they may be less liquid.
WARRANTS AND STOCK PURCHASE RIGHTS
The Fund may invest in warrants, which are securities permitting, but not
obligating, their holder to subscribe for other securities. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer.
The Fund may also invest in stock purchase rights. Stock purchase rights are
instruments, frequently distributed to an issuer's shareholders as a dividend,
that entitle the holder to purchase a specific number of shares of common stock
on a specific date or during a specific period of time. The exercise price on
the rights is normally at a discount
12
from market value of the common stock at the time of distribution. The rights do
not carry with them the right to dividends or to vote and may or may not be
transferable. Stock purchase rights are frequently used outside of the United
States as a means of raising additional capital from an issuer's current
shareholders.
As a result, an investment in warrants or stock purchase rights may be
considered more speculative than certain other types of investments. In
addition, the value of a warrant or a stock purchase right does not necessarily
change with the value of the underlying securities, and warrants and stock
purchase rights expire worthless if they are not exercised on or prior to their
expiration date.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may purchase and sell securities, including U.S. government securities,
on a when-issued, delayed delivery or forward commitment basis. Typically, no
income accrues on securities the Fund has committed to purchase prior to the
time delivery of the securities is made, although the Fund may earn income on
securities it has segregated. See "--Asset Segregation."
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Fund's other investments. If the Fund
remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund does not participate in future gains or losses with
respect to the security. If the other party to a transaction fails to deliver or
pay for the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. The Fund may dispose of or renegotiate a
transaction after it is entered into, and may sell when-issued, delayed delivery
or forward commitment securities before they are delivered, which may result in
a capital gain or loss. There is no percentage limitation on the extent to which
the Fund may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.
INDEXED SECURITIES
The Fund may invest in securities that fluctuate in value with an index. Such
securities generally will either be issued by the U.S. Government or one of its
agencies or instrumentalities or, if privately issued, collateralized by
mortgages that are insured, guaranteed or otherwise backed by the U.S.
Government, its agencies or instrumentalities. The interest rate or, in some
cases, the principal payable at the maturity of an indexed security may change
positively or inversely in relation to one or more interest rates, financial
indices, securities prices or other financial indicators ("reference prices").
An indexed security may be leveraged to the extent that the magnitude of any
change in the interest rate or principal payable on an indexed security is a
multiple of the change in the reference price. Thus, indexed securities may
decline in value due to adverse market changes in reference prices. Because
indexed securities derive their value from another instrument, security or
index, they are considered derivative debt securities, and are subject to
different combinations of prepayment, extension, interest rate and/or other
market risks.
SHORT SALES AGAINST THE BOX
The Fund may sell securities short "against the box." A short sale involves the
Fund borrowing securities from a broker and selling the borrowed securities. The
Fund has an obligation to return securities identical to the borrowed securities
to the broker. In a short sale against the box, the Fund at all times owns an
equal amount of the security sold short or securities convertible into or
exchangeable for, with or without payment of additional consideration, an equal
amount of the security sold short. The Fund intends to use short sales against
the box to hedge. For example, when the Fund believes that the price of a
current portfolio security may decline, the Fund may use a short sale against
the box to lock in a sale price for a security rather than selling the security
immediately. In such a case, any future losses in the Fund's long position
should be offset by a gain in the short position and, conversely, any gain in
the long position should be reduced by a loss in the short position.
13
If the Fund effects a short sale against the box at a time when it has an
unrealized gain on the security, it may be required to recognize that gain as if
it had actually sold the security (a "constructive sale") on the date it effects
the short sale. However, such constructive sale treatment may not apply if the
Fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale provided that certain other
conditions are satisfied. Uncertainty regarding certain tax consequences of
effecting short sales may limit the extent to which the Fund may make short
sales against the box.
ASSET SEGREGATION
The 1940 Act requires that the Fund segregate assets in connection with certain
types of transactions that may have the effect of leveraging the Fund's
portfolio. If the Fund enters into a transaction requiring segregation, such as
a forward commitment, the custodian, the administrator or Highland will
segregate liquid assets in an amount required to comply with the 1940 Act. Such
segregated assets will be valued at market daily. If the aggregate value of such
segregated assets declines below the aggregate value required to satisfy the
1940 Act, additional liquid assets will be segregated.
INTEREST RATE TRANSACTIONS
INTEREST RATE SWAPS, COLLARS, CAPS AND FLOORS. In order to hedge the value of
the Fund's portfolio against interest rate fluctuations or to enhance the Fund's
income, the Fund may, but is not required to, enter into various interest rate
transactions such as interest rate swaps and the purchase or sale of interest
rate caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions primarily as a hedge and not as
a speculative investment. However, the Fund also may invest in interest rate
swaps to enhance income or to increase the Fund's yield, for example, during
periods of steep interest rate yield curves (i.e., wide differences between
short-term and long-term interest rates). The Fund is not required to hedge its
portfolio and may choose not to do so. The Fund cannot guarantee that any
hedging strategies it uses will work.
In an interest rate swap, the Fund exchanges with another party their respective
commitments to pay or receive interest (e.g., an exchange of fixed rate payments
for floating rate payments). For example, if the Fund holds a debt instrument
with an interest rate that is reset only once each year, it may swap the right
to receive interest at this fixed rate for the right to receive interest at a
rate that is reset every week. This would enable the Fund to offset a decline in
the value of the debt instrument due to rising interest rates but would also
limit its ability to benefit from falling interest rates. Conversely, if the
Fund holds a debt instrument with an interest rate that is reset every week and
it would like to lock in what it believes to be a high interest rate for one
year, it may swap the right to receive interest at this variable weekly rate for
the right to receive interest at a rate that is fixed for one year. Such a swap
would protect the Fund from a reduction in yield due to falling interest rates
and may permit the Fund to enhance its income through the positive differential
between one week and one year interest rates, but would preclude it from taking
full advantage of rising interest rates.
The Fund usually will enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out 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 on a daily basis, and an amount of cash
or liquid instruments 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 interest rate swap transaction is entered into on other than a
net basis, the full amount of the Fund's obligations will be accrued on a daily
basis, and the full amount of the Fund's obligations will be maintained in a
segregated account by the Fund's custodian.
The Fund also may engage in interest rate transactions in the form of purchasing
or selling interest rate caps or floors. The Fund will not sell interest rate
caps or floors that it does not own. 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 equal to the
difference of the index and the predetermined rate on a notional principal
amount (i.e., the reference amount with respect to which interest obligations
are determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to
14
the extent that a specified index falls below a predetermined interest rate, to
receive payments of interest at the difference of the index and the
predetermined rate on a notional principal amount from the party selling such
interest rate floor. The Fund will not enter into caps or floors if, on a net
basis, the aggregate notional principal amount with respect to such agreements
exceeds the net assets of the Fund.
Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose
creditworthiness is believed by Highland to be equivalent to such rating. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with other similar instruments traded in the
interbank market. Caps and floors, however, are less liquid than swaps. Certain
federal income tax requirements may limit the Fund's ability to engage in
interest rate swaps.
CREDIT DEFAULT SWAP AGREEMENTS
The Fund may enter into credit default swap agreements. 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 "par value" (full notional value) of the reference
obligation in exchange for the reference obligation. The Fund may be either the
buyer or seller in the transaction. If the Fund is a buyer and no event of
default occurs, the Fund loses its investment and recovers nothing. However, if
an event of default occurs, the buyer receives full notional value for a
reference obligation that may have little or no value. As a seller, the Fund
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and three years, provided that there is no
default event. If an event of default occurs, the seller must pay the buyer the
full notional value of the reference obligation.
Credit default swaps involve greater risks than if the Fund had invested in the
reference obligation directly. In addition to general market risks, credit
default swaps are subject to illiquidity risk, counterparty risk and credit
risks. The Fund will enter into swap agreements only with counterparties who are
rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose
creditworthiness is believed by Highland to be equivalent to such rating. A
buyer also will lose its investment and recover nothing should an event of
default occur. If an event of default were to occur, the value of the reference
obligation received by the seller, coupled with the periodic payments previously
received, may be less than the full notional value it pays to the buyer,
resulting in a loss of value to the Fund. When the Fund acts as a seller of a
credit default swap agreement it is exposed to many of the same risks of
leverage described under "Risk factors--Leverage" and "Leverage" in the
prospectus since if an event of default occurs the seller must pay the buyer the
full notional value of the reference obligation.
If the Fund enters into a credit default swap, the Fund may be required to
report the swap as a "listed transaction" for tax shelter reporting purposes on
the Fund's federal income tax return. If the Internal Revenue Service (the
"IRS") were to determine that the credit default swap is a tax shelter, the Fund
could be subject to penalties under the Code.
The Fund may in the future employ new or additional investment strategies and
hedging instruments if those strategies and instruments are consistent with the
Fund's investment objectives and are permissible under applicable regulations
governing the Fund.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To hedge against changes in interest rates or securities prices or to seek to
increase total return, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write (sell) call and put options on any of such
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. government
securities), securities indices and other financial instruments and indices. The
Fund will engage in futures and related options
15
transactions for bona fide hedging and non-hedging purposes as described below.
All futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the Commodity Futures Trading
Commission (the "CFTC").
FUTURES CONTRACTS. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, the Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures on securities are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price, rate of return on portfolio securities
and securities that the Fund owns or proposes to acquire. The Fund may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. If, in the opinion of Highland, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and futures contracts based on other financial instruments,
securities indices or other indices, the Fund may also enter into such futures
contracts as part of its hedging strategies. Although under some circumstances
prices of securities in the Fund's portfolio may be more or less volatile than
prices of such futures contracts, Highland will attempt to estimate the extent
of this volatility difference based on historical patterns and compensate for
any such differential by having the Fund enter into a greater or lesser number
of futures contracts or by attempting to achieve only a partial hedge against
price changes affecting the Fund's portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of the
Fund's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This may be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the market to be less favorable than prices
that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the Fund the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, the Fund obtains the benefit of the futures position if prices move in
a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium that may partially offset an increase in the price
of securities that the Fund intends to purchase. However, the Fund becomes
obligated to purchase a futures contract (if the option is exercised) that may
have a value lower than the exercise price. Thus, the loss incurred by the Fund
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. The Fund will incur transaction costs in connection
with the writing of options on futures.
16
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. The Fund will engage in futures and related options
transactions only in accordance with CFTC regulations which permit principals of
an investment company registered under the 1940 Act to engage in such
transactions without registering as commodity pool operators. The Fund will
engage in transactions in futures contracts and related options only to the
extent such transactions are consistent with the requirements of the Code for
maintaining its qualification as a regulated investment company for U.S. federal
income tax purposes.
Futures contracts and related options involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the Fund to
purchase securities, require the Fund to segregate assets to cover such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may purchase put and call options on any security in which it may
invest or options on any securities index based on securities in which it may
invest. The Fund would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options it has purchased.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A call option written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by the Fund are covered, which means that the
Fund will own the securities subject to the options as long as the options are
outstanding, or the Fund will use the other methods described below. The Fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, the Fund may
forgo the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by the Fund would obligate the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by the
Fund would be covered, which means that the Fund would have segregated assets
with a value at least equal to the exercise price of the put option. The purpose
of writing such options is to generate additional income for the Fund. However,
in return for the option premium, the Fund accepts the risk that it may be
required to purchase the underlying security at a price in excess of its market
value at the time of purchase.
Call and put options written by the Fund will also be considered to be covered
to the extent that the Fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the Fund.
In addition, a written call option or put may be covered by entering into an
offsetting forward contract and/or by purchasing an offsetting option or any
other option which, by virtue of its exercise price or otherwise, reduces the
Fund's net exposure on its written option position.
WRITING CALL AND PUT OPTIONS ON SECURITIES INDICES. The Fund may also write
(sell) covered call and put options on any securities index composed of
securities in which it may invest. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segments of the securities market
rather than price fluctuations in a single security.
17
The Fund may cover call options on a securities index by owning securities whose
price changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional consideration if cash in such
amount is segregated) upon conversion or exchange of other securities in its
portfolio. The Fund may cover call and put options on a securities index by
segregating assets with a value equal to the exercise price.
PURCHASING CALL AND PUT OPTIONS. The Fund would normally purchase call options
in anticipation of an increase in the market value of securities of the type in
which it may invest. The purchase of a call option would entitle the Fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. The Fund would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the call option.
The Fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or in securities
in which it may invest. The purchase of a put option would entitle the Fund, in
exchange for the premium paid, to sell specified securities at a specified price
during the option period. The purchase of protective puts is designed to offset
or hedge against a decline in the market value of the Fund's holdings. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities that it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
The Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
RISKS OF TRADING OPTIONS. There is no assurance that a liquid secondary market
on an options exchange will exist for any particular exchange-traded option, or
at any particular time. If the Fund is unable to effect a closing purchase
transaction with respect to covered options it has written, the Fund will not be
able to sell the underlying securities or dispose of its segregated assets until
the options expire or are exercised. Similarly, if the Fund is unable to effect
a closing sale transaction with respect to options it has purchased, it will
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange, if any, that had been issued by the OCC as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund may purchase and sell options that are traded on U.S. exchanges and
options traded over the counter with broker-dealers who make markets in these
options. The ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options on securities and indices will be subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class which
may be written or purchased by a single investor or group of investors acting in
concert. Thus, the number of options that the Fund may write or purchase may be
affected by options written or purchased by other investment advisory
18
clients of Pioneer or Highland. An exchange, board of trade or other trading
facility may order the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on Highland's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price movements
can take place in the underlying markets that cannot be reflected in the options
markets.
In addition to the risks of imperfect correlation between the Fund's portfolio
and the index underlying the option, the purchase of securities index options
involves the risk that the premium and transaction costs paid by the Fund in
purchasing an option will be lost. This could occur as a result of unanticipated
movements in the price of the securities comprising the securities index on
which the option is based.
SECURITIES LENDING
As described in the prospectus, the Fund may lend a portion of its of portfolio
Senior Loans or other securities to broker-dealers or other institutional
borrowers. Loans will be made only to organizations whose credit quality or
claims paying ability is considered by Highland to be at least investment grade.
All securities loans will be collateralized on a continuous basis by cash or
U.S. government securities having a value, marked to market daily, of at least
100% of the market value of the loaned securities. The Fund may receive loan
fees in connection with loans that are collateralized by securities or on loans
of securities for which there is special demand. The Fund may also seek to earn
income on securities loans by reinvesting cash collateral in securities
consistent with its investment objectives and policies, seeking to invest at
rates that are higher than the "rebate" rate that it normally will pay to the
borrower with respect to such cash collateral. Any such reinvestment will be
subject to the investment policies, restrictions and risk considerations
described in the Prospectus and in this SAI.
The lending of Senior Loans and other securities may result in delays in
recovering, or a failure of the borrower to return, the loaned securities. The
defaulting borrower ordinarily would be liable to the Fund for any losses
resulting from such delays or failures, and the collateral provided in
connection with the loan normally would also be available for that purpose.
Securities loans normally may be terminated by either the Fund or the borrower
at any time. Upon termination and the return of the loaned securities, the Fund
would be required to return the related cash or securities collateral to the
borrower and it may be required to liquidate longer term portfolio securities in
order to do so. To the extent that such securities have decreased in value, this
may result in the Fund realizing a loss at a time when it would not otherwise do
so. The Fund also may incur losses if it is unable to reinvest cash collateral
at rates higher than applicable rebate rates paid to borrowers and related
administrative costs. These risks are substantially the same as those incurred
through investment leverage, and will be subject to the investment policies,
restrictions and risk considerations described in the prospectus and in this
SAI.
The Fund will receive amounts equivalent to any interest or other distributions
paid on securities while they are on loan, and the Fund will not be entitled to
exercise voting or other beneficial rights on loaned securities. The Fund will
exercise its right to terminate loans and thereby regain these rights whenever
Highland considers it to be in the Fund's interest to do so, taking into account
the related loss of reinvestment income and other factors.
SHORT-TERM TRADING
Securities may be sold in anticipation of market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold. In addition, a security may be sold and another purchased
at approximately the same time to take advantage of what Highland believes to be
a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of various types of
fixed income securities or changes in the investment objectives of investors.
19
TEMPORARY INVESTMENTS
The Fund may invest temporarily in cash or cash equivalents. Cash equivalents
are highly liquid, short-term securities such as commercial paper, time
deposits, certificates of deposit, short-term notes and short-term U.S.
Government obligations.
PORTFOLIO TURNOVER
It is the policy of the Fund not to engage in trading for short-term profits
although portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Fund. A high rate of portfolio
turnover (100% or more) involves correspondingly greater transaction costs,
which must be borne by the Fund and its shareholders.
INVESTMENT RESTRICTIONS
The following are the Fund's fundamental investment restrictions. These
restrictions may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities (which for this purpose and
under the 1940 Act means the lesser of (i) 67% of the common shares represented
at a meeting at which more than 50% of the outstanding common shares are
represented or (ii) more than 50% of the outstanding common shares). If the Fund
were to issue a class of preferred shares, the investment restrictions could not
be changed without the approval of a majority of the outstanding common and
preferred shares, voting together as a class, and the approval of a majority of
the outstanding preferred shares, voting separately by class. Statements in
italics are not part of the restriction.
The Fund may not:
(1) Issue senior securities, other than as permitted by the 1940 Act. Senior
securities that the Fund may issue in accordance with the 1940 Act include
preferred shares, borrowing, futures, when-issued and delayed delivery
securities and forward foreign currency exchange transactions.
(2) Borrow money, other than as permitted by the 1940 Act. Under current
regulatory requirements, the Fund is permitted to (i) incur borrowings in an
amount up to 331/3% of its assets (including the amount borrowed), (ii) borrow
up to an additional 5% of the Fund's asset for temporary purposes, (iii) obtain
such short-term credits as are necessary for the clearance of portfolio
transactions, and (iv) purchase securities on margin to the extent permitted by
applicable law.
(3) Invest in real estate, except the Fund may invest in securities of issuers
that invest in real estate or interests therein, securities that are secured by
real estate or interests therein, securities of real estate investment trusts,
mortgage-backed securities and other securities that represent a similar
indirect interest in real estate, and the Fund may acquire real estate or
interests therein through exercising rights or remedies with regard to an
instrument.
(4) Make loans, except that the Fund may (i) make loans or lend portfolio
securities in accordance with the Fund's investment policies, (ii) enter into
repurchase agreements, (iii) purchase all or a portion of an issue of publicly
distributed debt securities, bank loan participation interests, bank
certificates of deposit, acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities, (iv)
participate in a credit facility whereby the Fund may directly lend to and
borrow money from other affiliated funds to the extent permitted under the 1940
Act or an exemption therefrom and (v) make loans in any other manner consistent
with applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction.
(5) Invest in commodities or commodity contracts, except that the Fund may
invest in currency instruments and contracts and financial instruments and
contracts that might be deemed to be commodities and commodity contracts. A
futures contract, for example, may be deemed to be a commodity contract.
(6) Act as an underwriter, except insofar as the Fund technically may be deemed
to be an underwriter in connection with the purchase or sale of its portfolio
securities.
20
(7) Invest 25% or more of the value of its total assets in any one industry,
provided that this limitation does not apply to the purchase of obligations
issued or guaranteed by the U.S government, its agencies or instrumentalities.
(8) Amend its policy to invest at least 80% of its assets in Senior Loans.
All other investment policies of the Fund are considered non-fundamental and may
be changed by the Board of Trustees without prior approval of the Fund's
outstanding voting shares.
The Fund has not adopted a fundamental policy prohibiting or limiting the Fund's
use of short sales, purchases on margin and the writing of put and call options.
The Fund is subject, however, to the limitations on its use of these investments
under the 1940 Act and the rules and interpretive positions of the SEC under the
1940 Act. Certain other non-fundamental investment policies are included in the
prospectus under "Investment Objectives and Principal Investment Strategies" and
this statement of additional information under "Investment Objectives and
Policies."
Under one provision of the 1940 Act, the Fund may invest up to 10% of its total
assets in the aggregate in shares of other investment companies and up to 5% of
its total assets in any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. Other provisions of the 1940 Act may allow
the Fund to invest a greater percentage of its assets in other investment
companies subject to certain conditions. As a shareholder in any 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 fees and
other expenses with respect to assets so invested. Holders of common shares
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein and in the prospectus. As described in the
prospectus in the section entitled "Risk Factors," 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.
Although the Fund may borrow money, as permitted by the 1940 Act, in connection
with any such borrowing, the Fund will not pledge more than one-third of its
assets (including the amount borrowed).
In addition, to comply with U.S. federal income tax requirements for
qualification as a "regulated investment company," the Fund's investments will
be limited in a manner such that at the close of each quarter of each tax year,
(a) no more than 25% of the value of the Fund's total assets are invested in the
securities (other than U.S. government securities or securities of other
regulated investment companies) of a single issuer or two or more issuers
controlled by the Fund and engaged in the same, similar or related trades or
businesses and (b) with regard to at least 50% of the Fund's total assets, the
securities (other than U.S. government securities or securities of other
regulated investment companies) of a single issuer do not represent more than 5%
of the value of the Fund's total assets and do not represent more than 10% of
the outstanding voting securities of such issuer. These tax-related limitations
may be changed by the Trustees to the extent appropriate in light of changes to
applicable tax requirements.
The Fund intends to apply for ratings for the preferred shares from one or more
nationally recognized statistical rating organizations. In order to obtain and
maintain the required ratings, the Fund will be required to comply with
investment quality, diversification and other guidelines established by such
rating agency or agencies. Such guidelines will likely be more restrictive than
the restrictions set forth above. The Fund does not anticipate that such
guidelines would have a material adverse effect on the Fund's holders of common
shares or its ability to achieve its investment objective. The Fund presently
anticipates that any preferred shares that it intends to issue would be
initially given the highest ratings by such rating agency or agencies, but no
assurance can be given that such ratings will be obtained. With the exception of
this current offering of AMPS, no minimum rating is required for the issuance of
preferred shares by the Fund.
21
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Fund's Board of Trustees provides broad supervision over the Fund's affairs.
The officers of the Fund are responsible for the Fund's operations. The Fund's
Trustees and officers are listed below, together with their principal
occupations during the past five years. Asterisks indicate those Trustees who
are interested persons of the Fund within the meaning of the 1940 Act, and such
Trustees are referred to as "Interested Trustees." Trustees who are not
interested persons of the Fund are referred to as "Independent Trustees." Each
of the Trustees serves as a trustee of each of the 73 U.S. registered investment
portfolios for which Pioneer Investment Management, Inc., the Fund's investment
adviser, serves as investment adviser (the "Pioneer Funds"). The address for all
Interested Trustees and all officers of the Fund is 60 State Street, Boston,
Massachusetts 02109.
TERM OF OFFICE
NAME, AGE AND POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD
ADDRESS WITH THE FUND SERVICE FIVE YEARS BY THIS TRUSTEE
------------- --------------- -------------- ----------------------------------- -------------------------
INTERESTED TRUSTEES:
John F. Cogan, Jr. Chairman of the Since November Deputy Chairman and a Director of Director of Harbor Global
(78)* Board, Trustee 2004. Term Pioneer Global Asset Management Company, Ltd.
and President expires in S.p.A. ("PGAM"); Non-Executive
2007. Chairman and a Director of Pioneer
Investment Management USA Inc.
("PIM-USA"); Chairman and a
Director of Pioneer; Director of
Pioneer Alternative Investment
Management Limited (Dublin);
President and a Director of Pioneer
Alternative Investment Management
(Bermuda) Limited and affiliated
funds; President and Director of
Pioneer Funds Distributor, Inc.;
President of all of the Pioneer
Funds; and Of Counsel (since 2000,
partner prior to 2000), Wilmer
Cutler Pickering Hale and Dorr LLP
(counsel to PIM-USA and the Pioneer
Funds)
Osbert M. Hood* Trustee and Since October President and Chief Executive None
(52) Executive Vice 2004. Term Officer, PIM-USA since May, 2003
President expires in (Director since January, 2001);
2005. President and Director of Pioneer
since May, 2003; Chairman and
Director of Pioneer Investment
Management Shareholder Services,
Inc. ("PIMSS") since May, 2003;
Executive Vice President of all of
the Pioneer Funds since June 3,
2003; Executive Vice President and
Chief Operating Officer of PIMUSA,
November 2000 - May 2003; Executive
22
TERM OF OFFICE
NAME, AGE AND POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD
ADDRESS WITH THE FUND SERVICE FIVE YEARS BY THIS TRUSTEE
------------- --------------- -------------- ----------------------------------- -------------------------
Vice President, Chief Financial
Officer and Treasurer, John Hancock
Advisers, LLC, Boston, MA, November
1999 - November 2000; Senior Vice
President and Chief Financial
Officer, John Hancock Advisers,
LLC, April 1997 - November 1999
INDEPENDENT
TRUSTEES:
David R. Bock Trustee Since January Senior Vice President and Chief Director of The
2005. Term Financial Officer, I-trax, Enterprise Social
expires in Inc. (publicly Traded Health Care Investment Company
2007. Services Company); (2001- (privately-held
Present); Managing Partner, affordable housing
Federal City Capital finance company);
Advisors(boutique Merchant Director of New York
Bank)(1995-2000; 2002 to 2004); Mortgage Trust (publicly
Executive Vice President and traded mortgage reit)
(2000-2002)
Mary K. Bush (56) Trustee Since November President, Bush International Director of Brady
3509 Woodbine 2004. Term (international financial Corporation (industrial
Street; Chevy expires in advisory firm) identification and
Chase, MD 20815 2006. specialty coated material
products manufacturer),
Millennium Chemicals,
Inc. (commodity
chemicals), Mortgage
Guaranty Insurance
Corporation, and R.J.
Reynolds Tobacco
Holdings, Inc. (tobacco)
Margaret B.W. Trustee Since November Founding Director, The Winthrop None
Graham (57) 2004. Term Group, Inc. (consulting firm);
1001 Sherbrooke expires in Professor of Management, Faculty of
Street West, 2005. Management, McGill University
Montreal, Quebec,
Canada
Marguerite A. Piret Trustee Since November President and Chief Executive Director, New America
(56) 2004. Term Officer, Newbury, Piret & Company, High Income Fund, Inc.
One Boston Place, expires in Inc. (investment banking firm) (closed-end investment
26th Floor, Boston, 2006. company)
MA 02108
Stephen K. West Trustee Since November Senior Counsel, Sullivan & Director, The Swiss
23
TERM OF OFFICE
NAME, AGE AND POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD
ADDRESS WITH THE FUND SERVICE FIVE YEARS BY THIS TRUSTEE
-------------------- -------------- -------------- ------------------------------------ ------------------------
(76) 2004. Term Cromwell (law firm) Helvetia Fund, Inc.
125 Broad Street, expires in (closed-end investment
New York, NY 2007. company)and AMVESCAP
10004 PLC(investment managers)
John Winthrop Trustee Since November President, John Winthrop & Co., None
(68) 2004. Term Inc. (private investment firm)
One North Adgers expires in
Wharf, Charleston, 2005.
SC 29401
FUND OFFICERS:
Dorothy E. Secretary Since October Secretary of PIM-USA; Senior None
Bourassa (56) 2004. Serves Vice President-Legal of Pioneer;
at the and Secretary/Clerk of most of
discretion PIM-USA's subsidiaries since
of board October 2000; Secretary of all of
the Pioneer Funds since September
2003 (Assistant Secretary from
November 2000 to September 2003);
and Senior Counsel, Assistant Vice
President and Director of
Compliance of PIM-USA from April
1998 through October 2000
Christopher J. Assistant Since October Assistant Vice President and Senior None
Kelley (39) Secretary 2004. Serves Counsel of Pioneer since July 2002;
at the Vice President and Senior Counsel
discretion of of BISYS Fund Services, Inc.
board (April 2001 to June 2002); Senior
Vice President and Deputy General
Counsel of Funds Distributor, Inc.
(July 2000 to April 2001; Vice
President and Associate General
Counsel from July 1996 to July
2000); Assistant Secretary of all
of the Pioneer Funds since
September 2003
David C. Phelan Assistant Since October Partner, Wilmer Cutler Pickering None
(47) Secretary 2004. Serves Hale and Dorr LLP; Assistant
at the Secretary of all of the Pioneer
discretion of Funds since September 2003
board
Vincent Nave Treasurer Since October Vice President-Fund Accounting, None
(59) 2004. Serves Administration and Custody Services
at the of Pioneer (Manager from September
discretion of 1996
board
24
TERM OF OFFICE
NAME, AGE AND POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD
ADDRESS WITH THE FUND SERVICE FIVE YEARS BY THIS TRUSTEE
-------------------- -------------- -------------- ------------------------------------ ------------------------
to February 1999); and Treasurer of
all of the Pioneer Funds (Assistant
Treasurer from June 1999 to
November 2000)
Mark E. Bradley Assistant Since November Deputy Treasurer of Pioneer since None
(45) Treasurer 2004. Serves 2004; Treasurer and Senior Vice
at the President, CDC IXIS Asset
discretion of Management Services from 2002 to
the board 2003; Assistant Treasurer and Vice
President, MFS Investment
Management from 1997 to 2002; and
Assistant Treasurer of all of the
Pioneer Funds since November 2004
Luis I. Presutti Assistant Since October Assistant Vice President-Fund None
(39) Treasurer 2004. Serves Accounting, Administration and
at the Custody Services of Pioneer (Fund
discretion of Accounting Manager from 1994 to
board 1999); and Assistant Treasurer of
all of the Pioneer Funds since
November 2000
Gary Sullivan Assistant Since October Fund Accounting Manager - Fund None
(46) Treasurer 2004. Serves Accounting, Administration and
at the Custody Services of Pioneer; and
discretion of Assistant Treasurer of all of the
board Pioneer Funds since May 2002
Katharine Kim Assistant Since October Fund Administration Manager-Fund None
Sullivan (30) Treasurer 2004. Serves Accounting, Administration and
at the Custody Services since June 2003;
discretion of Assistant Vice President-Mutual
board Fund Operations of State Street
Corporation from June 2002 to June
2003 (formerly Deutsche Bank Asset
Management); Pioneer Fund
Accounting, Administration and
Custody Services (Fund Accounting
Manager from August 1999 to May
2002, Fund Accounting Services
Supervisor from 1997 to July 1999);
Assistant Treasurer of all of the
Pioneer Funds since September 2003
Martin J. Wolin (37) Chief Since October Chief Compliance Officer of Pioneer None
Compliance 2004. Serves (Director of Compliance and Senior
Officer at the Counsel
discretion of
25
TERM OF OFFICE
NAME, AGE AND POSITIONS HELD AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD
ADDRESS WITH THE FUND SERVICE FIVE YEARS BY THIS TRUSTEE
-------------------- -------------- -------------- ------------------------------------ ------------------------
the Board from November 2000 to September
2004); Vice President and Associate
General Counsel of UAM Fund
Services, Inc. (mutual fund
administration company) from
February 1998 to November 2000; and
Chief Compliance Officer of all of
the Pioneer Funds.
* Mr. Cogan and Mr. Hood are Interested Trustees because each is an officer
or director of Pioneer and certain of its affiliates.
The outstanding capital stock of Pioneer is indirectly majority owned by
UniCredito Italiano S.p.A. ("UniCredito"), one of the largest banking groups in
Italy.
The Fund's Board of Trustees consists of eight members. The term of one class
expires each year commencing with the first annual meeting following this public
offering and no term shall continue for more than three years after the
applicable election. The terms of Ms. Graham, Mr. Hood and Mr. Winthrop at the
first annual meeting following this public offering, the terms of Ms. Bush and
Ms. Piret expire at the second annual meeting, and the terms of Mr. Cogan, Mr.
Bock and Mr. West expire at the third annual meeting. Subsequently, each class
of Trustees will stand for election at the conclusion of its respective term.
Such classification may prevent replacement of a majority of the Trustees for up
to a two-year period.
BOARD COMMITTEES
The Board of Trustees has an Audit Committee, an Independent Trustees Committee,
a Nominating Committee, a Valuation Committee and a Policy Administration
Committee. Committee members are as follows:
AUDIT COMMITTEE
Marguerite A. Piret (Chair), David R. Bock and Margaret B.W. Graham
INDEPENDENT TRUSTEES COMMITTEE
David R. Bock, Mary K. Bush, Margaret B.W. Graham (Chair), Marguerite A. Piret,
Stephen K. West and John Winthrop
NOMINATING COMMITTEE
Mary K. Bush, John Winthrop (Chair) and Marguerite A. Piret
VALUATION COMMITTEE
Marguerite A. Piret (Chair), Stephen K. West and John Winthrop
POLICY ADMINISTRATION COMMITTEE
Mary K. Bush (Chair), John Winthrop and Margaret B.W. Graham
The Board of Trustees has adopted a charter for the Audit Committee. In
accordance with its charter, the purposes of the Audit Committee are to:
- act as a liaison between the Fund's independent public accounting firm and
the full Board of Trustees of the Fund;
26
- discuss with the Fund's independent public accounting firm and its
judgments about the quality of the Fund's accounting principles and
underlying estimates as applied in the Fund's financial reporting;
- together with the Independent Trustees Committee, review and assess the
renewal materials of all related party contracts and agreements, including
investment advisory agreements, underwriting contracts, administration
agreements, and transfer agency contracts, among any other instruments and
agreements that may be appropriate from time to time; and
- ensure that the independent public accounting firm submits on a periodic
basis to the Audit Committee a formal written statement delineating all
relationships between the auditors and the Fund or Pioneer; actively to
engage in a dialogue with the independent public accounting firm with
respect to any disclosed relationships or services that may impact the
objectivity and independence of the independent public accounting firm; and
to recommend that the Trustees take appropriate action in response to the
independent public accounting firm's report to satisfy itself of the
independent public accounting firm's independence.
The Nominating Committee reviews the qualifications of any candidate recommended
by the Independent Trustees to serve as an Independent Trustee and makes a
recommendation regarding that person's qualifications. The Committee does not
accept nominations from shareholders.
The Valuation Committee reviews the valuation assigned to certain securities by
Pioneer in accordance with the Fund's valuation procedures.
The Policy Administration Committee reviews the implementation of certain of the
Fund's administration policies and procedures.
The Independent Trustees Committee reviews the Fund's investment advisory
agreement and other related party contracts annually and is also responsible for
any other action required to be taken, under the 1940 Act, by the Independent
Trustees acting alone.
The Fund's Declaration of Trust provides that the Fund will indemnify the
Trustees and officers against liabilities and expenses incurred in connection
with any litigation in which they may be involved because of their offices with
the Fund, unless it is determined in the manner specified in the Declaration of
Trust that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the Fund or that such indemnification
would relieve any officer or Trustee of any liability to the Fund or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
COMPENSATION OF OFFICERS AND TRUSTEES
The Fund pays no salaries or compensation to any of its officers. The Pioneer
Funds, including the Fund, compensate their trustees as follows:
- If the Pioneer Fund has assets greater than $250 million, the Pioneer Fund
pays each Independent Trustee an annual base fee calculated on the basis of
the Pioneer Fund's net assets.
- If the Pioneer Fund has assets less than $250 million, the Pioneer Fund
pays each Independent Trustee an annual fee of $1,000.
- If the Pioneer Fund has assets greater than $50 million, the Pioneer Fund
pays each Interested Trustee an annual fee of $500, and if the Pioneer Fund
has assets less than $50 million, the Pioneer Fund pays each Interested
Trustee and annual fee of $200 (Pioneer reimburses the Fund for these
fees).
- Each Pioneer Fund with assets greater than $250 million pays each
Independent Trustee who serves on a board committee an annual committee fee
based the Pioneer Fund's net assets (with additional compensation for
chairpersons of such committees).
27
The following table sets forth certain information with respect to the
compensation paid to each Trustee by the Fund and the Pioneer Funds as a group.
Compensation from the Fund is for the current calendar year and is estimated.
Total compensation from the Pioneer Funds as a group is for the calendar year
ended December 31, 2003.
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE FUND
COMPENSATION ACCRUED AS PART OF BENEFIT UPON AND OTHER
NAME OF TRUSTEE FROM FUND* FUND EXPENSES RETIREMENT PIONEER Funds**
---------------------- ------------ ------------------- ---------------- ---------------
INTERESTED TRUSTEES:
John F. Cogan, Jr. *** $ 500.00 $0.00 $0.00 $ 19,200.00
Osbert M. Hood *** + $ 500.00 $0.00 $0.00 $ 11,520.00
INDEPENDENT TRUSTEES:
Mary K. Bush $ 3,167.00 $0.00 $0.00 $104,000.00
David R. Bock++ $ 3,167.00 $0.00 $0.00 $ 0.00
Margaret B.W. Graham $ 3,167.00 $0.00 $0.00 $104,000.00
Marguerite A. Piret $ 3,167.00 $0.00 $0.00 $113,562.50
Stephen K. West $ 3,167.00 $0.00 $0.00 $ 99,750.00
John Winthrop $ 3,167.00 $0.00 $0.00 $ 99,750.00
---------- ----- ----- -----------
$20,002.00 $0.00 $0.00 $551,782.50
* ESTIMATED FOR THE FISCAL YEAR ENDING NOVEMBER 30, 2005.
** For the calendar year ended December 31, 2003. There are 65 U.S. registered
investment portfolios in the Pioneer Family of Funds.
*** Under the investment advisory agreement, Pioneer reimburses the Fund for
any Trustee fees paid by the Fund.
+ Mr. Hood became a trustee of the other Pioneer Funds during the calendar
year 2003.
++ Mr. Bock became a Trustee on January 1, 2005.
OWNERSHIP OF SHARES OF THE FUND AND OTHER PIONEER FUNDS
The following table indicates the value of shares that each Trustee beneficially
owns in the Fund and the Pioneer Funds in the aggregate. The value of shares of
the Fund and any other closed-end fund are determined based on closing market
price on December 31, 2004. The value of shares of any Pioneer Fund that is an
open-end investment company is determined on the basis of the net asset value of
the class of shares held as of December 31, 2004. The value of the shares held
are stated in ranges in accordance with the requirements of the SEC. The table
reflects the Trustee's beneficial ownership of shares of the Pioneer Funds.
Beneficial ownership is determined in accordance with the rules of the SEC.
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT
NAME OF TRUSTEE SECURITIES IN THE FUND COMPANIES IN THE PIONEER FUNDS
--------------------- ---------------------- ---------------------------------------
INTERESTED TRUSTEES:
John F. Cogan, Jr. none Over $100,000
Osbert M. Hood none Over $100,000
INDEPENDENT TRUSTEES:
DAVID R. BOCK* N/A N/A
Mary K. Bush none $10,001-$50,000
Margaret B.W. Graham none $1-$10,000
Marguerite A. Piret none $1-$10,000
Stephen K. West none Over $100,000
John Winthrop none Over $100,000
* Mr. Bock became a Trustee of the Fund on January 1, 2005.
Material Relationships of the Independent Trustees. For purposes of the
statements below:
28
- the immediate family members of any person includes their spouse, children
in the person's household (including step and adoptive children) and any
dependent of the person.
- an entity in a control relationship means any person who controls, is
controlled by or is under common control with the named person. For
example, UniCredito is an entity that is in a control relationship with
Pioneer.
- a related fund is a registered investment company or an entity exempt from
the definition of an investment company pursuant to Sections 3(c)(1) or
3(c)(7) of the 1940 Act, for which Pioneer or any of its affiliates act as
investment adviser, or for which PFD or any of its affiliates act as
principal underwriter. For example, the Fund's related funds include all of
the Pioneer Funds and any non-U.S. funds managed by Pioneer or its
affiliates.
As of December 31, 2004, none of the Independent Trustees, nor any of their
immediate family members, beneficially owned any securities issued by Pioneer,
UniCredito Italiano or any other entity in a control relationship to Pioneer.
During the calendar years 2003 and 2004, none of the Independent Trustees, nor
any of their immediate family members, had any direct or indirect interest (the
value of which exceeded $60,000), whether by contract, arrangement or otherwise,
in Pioneer, UniCredito Italiano, or any other entity in a control relationship
to Pioneer.
During the calendar years 2003 and 2004, none of the Independent Trustees, nor
any of their immediate family members, had an interest in a transaction or a
series of transactions in which the aggregate amount involved exceeded $60,000
and to which any of the following were a party (each a "fund related party"):
- the Fund
- an officer of the Fund
- a related fund
- an officer of any related fund
- Pioneer
- an officer of Pioneer
- an entity in a control relationship to Pioneer
- an officer of any such entity in a control relationship to Pioneer
During the calendar years 2003 and 2004, none of the Independent Trustees, nor
any of their immediate family members, had any relationship (the value of which
exceeded $60,000) with any fund related party, including, but not limited to,
relationships arising out of (i) the payment for property and services, (ii) the
provision of legal services, (iii) the provision of investment banking services
(other than as a member of the underwriting syndicate) or (iv) the provision of
consulting services, except that Mr. West, an Independent Trustee, is Senior
Counsel to Sullivan & Cromwell and acts as counsel to the Independent Trustees
and the Independent Trustees of the other Pioneer Funds. The aggregate
compensation paid to Sullivan & Cromwell by the fund and the other Pioneer funds
was approximately $126,603 and 208,010 in each of 2003 and 2004.
During the calendar years 2003 and 2004, none of the Independent Trustees, nor
any of their immediate family members, served as a member of a board of
directors on which an officer of any of the following entities also serves as a
director:
29
- Pioneer
- UniCredito
- any other entity in a control relationship with Pioneer
None of the fund's Trustees or officers has any arrangement with any other
person pursuant to which that Trustee or officer serves on the Board of
Trustees. During the calendar years 2003 and 2004, none of the Independent
Trustees, nor any of their immediate family members, had any position, including
as an officer, employee, director or partner, with any of the following:
- the Fund
- any related fund
- Pioneer
- any affiliated person of the Fund or Pioneer
- UniCredito
- any other entity in a control relationship to the Fund or Pioneer
FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES IN APPROVING THE INVESTMENT
ADVISORY AGREEMENT AND SUBADVISORY AGREEMENT.
The 1940 Act requires that a fund's investment advisory and subadvisory
agreements be approved annually by both the Board of Trustees and a majority of
the Independent Trustees voting separately. The Independent Trustees have
determined that the terms of the Fund's investment advisory agreement and
subadvisory agreement are fair and reasonable and that the contracts are in the
Fund's best interest. The Independent Trustees believe that the investment
advisory agreement and subadvisory agreement will enable the Fund to enjoy high
quality investment advisory and subadvisory services at a cost they deem
appropriate, reasonable and in the best interests of the Fund and its
shareholders. In making such determinations, the Independent Trustees met
independently from the Interested Trustees of the Fund and any officers of
Pioneer, Highland, or their affiliates. The Independent Trustees also relied
upon the assistance of counsel to the Independent Trustees and counsel to the
Fund.
In evaluating the investment advisory agreement and subadvisory agreement, the
Independent Trustees reviewed materials furnished by Pioneer, including
information regarding Pioneer, its affiliates and their personnel, operations
and financial condition, and materials furnished by Highland, including
information regarding Highland, its affiliates and their personnel, operations
and financial condition. The Independent Trustees discussed with representatives
of both firms the Fund's proposed operations and their respective abilities to
provide advisory and other services to the Fund. The Independent Trustees also
reviewed:
- the experience of Highland in managing other portfolios with significant
investments in Senior Loans and the performance of such portfolios;
- the experience of the investment advisory and other personnel who would be
providing services to the Fund and the historical quality of the services
provided by Pioneer and Highland;
- the fee charged by Pioneer for investment advisory and administrative
services, as well as other compensation received by PIMSS, and the fees
Pioneer would pay to Highland;
- the Fund's projected total operating expenses, and Pioneer's agreement to
limit the Fund's expenses for three years;
30
- the fees and total expenses of investment companies with similar objectives
and strategies managed by other investment advisers; and
- the expected profitability to Pioneer of managing the Fund.
The Independent Trustees considered the following as relevant to their
recommendations: (1) the favorable history, reputation, qualification and
background of Pioneer, UniCredito and Highland, as well as the qualifications of
their personnel; (2) that the fee and expense ratios of the Fund are reasonable
given the quality of services expected to be provided and are comparable to or
lower than the fees and expense ratios of similar investment companies,
particularly other closed-end investment companies which are expected to be
leveraged that invest in dividend-paying equity securities and municipal
securities; and (3) the performance of other funds advised by Pioneer and
Highland that invest a significant portion of their assets in Senior Loans. The
Independent Trustees deemed each of these factors to be relevant to their
consideration of the Fund's investment advisory agreement and subadvisory
agreement.
CODE OF ETHICS
The Fund and Pioneer have adopted a code of ethics under Rule 17j-1 of the 1940
Act that is applicable to officers, directors/trustees and designated employees
of Pioneer and Pioneer Investment Management Limited ("PIML"). The code permits
such persons to engage in personal securities transactions for their own
accounts, including securities that may be purchased or held by the Fund, and is
designed to prescribe means reasonably necessary to prevent conflicts of
interest from arising in connection with personal securities transactions. The
code is on public file with and available from the SEC.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 11, 2005, the Trustees and officers of the Fund owned beneficially
in the aggregate less than 1% of any class of the outstanding shares of the
Fund. The Fund is not aware of any beneficial owner of 5% or more of any class
of its shares. The following is a list of the holders of record of 5% or more of
any class of the Fund's outstanding shares as of March 11, 2005:
RECORD HOLDER SHARE CLASS NUMBER OF SHARES % OF CLASS
---------------------------------- ------------- ---------------- ----------
Cede & Co. Common Shares 24,325,000 99.97%
P.O. Box 20 Bowling Greene Station
New York, NY 10274
INVESTMENT ADVISER AND SUBADVISER
The Fund has contracted with Pioneer to act as its investment adviser. Pioneer
is an indirect, majority owned subsidiary of UniCredito. Pioneer is part of the
global asset management group providing investment management and financial
services to mutual funds, institutional and other clients. As of December 31,
2004, assets under management were approximately $175 billion worldwide,
including over $42 billion in assets under management by Pioneer. Certain
Trustees or officers of the Fund are also directors and/or officers of certain
of UniCredito's subsidiaries. Pioneer has entered into an agreement with its
affiliate, PIML, pursuant to which PIML provides certain services and personnel
to Pioneer.
Pioneer has engaged Highland Capital Management, L.P. (as defined above
"Highland") to act as the Fund's subadviser. Highland is a limited partnership
100% owned by its employees. Highland has one general partner, Strand Advisors,
Inc. Strand Advisors, Inc. is a Delaware corporation. As of December 31, 2004,
Highland had approximately $11.9 billion in assets under management.
As the Fund's investment adviser, Pioneer oversees the Fund's operations and
supervises Highland, which is responsible for the day-to-day management of the
Fund's portfolio (see "Investment Subadviser" below). Except as
31
otherwise provided under "Investment Subadviser" below, Pioneer also maintains
books and records with respect to the Fund's securities transactions, and
reports to the Trustees on the Fund's investments and performance. The
Highland's expertise in managing portfolios of Senior Loans and structured
finance assets is particularly suited to the Fund's focus on Senior Loans.
Highland has strong expertise in syndicated loans, high yield bonds and
distressed investments.
In its capacity as subadviser to the Fund, Highland is responsible for the
selection and on-going monitoring of assets in the Fund's investment portfolio
and foreign currency hedging. Highland provides the Fund with investment
research, advice and supervision and furnishes the Fund with an investment
program consistent with the Fund's investment objectives and policies, subject
to the supervision of the Adviser and the Fund's Trustees. Highland determines
what portfolio securities will be purchased or sold, arranges for the placing of
orders for the purchase or sale of portfolio securities, selects brokers or
dealers to place those orders, maintains books and records with respect to the
Fund's securities transactions, and reports to the Trustees on the Fund's
investments and performance.
Highland is a defendant in an action entitled Richard Haskell, et al v. Goldman
Sachs & Co., Mellon Bank, N.A., Highland Capital Management, L.P., Genesis
Health Ventures, Inc. ("Genesis"), and George V. Hager, which was commenced on
January 27, 2004. The action was brought in the Supreme Court of the State of
New York, New York County, but has been moved to the U.S. Bankruptcy Court in
Wilmington, Delaware. The case was brought by certain junior creditors of
Genesis alleging fraud, conspiracy to commit fraud, and gross negligence with
respect to the defendants' actions as senior creditors in connection with
Genesis's Chapter 11 bankruptcy proceeding. The plaintiffs are seeking damages
in excess of $200 million. A motion to dismiss filed by the defendants is
currently pending.
Under the investment advisory agreement, Pioneer is not liable to the Fund
except by willful malfeasance, bad faith, gross negligence or reckless disregard
of its duties and obligations. In providing its services to the Fund, Pioneer
may draw upon the research and investment management expertise of Pioneer's
affiliate, PIML.
The Fund will enter into an administration agreement with the Adviser, pursuant
to which the Adviser will provide certain administrative and accounting services
to the Fund. The Adviser has appointed Princeton Administrators, L.P. as the
sub-administrator to the Fund to perform certain of the Adviser's administration
and accounts obligations to the Fund. Under the administration agreement, the
Fund will pay the Adviser a monthly fee equal to .07% of the Fund's average
daily managed assets up to $500 million and .03% for average daily managed
assets in excess of $500 million. The Adviser, and not the Fund, is responsible
for paying the fees of Princeton Administrators, L.P. Princeton Administrators,
L.P. is affiliated with Merrill, Lynch & Co., one of the underwriters of the
Fund's offering of common shares.
Pursuant to a separate agreement, the Fund may compensate the Adviser for
providing certain legal and accounting services.
COMPENSATION AND EXPENSES
Under the investment advisory agreement, the Fund will pay to Pioneer monthly,
as compensation for the services rendered and expenses paid by it, a fee equal
on an annual basis to 0.70% of the Fund's average daily managed assets. Because
the fees paid to Pioneer are determined on the basis of the Fund's managed
assets, Pioneer's interest in determining whether to leverage the Fund may
differ from the interests of the Fund. The advisory fee payable by the Fund to
Pioneer is higher than the fees paid by most U.S. investment companies.
The Fund's average daily managed assets are determined for the purpose of
calculating the advisory fee by taking the average of all the daily
determinations of total assets during a given calendar month. The fee is payable
for each calendar month as soon as practicable after the end of that month.
Under the terms of its investment advisory agreement with the Fund, Pioneer pays
all the operating expenses, including executive salaries and the rental of
office space, relating to its services for the Fund, with the exception of the
following, which are to be paid by the Fund: (a) charges and expenses for fund
accounting, pricing and appraisal services and related overhead, including, to
the extent such services are performed by personnel of Pioneer or its
affiliates, office space and facilities and personnel compensation, training and
benefits; (b) the charges and expenses
32
of auditors; (c) the charges and expenses of any administrator, custodian,
transfer agent, plan agent, dividend disbursing agent and registrar appointed by
the Fund; (d) issue and transfer taxes chargeable to the Fund in connection with
securities transactions to which the Fund is a party; (e) insurance premiums,
interest charges, expenses in connection with any preferred shares,
organizational and offering expenses, dues and fees for membership in trade
associations and all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies; (f) fees and expenses involved in
registering and maintaining registrations of the Fund and/or its shares with
federal regulatory agencies, state or blue sky securities agencies and foreign
jurisdictions, including the preparation of prospectuses and statements of
additional information for filing with such regulatory authorities; (g) all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
distributing prospectuses, notices, proxy statements and all reports to
shareholders and to governmental agencies; (h) charges and expenses of legal
counsel to the Fund and the Trustees; (i) compensation of those Trustees of the
Fund who are not affiliated with or interested persons of Pioneer or the Fund
(other than as Trustees); (j) the cost of preparing and printing share
certificates; (k) interest on borrowed money, if any; (l) the fees and other
expenses of listing the Fund's shares on the New York Stock Exchange or any
other national stock exchange; and (m) any other expense that the Fund, Pioneer
or any other agent of the Fund may incur (I) as a result of a change in the law
or regulations, (II) as a result of a mandate from the Board of Trustees with
associated costs of a character generally assumed by similarly structured
investment companies or (III) that is similar to the expenses listed above, and
that is approved by the Board of Trustees (including a majority of the Trustees
who are not affiliates of Pioneer) as being an appropriate expense of the Fund.
In addition, the Fund will pay all brokers' and underwriting commissions or
other fees chargeable to the Fund in connection with securities transactions to
which the Fund is a party or the origination of any Senior Loan in which the
Fund invests.
INVESTMENT SUBADVISER. As described in the prospectus, Highland serves as the
Fund's investment subadviser. Highland will, among other things, regularly
provide the Fund with investment research, advice and supervision and furnish
continuously an investment program for the Fund and, subject to the supervision
of Pioneer, manage the investment and reinvestment of the Fund's assets.
Highland, a Delaware limited partnership, is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act").
Highland was established in 1993 and had, as of December 31, 2004, approximately
$11.9 billion in assets under management. Highland's principal place of business
is located at 13455 Noel Road, Suite 1300, Dallas, Texas 75240.
Pioneer and Highland have entered into a subadvisory contract, dated as of
December 22, 2004, pursuant to which Highland has agreed, among other things,
to:
- comply with the provisions of the Fund's Declaration of Trust and
By-laws, the 1940 Act, the Advisers Act and the investment objectives,
policies and restrictions of the Fund;
- not take any action to cause the Fund to fail to comply with the
requirements of Subchapter M of the Code for qualification as a
regulated investment company;
- comply with any policies, guidelines, procedures and instructions as
Pioneer may from time to time establish;
- be responsible for voting proxies and acting on other corporate
actions if authorized to do so by the Board of Trustees or by Pioneer;
- maintain separate books and detailed records of all matters pertaining
to the portion of the Fund's assets advised by Highland required by
Rule 31a-1 under the 1940 Act relating to its responsibilities
provided under the subadvisory agreement with respect to the Fund;
- require that its Access Persons comply in all respects with Highland's
Code of Ethics, as in effect from time to time; and
- furnish reports to the Trustees and Pioneer.
33
SUBADVISORY FEE. For its services, Highland is entitled to a subadvisory fee
from Pioneer at an annual rate of 0.35% of the Fund's average daily managed
assets as set forth below. The fee will be paid monthly in arrears. The Fund
does not pay a fee to Highland.
EXPENSE LIMIT. Pioneer has agreed for the first three years of the Fund's
investment operations to limit the Fund's total expenses (excluding offering
costs for common and preferred shares, interest expense, the cost of defending
or prosecuting any claim or litigation to which the Fund is a party (together
with any amount in judgment or settlement), indemnification expenses or taxes
incurred due to the failure of the Fund to qualify as a regulated investment
company under the Code or any other nonrecurring or non-operating expenses) to
0.95% of the Fund's average daily managed assets. The dividend on any preferred
shares is not an expense.
PROXY VOTING
The Fund's Trustees have delegated to Pioneer the authority to vote proxies on
behalf of the Fund. The Trustees have approved the proxy voting guidelines of
Pioneer and will review the guidelines and suggest changes they deem advisable.
A summary of Pioneer's proxy voting policies and procedures are attached to this
statement of additional information as Appendix B.
DURATION AND TERMINATIONS; NONEXCLUSIVE SERVICES
The economic terms of the investment advisory and subadvisory agreements were
approved by the Fund's Board of Trustees at a meeting of the Board of Trustees
held on December 2, 2004, including a majority of the Trustees who are not
parties to the agreement or interested persons of any such party (as such term
is defined in the 1940 Act). The 1940 Act requires that the investment advisory
agreement be approved by a majority of the Fund's Board of Trustees, including a
majority of the Trustees who are not interested persons as that term is defined
in the 1940 Act, at an in person meeting of the Board of Trustees.
The investment advisory and subadvisory agreements were approved by the sole
common shareholder of the Fund as of December 8, 2004.
Unless earlier terminated as described below, the investment advisory agreement
will remain in effect for two years from the date of its execution and from year
to year thereafter if approved annually (i) by a majority of the Independent
Trustees of the Fund and (ii) by the Board of Trustees or by a majority of the
outstanding voting securities of the Fund. The investment advisory agreement may
be terminated without penalty on 60 days' written notice by either party thereto
or by a vote of a majority of the outstanding voting securities of the Fund and
will terminate in the event it is assigned (as defined in the 1940 Act). The
services of Pioneer are not deemed to be exclusive, and nothing in the relevant
agreement will prevent Pioneer or its affiliates from providing similar services
to other investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging in
other activities.
POTENTIAL CONFLICTS OF INTEREST
The Fund is managed by Pioneer and Highland, which also serve as investment
advisers to other funds and other accounts with investment objectives identical
or similar to those of the Fund. Securities frequently meet the investment
objectives of the Fund, these other funds and such other accounts. In such
cases, the decision to recommend a purchase to one fund or account rather than
another is based on a number of factors. The determining factors in most cases
are the amount of securities of the issuer then outstanding, the value of those
securities and the market for them. Other factors considered in the investment
recommendations include other investments that each fund or account presently
has in a particular industry and the availability of investment funds in each
fund or account.
It is possible that at times identical securities will be held by more than one
fund and/or account. However, positions in the same issue may vary and the
length of time that any fund or account may choose to hold its investment in the
same issue may likewise vary. To the extent that more than one of the funds
managed by Pioneer or Highland or a private account managed by Pioneer or
Highland seeks to acquire the same security at about the same time, the Fund may
not be able to acquire as large a position in such security as it desires or it
may have to pay a higher price for
34
the security. Similarly, the Fund may not be able to obtain as large an
execution of an order to sell or as high a price for any particular portfolio
security if Pioneer or Highland decides to sell on behalf of another account the
same portfolio security at the same time. On the other hand, if the same
securities are bought or sold at the same time by more than one fund or account,
the resulting participation in volume transactions could produce better
executions for the Fund. In the event more than one account purchases or sells
the same security on a given date, the purchases and sales will normally be made
as nearly as practicable on a pro rata basis in proportion to the amounts
desired to be purchased or sold by each account. Although other funds managed by
Pioneer or Highland may have the same or similar investment objectives and
policies as the Fund, their portfolios do not generally consist of the same
investments as the Fund or each other, and their performance results are likely
to differ from those of the Fund.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on behalf
of the Fund by Highland pursuant to authority contained in the Fund's investment
subadvisory agreement. Securities purchased and sold on behalf of the Fund
normally will be traded in the over-the-counter market on a net basis (i.e.,
without commission) through dealers acting for their own account and not as
brokers or otherwise through transactions directly with the issuer of the
instrument. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased and sold from and to dealers include a dealer's markup or markdown.
Highland normally seeks to deal directly with the primary market makers unless,
in its opinion, better prices are available elsewhere. Some securities are
purchased and sold on an exchange or in over-the-counter transactions conducted
on an agency basis involving a commission. Highland seeks to obtain the best
execution on portfolio trades. The price of securities and any commission rate
paid are always factors, but frequently not the only factors, in judging best
execution. In selecting brokers or dealers, Highland considers various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability and financial condition of
the dealer; the dealer's execution services rendered on a continuing basis; and
the reasonableness of any dealer spreads.
Highland may select broker-dealers that provide brokerage and/or research
services to the Fund and/or other investment companies or other accounts managed
by Highland. In addition, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), if Highland determines in
good faith that the amount of commissions charged by a broker-dealer is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker-dealer in
an amount greater than the amount another firm may charge. Such services may
include advice concerning the value of securities; the advisability of investing
in, purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; providing stock quotation services, credit
rating service information and comparative fund statistics; furnishing analyses,
electronic information services, manuals and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts and particular investment decisions; and effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Highland maintains a listing of broker-dealers who
provide such services on regular basis. However, because many transactions on
behalf of the Fund and other investment companies or accounts managed by
Highland are placed with broker-dealers (including broker-dealers on the
listing) without regard to the furnishing of such services, it is not possible
to estimate the proportion of such transactions directed to such dealers solely
because such services were provided. Highland believes that no exact dollar
value can be calculated for such services.
The research received from broker-dealers may be useful to Highland in rendering
investment management services to the Fund as well as other investment companies
or other accounts managed by Highland, although not all such research may be
useful to the Fund. Conversely, such information provided by brokers or dealers
who have executed transaction orders on behalf of such other accounts may be
useful to Highland in carrying out its obligations to the Fund. The receipt of
such research has not reduced Highland's normal independent research activities;
however, it enables Highland to avoid the additional expenses that might
otherwise be incurred if it were to attempt to develop comparable information
through its own staff.
The Pioneer Funds have entered into third-party brokerage and/or expense offset
arrangements to reduce the Funds' total operating expenses. Pursuant to
third-party brokerage arrangements, certain of the funds that invest primarily
in U.S. equity securities may incur lower custody fees by directing brokerage to
third-party broker-dealers. Pursuant to
35
expense offset arrangements, the funds incur lower transfer agency expenses by
maintaining their cash balances with the custodian.
The Board of Trustees periodically reviews Pioneer's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
GENERAL. The Depository Trust Company ("DTC" or the "Securities Depository")
will act as the Securities Depository with respect to the AMPS. One certificate
for all of the shares of each series will be registered in the name of Cede &
Co., as nominee of the Securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of shares of the AMPS contained in the Statement. Prior to
the commencement of the right of holders of the AMPS to elect a majority of the
Trustees, as described under "Description of AMPS -- Voting Rights" in the
prospectus, Cede & Co. will be the holder of record of the AMPS and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also facilitates the settlement among Direct Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Direct
Participants' accounts, thereby eliminating the need or physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The Rules
applicable to DTC and its Direct and Indirect Participants are on file with the
Securities and Exchange Commission.
THE AUCTION AGENT. Deutsche Bank Trust Company Americas (the "Auction Agent")
will act as agent for the Fund in connection with the auctions of the AMPS (the
"Auctions"). In the absence of willful misconduct or gross negligence on its
part, the Auction Agent will not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its duties
under the auction agency agreement between the Fund and the Auction Agent and
will not be liable for any error of judgment made in good faith unless the
Auction Agent was grossly negligent in ascertaining the pertinent facts.
The Auction Agent may conclusively rely upon, as evidence of the identities of
the holders of the AMPS, the Auction Agent's registry of holders, and the
results of auctions and notices from any broker-dealer ("Broker-Dealer") that
has entered into an agreement with the Auction Agent (a "Broker-Dealer
Agreement") (or other person, if permitted by the Fund) with respect to
transfers described under "The Auction - Secondary Market Trading and Transfers
of AMPS" in the prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an auction unless it is received by the
Auction Agent by 3:30 p.m., New York City time, on the business day preceding
such Auction.
The Auction Agent may terminate its auction agency agreement with the Fund 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
36
auction agency agreement. The Fund may remove the Auction Agent provided that
prior to such removal the Fund shall have entered into such an agreement with a
successor auction agent.
BROKER-DEALERS. The Auction Agent after each Auction for the AMPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate: (i) in the case of any Auction Date immediately preceding a
Dividend Period other than a Special Dividend Period, the product of (A) a
fraction the numerator of which is the number of days in such Dividend Period
(calculated by counting the date of original issue of such shares to but
excluding the next succeeding dividend payment date of such shares) and the
denominator of which is 360, times (B) 1/4 of 1%, times (C) $25,000 times (D)
the sum of the aggregate number of shares of outstanding AMPS for which the
Auction is conducted and (ii) in the case of any Special Dividend Period the
amount determined by mutual consent of the Trust and any such Broker-Dealers and
shall be based upon a selling concession that would be applicable to an
underwriting of fixed or variable rate AMPS with a similar final maturity or
variable rate dividend period, respectively, at the commencement of the Dividend
Period with respect to such Auction. For the purposes of the preceding sentence,
the AMPS will be placed by a Broker-Dealer if such shares were (a) the subject
of hold orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its customers who are
beneficial owners or (b) the subject of an order submitted by such Broker-Dealer
that is (i) a submitted bid of an existing holder that resulted in the existing
holder continuing to hold such shares as a result of the Auction or (ii) a
submitted bid of a potential bidder that resulted in the potential holder
purchasing such shares as a result of the Auction or (iii) a valid hold order.
The Fund may request the Auction Agent to terminate one or more Broker-Dealer
agreements at any time, provided that at least one Broker-Dealer agreement is in
effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in Auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any Auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that Auction.
RATING AGENCY GUIDELINES
The descriptions of Fitch, Inc. ("Fitch") and Moody's Investors Service, Inc.
("Moody's") rating guidelines ("Rating Agency Guidelines") contained in this
statement of additional information do not purport to be complete and are
subject to and qualified in their entireties by reference to the Statement, a
copy of which is attached as Appendix C to this statement of additional
information. A copy of the Statement is filed as an exhibit to the registration
statement of which the prospectus and this statement of additional information
are a part and may be inspected, and copies thereof may be obtained, as
described in the prospectus.
The composition of the Fund's portfolio reflects the Rating Agency Guidelines in
connection with the Fund's receipt of a rating of "Aaa" and "AAA" from Moody's
and Fitch, respectively, for the AMPS. These Rating Agency Guidelines relate,
among other things, to credit quality characteristics of issuers and
diversification requirements and specify various discount factors for different
types of securities (with the level of discount greater as the rating of a
security becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its investment
strategy are not eligible for inclusion in the calculation of the discounted
value of the Fund's portfolio. Such instruments include, for example, private
placements (other than Rule 144A securities) and other securities not within the
Rating Agency Guidelines. Accordingly, although the Fund reserves the right to
invest in such securities to the extent set forth herein, they have not and it
is anticipated that they will not constitute a significant portion of the Fund's
portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate discounted value, determined on the basis of the Rating Agency
Guidelines, greater than the aggregate liquidation preference of the AMPS plus
specified liabilities, payment obligations and other amounts, as of periodic
valuation dates. The Rating Agency Guidelines also require the Fund to maintain
asset coverage required by the 1940 Act as a
37
condition to paying dividends or other distributions on the Fund's common
shares. The effect of compliance with the Rating Agency Guidelines may be to
cause the Fund to invest in higher quality assets and/or to maintain relatively
substantial balances of highly liquid assets or to restrict the Fund's ability
to make certain investments that would otherwise be deemed potentially desirable
by Pioneer. The Rating Agency Guidelines are subject to change from time to time
with the consent of the relevant rating agency and would not apply if the Fund
in the future elected not to use financial leverage consisting of senior
securities rated by one or more rating agencies, although other similar
arrangements might apply with respect to other senior securities that the Fund
may issue.
The Fund intends to maintain, at specified times, a discounted value for its
portfolio at least equal to the amount specified by each rating agency. Moody's
and Fitch have each established separate guidelines for determining discounted
value. To the extent any particular portfolio holding does not satisfy the
applicable Rating Agency's Guidelines, all or a portion of such holding's value
will not be included in the calculation of discounted value (as defined by such
rating agency). The Rating Agency Guidelines do not impose any limitations on
the percentage of Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the discounted value of the Fund's
portfolio. The amount of such assets included in the Fund's portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the Fund's assets that are eligible for inclusion in the
discounted value of the Fund's portfolio under the Rating Agency Guidelines. For
a more detailed description of the Rating Agency Guidelines, see the Statement
which is attached to this Statement of Additional Information as Appendix C.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder acquiring, holding and
disposing of AMPS of the Fund. This discussion addresses only U.S. federal
income tax consequences to U.S. shareholders who hold their shares as capital
assets and does not address all of the U.S. federal income tax consequences that
may be relevant to particular shareholders in light of their individual
circumstances. This discussion also does not address the tax consequences to
shareholders that are subject to special rules, including, without limitation,
banks and financial institutions, insurance companies, dealers in securities or
foreign currencies, foreign shareholders, tax-exempt or tax-deferred plans,
accounts, or entities, or investors who engage in constructive sale or
conversion transactions. In addition, the discussion does not address state,
local or foreign tax consequences, and it does not address any tax consequences
other than U.S. federal income tax consequences. The discussion reflects
applicable tax laws of the United States as of the date of this statement of
additional information, which tax laws may be changed or subject to new
interpretations by the courts, Treasury or the Internal Revenue Service (the
"IRS") retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal income tax concerns affecting the Fund or its
shareholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine the
specific tax consequences to them of investing in the Fund, including the
applicable federal, state, local and foreign tax consequences to them and the
effect of possible changes in tax laws.
The Fund intends to elect to be treated and to qualify each year as a "regulated
investment company" under Subchapter M of the Code and to comply with applicable
distribution requirements so that it generally will not pay U.S. federal income
tax on income of the Fund, including net capital gains distributed to
shareholders. In order to qualify as a regulated investment company under
Subchapter M of the Code, which qualification this discussion assumes, the Fund
must, among other things, derive at least 90% of its gross income for each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% income test"). In addition to satisfying the
requirements described above, the Fund must satisfy an asset diversification
test in order to qualify as a regulated investment company. Under this test, at
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's assets must consist of cash and cash items (including receivables),
U.S. Government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Fund must not have invested
more than 5% of the value of the Fund's total assets in securities of any one
such issuer and as to which the Fund must not have held more than 10% of the
outstanding voting securities of any one such issuer), and no more than 25% of
the value of its total assets may be invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer, or of two or more issuers which the Fund controls and which are
engaged in the same or similar or related trades or businesses.
38
The American Jobs Creation Act of 2004 (the "2004 Tax Act") provides that for
taxable years of a regulated investment company beginning after October 22,
2004, net income derived from an interest in a "qualified publicly traded
partnership," as defined in the Code, will be treated as qualifying income for
purposes of the 90% income test, and for the purposes of the diversification
requirements described above, the outstanding voting securities of any issuer
includes the equity securities of a qualified publicly traded partnership and no
more than 25% of the value of a regulated investment company's total assets may
be invested in the securities of one or more qualified publicly traded
partnerships. In addition, the separate treatment for publicly traded
partnerships under the passive loss rules of the Code applies to a regulated
investment company holding an interest in a qualified publicly traded
partnership, with respect to items attributable to such interest.
If the Fund qualifies as a regulated investment company and, for each taxable
year, it distributes to its shareholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) and (ii) 90% of the excess of
its gross tax-exempt interest, if any, over certain disallowed deductions, the
Fund generally will not be subject to U.S. federal income tax on any income of
the Fund, including "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), distributed to shareholders. However, if the
Fund has met such distribution requirements but chooses to retain some portion
of its investment company taxable income or net capital gain, it generally will
be subject to U.S. federal income tax at regular corporate rates on the amount
retained. The Fund intends to distribute at least annually all or substantially
all of its investment company taxable income, net tax-exempt interest, and net
capital gain. If for any taxable year, the Fund did not qualify as a regulated
investment company, it would be treated as a corporation subject to U.S. federal
income tax and all distributions out of earnings and profits would be taxed to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay taxes and make distributions (which could be
subject to interest charges) before requalifying as a regulated investment
company.
Under the Code, the Fund will be subject to a nondeductible 4% U.S. federal
excise tax on a portion of its undistributed taxable ordinary income and capital
gains if it fails to meet certain distribution requirements with respect to each
calendar year. The Fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax, but as described
below, there can be no assurance that the Fund's distributions will be
sufficient to avoid entirely this tax.
Based in part on the lack of any present intention on the part of the Fund to
redeem or purchase AMPS at any time in the future, the Fund intends to take the
position that under present law the AMPS will constitute stock of the Fund and
distributions with respect to the AMPS (other than distributions in redemption
of the AMPS that are treated as exchanges under Section 302(b) of the Code) will
constitute dividends to the extent of the Fund's current or accumulated earnings
and profits as calculated for U.S. federal income tax purposes. This view relies
in part on a published ruling of the IRS stating that certain preferred stock,
similar in many material respects to the AMPS, represents equity. It is
possible, however, that the IRS might take a contrary position asserting, for
example, that the AMPS constitute debt of the Fund. If this position were
upheld, the discussion of the treatment of distributions below would not apply.
Instead distributions by the Fund to holders of AMPS would constitute interest,
whether or not such distributions exceeded the earnings and profits of the Fund,
would be included in the income of the recipient, and would be taxed as ordinary
income.
In general, assuming that the Fund has sufficient earnings and profits,
dividends from investment company taxable income are taxable as ordinary income
and distributions from net capital gain, if any, that are designated as capital
gain dividends are taxable as long-term capital gains for U.S. federal income
tax purposes without regard to the length of time the shareholder has held
shares of the Fund. Since the Fund's income is derived primarily from interest,
dividends of the Fund from its investment company taxable income generally will
not constitute "qualified dividend income" for federal income tax purposes and
thus will not be eligible for the favorable federal long-term capital gain tax
rates on qualified dividend income. In addition, the Fund's dividends are not
expected to qualify for any dividends-received deduction that might otherwise be
available for certain dividends received by shareholders that are corporations.
Capital gain dividends distributed by the Fund to individual shareholders
generally will qualify for the maximum 15% U.S. federal tax rate on long-term
capital gains. Under current law, the maximum 15% U.S.
39
federal tax rate on long-term capital gains will cease to apply to taxable years
beginning after December 31, 2008.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in its shares and any such
amount in excess of that basis will be treated as gain from the sale of shares,
as discussed below. The U.S. federal income tax status of all distributions will
be reported to shareholders annually.
If the Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the Fund as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the Fund may be "spilled back" and treated
as paid by the Fund (except for purposes of the 4% excise tax) during such
taxable year. In such case, shareholders generally will be treated as having
received such dividends in the taxable year in which the distributions were
actually made.
If the Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its investment company taxable income and
net tax-exempt interest, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.
The Fund may invest significantly in debt obligations that are in the lowest
rating categories or are unrated, including debt obligations of issuers not
currently paying interest or who are in default. Investments in debt obligations
that are at risk of or in default present special tax issues for the Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If the Fund utilizes leverage through borrowing or issuing preferred shares, a
failure by the Fund to meet the asset coverage requirements imposed by the 1940
Act or by any rating organization that has rated such leverage, or additional
restrictions that may be imposed by certain lenders on the payment of dividends
or distributions potentially could limit or suspend the Fund's ability to make
distributions on its common shares. Such a limitation or suspension or
limitation could prevent the Fund from distributing at least 90% of its
investment company taxable income and net tax-exempt interest as is required
under the Code and therefore might jeopardize the Fund's qualification for
taxation as a regulated investment company under the Code and/or might subject
the Fund to the 4% excise tax discussed above. Upon any failure to meet such
asset coverage requirements, the Fund may, in its sole discretion, purchase or
redeem shares of preferred stock in order to maintain or restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. The
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
40
For U.S. federal income tax purposes, the Fund is permitted to carry forward an
unused net capital loss for any year to offset its capital gains, if any, for up
to eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in U.S. federal income
tax liability to the Fund and are not expected to be distributed as such to
shareholders.
At the time of an investor's purchase of Fund shares, a portion of the purchase
price may be attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions by the Fund with respect to these shares from such appreciation or
income may be taxable to such investor even if the trading value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares and the distributions economically represent a
return of a portion of the investment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain options and futures contracts relating to foreign currency, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
shareholders. Under Treasury regulations that may be promulgated in the future,
any gains from such transactions that are not directly related to the Fund's
principal business of investing in stock or securities (or its options contracts
or futures contracts with respect to stock or securities) may have to be limited
in order to enable the Fund to satisfy the 90% income test. If the net foreign
exchange loss for a year were to exceed the Fund's investment company taxable
income (computed without regard to such loss), the resulting ordinary loss for
such year would not be deductible by the Fund or its shareholders in future
years.
Sales and other dispositions of Fund shares are taxable events for shareholders
that are subject to tax. Shareholders should consult their own tax advisers with
reference to their individual circumstances to determine whether any particular
transaction in Fund shares is properly treated as a sale for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if Fund shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted tax basis in the
shares sold. Such gain or loss will be treated as long-term capital gain or loss
if the shares sold were held for more than one year and otherwise generally will
be treated as short-term capital gain or loss. Any loss realized by a
shareholder upon the sale or other disposition of shares with a tax holding
period of six months or less will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains with
respect to such shares. Losses on sales or other dispositions of shares may be
disallowed under "wash sale" rules in the event substantially identical shares
of the Fund are purchased (including those made pursuant to reinvestment of
dividends and/or capital gains distributions) within a period of 61 days
beginning 30 days before and ending 30 days after a redemption or other
disposition of shares. In such a case, the disallowed portion of any loss
generally would be included in the U.S. federal tax basis of the shares acquired
in the other investments. The ability to otherwise deduct capital losses may be
subject to other limitations under the Code.
The Fund may, at its option, redeem the AMPS in whole or in part subject to
certain limitations and to the extent permitted under applicable law, and is
required to redeem all or a portion of the AMPS to the extent required to
maintain the Preferred Shares Basic Maintenance Amount and the Investment
Company Act Preferred Share Asset Coverage. Gain or loss, if any, resulting from
a redemption of AMPS generally will be taxed as gain or loss from the sale of
AMPS under Section 302 of the Code rather than as a dividend, but only if the
redemption distribution (a) is deemed not to be essentially equivalent to a
dividend, (b) is in complete redemption of a shareholder's interest in the Fund,
(c) is substantially disproportionate with respect to the shareholder, or (d)
with respect to a non-corporate shareholder, is in partial liquidation of the
shareholder's interest in the Fund. For the purposes of (a), (b), and (c) above,
a shareholder's ownership of common shares and AMPS will be taken into account
and the common shares and AMPS held by persons who are related to the redeemed
shareholder may also have to be taken into account. If none of the conditions
(a) through (d) are met, the redemption proceeds may be considered to be a
dividend distribution taxable as ordinary income as discussed above. In
addition, any declared but unpaid dividends distributed to shareholders in
connection with a redemption will be taxable to shareholders as dividends as
described above.
41
Under Treasury regulations, if a shareholder recognizes a loss with respect to
shares of $2 million or more for an individual shareholder, or $10 million or
more for a corporate shareholder, in any single taxable year (or a greater
amount over a combination of years), the shareholder must file with the IRS a
disclosure statement on Form 8886. Shareholders who own portfolio securities
directly are in many cases excepted from this reporting requirement but, under
current guidance, shareholders of regulated investment companies are not
excepted. A shareholder who fails to make the required disclosure to the IRS may
be subject to substantial penalties. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether or not the
taxpayer's treatment of the loss is proper. Shareholders should consult with
their tax advisers to determine the applicability of these regulations in light
of their individual circumstances.
Options written or purchased and futures contracts entered into by the Fund on
certain securities, indices and foreign currencies, as well as certain forward
foreign currency contracts, may cause the Fund to recognize gains or losses from
marking-to-market even though such options may not have lapsed, been closed out,
or exercised, or such futures and forward contracts may not have been performed
or closed out. The tax rules applicable to these contracts may affect the
characterization of some capital gains and losses realized by the Fund as
long-term or short-term. Certain options, futures and forward contracts relating
to foreign currencies may be subject to Section 988, as described above, and
accordingly may produce ordinary income or loss. Additionally, the Fund may be
required to recognize gain if an option, futures contract, short sale or other
transaction that is not subject to the mark-to-market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though the Fund may receive no corresponding
cash amounts, possibly requiring the disposition of portfolio securities or
borrowing to obtain the necessary cash. Losses on certain options, futures or
forward contracts and/or offsetting positions (portfolio securities or other
positions with respect to which the Fund's risk of loss is substantially
diminished by one or more options, futures or forward contracts) may also be
deferred under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available that would enable the Fund to ameliorate some adverse effects of the
tax rules described in this paragraph. The tax rules applicable to options,
futures, forward contracts and straddles may affect the amount, timing and
character of the Fund's income and gains or losses and hence of its
distributions to shareholders.
The federal income tax treatment of the Fund's investment in transactions
involving swaps, caps, floors, and collars and structured securities is
uncertain and may be subject to recharacterization by the IRS. To the extent the
tax treatment of such securities or transactions differs from the tax treatment
expected by the Fund, the timing or character of income recognized by the Fund
could be affected, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
The IRS has taken the position that if a regulated investment company has two
classes or more of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including ordinary income and net capital gain. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the regulated investment
company to such class. Consequently, if both common shares and AMPS are
outstanding, the Fund intends to designate distributions made to the classes of
particular types of income in accordance with the classes' proportionate shares
of such income. Thus, the Fund will designate dividends constituting capital
gain dividends and other taxable dividends in a manner that allocates such
income between the holders of common shares and AMPS in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law.
The Fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to its investments in those countries, which would, if imposed, reduce the yield
on or return from those investments. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The Fund does not
expect to satisfy the requirements for passing through to its shareholders their
pro rata shares of qualified foreign taxes paid by the Fund, with the general
result that shareholders would not be entitled to any deduction or credit for
such taxes on their own tax returns.
42
Federal law requires that the Fund withhold (as "backup withholding") 28% of
reportable payments, including dividends, capital gain distributions and the
proceeds of redemptions and exchanges or repurchases of Fund shares, paid to
shareholders who have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The Fund may nevertheless be required to
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of interest or dividend income.
The description of certain U.S. federal tax provisions above relates only to
U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. Investors other than
U.S. persons may be subject to different U.S. tax treatment, including a
non-resident alien U.S. withholding tax at the rate of 30% or at a lower treaty
rate on amounts treated as ordinary dividends from the Fund and, unless an
effective IRS Form W-8BEN or other authorized withholding certificate is on
file, to backup withholding at the rate of 28% on certain other payments from
the Fund. Under the provisions the 2004 Tax Act, dividends paid by the Fund to
non-U.S. shareholders that are derived from short-term capital gains and
qualifying net interest income (including income from original issue discount
and market discount), and that are properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to U.S. withholding tax, provided that the income would
not be subject to federal income tax if earned directly by the non-U.S.
shareholder. In addition, pursuant to the 2004 Tax Act, distributions of the
Fund attributable to gains from sales or exchanges of "U.S. real property
interests" (as defined in the Code and regulations) (including certain U.S. real
property holding corporations) will generally be subject to U.S. withholding tax
and may give rise to an obligation on the part of the non-U.S. shareholder to
file a United States tax return. The provisions contained in the 2004 Tax Act
relating to distributions to shareholders who are non-U.S. persons generally
will apply to distributions with respect to taxable years of the Fund beginning
after December 31, 2004 and before January 1, 2008. Shareholders should consult
their own tax advisers on these matters and on state, local, foreign and other
applicable tax laws.
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION
PERFORMANCE-RELATED INFORMATION. From time to time, in advertisements, in sales
literature or in reports to shareholders, the past performance of the Fund may
be illustrated and/or compared with that of other investment companies with a
similar investment objectives. For example, yield or total return of the Fund's
shares may be compared to averages or rankings prepared by Lipper, Inc., a
widely recognized independent service which monitors mutual fund performance;
the S&P 500 Index; the Russell U.S. Equity Indexes; the Dow Jones Industrial
Average; the Wilshire Total Market Value Index,; or other comparable indices or
investment vehicles. In addition, the performance of the Fund's shares may be
compared to alternative investment or savings vehicles and/or to indices or
indicators of economic activity, e.g., inflation or interest rates. The Fund may
also include securities industry or comparative performance information
generally and in advertising or materials marketing the Fund's shares.
Performance rankings and listings reported in newspapers or national business
and financial publications, such as Barron's, Business Week, Consumers Digest,
Consumer Reports, Financial World, Forbes, Fortune, Investors Business Daily,
Kiplinger's Personal Finance Magazine, Money Magazine, New York Times, Smart
Money, USA Today, U.S. News and World Report, The Wall Street Journal and Worth,
may also be cited (if the Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from various other
sources including Bloomberg Financial Markets, CDA/Wiesenberger, Donoghue's
Mutual Fund Almanac, Ibbotson Associates, Investment Company Data, Inc.,
Johnson's Charts, Kanon Bloch Carre and Co., Lipper, Inc., Micropal, Inc.,
Morningstar, Inc., Schabacker Investment Management and Towers Data Systems,
Inc. In addition, from time to time, quotations from articles from financial
publications such as those listed above may be used in advertisements, in sales
literature or in reports to shareholders of the Fund.
The Fund may also present, from time to time, historical information depicting
the value of a hypothetical account in one or more classes of the Fund since
inception.
Past performance is not indicative of future results. At any time in the future,
yields and total return may be higher or lower than past yields and total
return, and there can be no assurance that any historical results will continue.
43
PIONEER. From time to time, Pioneer or the Fund may use, in advertisements or
information furnished to present or prospective shareholders, information
regarding Pioneer including, without limitation, information regarding Pioneer's
and Highland's investment style, countries of operation, organization,
professional staff, clients (including other registered investment companies),
assets under management and performance record. These materials may refer to
opinions or rankings of Pioneer's and Highland's overall investment management
performance contained in third-party reports or publications. Pioneer's U.S.
mutual fund investment history includes creating in 1928 one of the first mutual
funds. Pioneer has traditionally served a mutual fund and an institutional
clientele.
Advertisements for the Fund may make reference to certain other open- or
closed-end investment companies managed by Pioneer.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The statements of assets and liabilities and operations of the Fund as of
December 8, 2004 appearing in this statement of additional information has been
audited by Ernst & Young LLP, independent registered public accounting firm, as
set forth in its 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. Ernst & Young LLP, located at 200 Clarendon Street,
Boston, Massachusetts 02116, provides accounting, auditing and tax preparation
services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 (File No. 811- 21654), including amendments
thereto, relating to the AMPS offered hereby, has been filed by the Fund with
the SEC, Washington, D.C. The prospectus and this statement of additional
information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further information
with respect to the Fund and the AMPS offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
statement of additional information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the SEC's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees
prescribed by the SEC.
44
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
PIONEER FLOATING RATE TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 8, 2004
----------------
ASSETS:
Cash......................................................... $ 100,084
Receivable from Investment
Adviser...................................................... 40,000
Deferred offering costs...................................... 1,016,100
----------
Total assets................................................. $1,156,184
----------
LIABILITIES:
Accrued organizational
Expenses..................................................... $ 40,000
Accrued offering costs....................................... 1,016,100
----------
Total liabilities............................................ $1,056,100
----------
Net Assets (5,240, common shares issued and outstanding;
unlimited shares authorized).............................. $ 100,084
----------
Net asset value per share................................... $ 19.10
----------
<
STATEMENT OF OPERATIONS
ONE DAY ENDED DECEMBER 8, 2004
Investment income............................................ $ --
--------
Organizational expenses...................................... 40,000
Less: Reimbursement from Investment Adviser.................. (40,000)
--------
Net Expenses................................................. --
Net Investment income........................................ $ --
--------
45
NOTES
1. ORGANIZATION
Pioneer Floating Rate Trust (the "Trust") is a non-diversified, closed-end
management investment company organized under the Investment Company Act of 1940
on October 6, 2004, which has had no operations other than the sale and issuance
of 5,240 shares at an aggregate purchase price of $100,084 to Pioneer Funds
Distributor, Inc., an affiliate of Pioneer Investment Management, Inc.
("Pioneer" or the "Adviser"). The Adviser has agreed to reimburse all of the
Trust's organizational expenses and the amount by which the aggregate of all
offering costs (other than the sales load but including reimbursement of
underwriters' expenses of $0.00667 per common share) exceeds $0.04 per common
share. The line items Receivable from Investment Adviser and Reimbursement from
Investment Adviser reflect the anticipated reimbursement by the Adviser of the
Trust's organizational expenses. Offering costs, estimated to be approximately
$1,016,100, up to $0.04 per common share, will be charged to the Trust's
paid-in-capital at the time shares of beneficial interest are sold.
2. ACCOUNTING POLICIES
The preparation of the financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from these estimates.
3. AGREEMENTS
The Trust has entered into an advisory agreement with the Adviser, which, upon
commencement of investment operations, provides for payment of a monthly fee
computed at the annual rate of 0.70% of the Trust's average daily Managed
Assets. "Managed Assets" means the total assets of the Trust (including any
assets attributable to leverage) minus accrued liabilities (other than
liabilities representing leverage). For purposes of calculating "Managed
Assets," the liquidation preference of any preferred shares outstanding is not
considered a liability. Pioneer Investment Management Shareholder Services, Inc.
("PIMSS"), a wholly owned indirect subsidiary of UniCredito Italiano S.p.A., and
a affiliate of the Adviser, has contracted with the Trust to provide transfer
agent and shareholder services to the Trust. PIMSS has retained Mellon Investor
Services, LLC ("Mellon") to provide sub-transfer agent, registrar, shareholder
servicing agent and dividend dispersing agent services for the Trust. The Trust
will pay PIMSS its cost of providing such services to the Trust, including the
cost of Mellon's services.
As described in the prospectus, Highland Capital Management, L.P. ("Highland")
serves as the Trust's investment subadviser. Highland will, among other things,
regularly provide the Trust with investment research, advice and supervision and
furnish continuously an investment program for the Trust and, subject to the
supervision of Pioneer, manage the investment and reinvestment of the Trust's
assets. For its services, Highland is entitled to a subadvisory fee from Pioneer
at an annual rate of 0.35% of the Trust's average daily Managed Assets as set
forth below. The fee will be paid monthly in arrears. The Trust does not pay a
fee to Highland.
The Adviser has agreed for the first three years of the Trust's investment
operations to limit the Trust's total annual expenses (excluding offering costs
for common and preferred shares, interest expense, the cost of defending or
prosecuting any claim or litigation to which the Trust is a party together with
any amount in judgment or settlement, indemnification expenses or taxes incurred
due to the failure of the Trust to qualify as a regulated investment company
under the Internal Revenue Code or any other non-recurring or non-operating
expenses) to 0.95% of the Trust's average daily Managed Assets. The dividend on
any preferred shares is not an expense.
The Trust has entered into an administration agreement with the Adviser,
pursuant to which the Adviser will provide certain administrative and accounting
services to the Trust. The Adviser has appointed Princeton Administrators, L.P.
("Princeton") as the sub-administrator to the Trust to perform certain of the
Adviser's administration and accounts obligations to the Trust. Under the
administration agreement, the Trust will pay
46
the Adviser a monthly fee equal to 0.07% of the Trust's average daily Managed
Assets up to $500 million and 0.03% for average daily Managed Assets in excess
of $500 million. The Adviser, and not the Trust, is responsible for paying the
fees of Princeton, which is affiliated with Merrill, Lynch & Co., one of the
underwriters of the Trust's offering of common shares. Pursuant to a separate
agreement, the Trust may compensate the Adviser for providing certain legal and
accounting services.
4. FEDERAL INCOME TAXES
The Trust intends to qualify as a "regulated investment company" and to comply
with the applicable provisions of the Internal Revenue Code, such that it will
not be subject to Federal income tax on taxable income (including realized
capital gains) that is distributed to shareholders.
47
Report of Independent Registered Public Accounting Firm
48
To the Shareholder and
Board of Trustees of
Pioneer Floating Rate Trust
We have audited the accompanying statement of assets and liabilities of Pioneer
Floating Rate Trust (the "Trust") as of December 8, 2004 (date of
capitalization) and the related statement of operations for the one-day period
then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of Pioneer Floating Rate Trust at
December 8, 2004 (date of capitalization), and the results of its operations for
the one-day period then ended, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
December 15, 2004
Boston, Massachusetts
49
Pioneer Floating Rate Trust
FINANCIAL HIGHLIGHTS 1/31/05 (unaudited)
December 23, 2004 to
January 31, 2005 (1)
--------------------
Per common share operating performance (2)
Net asset value, beginning of period $ 19.10(5)
--------
Increase (decrease) from investment operations:
Net investment income 0.04
Net realized and unrealized gain on investments 0.08
Distributions to preferred shareowners from net
investment income --
--------
Net increase from investment operations $ 0.12
Capital charge with respect to issuance of:
common shares (0.04)
--------
Net increase in net asset value $ 0.08
--------
Net asset value, end of period (3) $ 19.18
--------
Market value, end of period (3) $ 20.00
--------
Total return at market value (6) 0.00%
Total return on nav (7) 0.42%
Ratios to average net assets of holders of Common Shares
Net expenses (8) 0.84%(4)
Net investment income before preferred share
dividends (8) 2.00%(4)
Preferred share dividends --%(4)
Net investment income available to holders of Common
Shares 2.00%(4)
Portfolio turnover 6.47%
Net assets of holders of Common Shares, end of period
(in thousands) $432,563
Preferred shares outstanding (in thousands) $ --
Asset coverage per preferred share, end of period $ --
Average market value per preferred share $ --
Liquidation value per preferred share $ --
Ratios to average net assets of common shareowners before
reimbursement of organization expenses
Net Expenses (8) 0.94%(4)
Net investment income before preferred share
dividends (8) 1.90%(4)
Preferred share dividends --%(4)
Net investment income available to common shareowners 1.90%(4)
(1) Trust shares were first publicly offered on December 23, 2004.
(2) The per share data presented above is based upon the average common shares
outstanding for the period presented.
50
(3) Net asset value and market value are published in Barron's on Saturday, The
Wall Street Journal on Monday and The New York Times on Monday and
Saturday.
(4) Annualized.
(5) Net asset value immediately after the closing of the first public offering
was $19.06.
(6) Total investment return is calculated assuming a purchase of common shares
at the current market value on the first day and a sale at the current
market value on the last day of the period reported. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions on the
shares of the Trust. Total investment returns less than a full period are
not annualized. Past performance is not a guarantee of future results.
(7) Total return on net asset value is calculated assuming a purchase at the
offering price of $20.00 less the sales load of $0.90, and the ending net
asset value per share of $19.18.
(8) Ratios do not reflect the effect of dividend payments to preferred
shareowners.
The information above represents the unaudited operating performance data for a
share of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data for the period indicated. This
information has been determined based upon financial information provided in the
financial statements and market value data for the Trust's common shares.
The accompanying notes are an integral part of these financial statements.
51
Pioneer Floating Rate Trust
STATEMENT OF ASSETS AND LIABILITIES 1/31/05 (unaudited)
ASSETS:
Investments in securities, at value (COST $524,161,362) $525,787,675
Cash 19,454,251
Receivables -
Investment securities sold 9,557,307
Interest 429,944
Unrealized appreciation on unfunded corporate loans 106,080
Receivable from Investment Adviser 40,000
Other assets 3,694
------------
Total Assets $555,378,951
------------
LIABILITIES:
Payables -
Investment securities purchased $121,900,537
Offering costs payable 595,525
Due to affiliates 318,355
Accrued expenses 1,525
------------
Total liabilities $122,815,942
------------
PREFERRED SHARES AT REDEMPTION VALUE:
$25,000 liquidation value per share; no shares outstanding $ --
------------
Net assets applicable to common shareowners $432,563,009
------------
NET ASSETS APPLICABLE TO COMMON SHAREOWNERS:
Paid-in capital $429,903,084
Undistributed net investment income 826,427
Accumulated net realized gain on investments 83,741
Net unrealized gain on investments 1,749,757
------------
Net assets applicable to common shareowners $432,563,009
------------
Net Asset Value Per Share:
(Unlimited number of shares authorized)
Based on $432,563,009/22,555,240 common shares $ 19.18
------------
The accompanying notes are an integral part of these financial statements.
52
Pioneer Floating Rate Trust
STATEMENT OF OPERATIONS (unaudited)
For the period 12/23/04 (commencement of operations) to 1/31/05
INVESTMENT INCOME:
Interest $1,168,405
Facility and other fees 4,827
----------
Total investment income $1,173,232
----------
EXPENSES:
Management fees $ 289,414
Administration fees 28,941
Transfer agent fees and expenses 4,690
Custodian fees 3,759
Registration fees 3,006
Organization costs 40,000
Professional fees 7,145
Printing fees 1,864
Trustees' fees 1,657
Miscellaneous 6,329
----------
Total expenses $ 386,805
----------
Reimbursement of organization fees $ (40,000)
----------
Net expenses $ 346,805
----------
Net investment income $ 826,427
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments $ 83,741
----------
Change in net unrealized gain on:
Investments $1,626,313
Unfunded corporate loans 123,444 $1,749,757
---------- ----------
Net gain on investments $1,833,498
----------
DIVIDENDS TO PREFERRED SHAREOWNERS FROM NET
INVESTMENT INCOME $ --
----------
Net increase in net assets applicable to common shareowners
resulting from operations $2,659,925
----------
The accompanying notes are an integral part of these financial statements.
53
Pioneer Floating Rate Trust
STATEMENT OF CHANGES (unaudited)
For the period 12/23/04 (commencement of operations) to 1/31/05
12/23/04
to
1/31/05
------------
FROM OPERATIONS:
Net investment income $ 826,427
Net realized gain on investments 83,741
Change in net unrealized gain on investments 1,749,757
Dividends to preferred shareowners from net investment income --
------------
Net increase in net assets applicable to common shareowners $ 2,659,925
------------
FROM TRUST SHARE TRANSACTIONS:
Net proceeds from the issuance of common shares $430,705,000
Common share offering expenses charged to paid-in capital (902,000)
------------
Net increase in net assets applicable to common shareowners
resulting from Trust share transactions $429,803,000
Net increase in net assets applicable to common shareowners $432,462,925
NET ASSETS APPLICABLE TO COMMON SHAREOWNERS:
Beginning of period 100,084
------------
End of period (including undistributed net investment income of
$826,427) $432,563,009
------------
The accompanying notes are an integral part of these financial statements.
54
PIONEER FLOATING RATE TRUST
SCHEDULE OF INVESTMENTS 1/31/05 (unaudited)
Principal S&P Moody's
Amount Rating Rating Value
----------- ------ ------- -----------
SENIOR SECURED FLOATING RATE LOANS - 79.5% of Net Assets*
Aerospace & Defense - 3.5%
$ 3,500,000 B- B2 American Airlines, Term Facility, 12/17/10 $ 3,547,033
520,674 B- B3 DeCrane Aircraft Holdings, Inc., Term B, 6/30/08 520,674
2,628,366 B- B3 DeCrane Aircraft Holdings, Inc., Term D, 6/30/08 2,654,649
5,000,000 NR Ba3 United Airlines, Inc. DIP, Tranche B, 6/30/05 5,046,875
3,000,000 B+ Ba3 Vought Aircraft Industries, Inc., Tranche B L/C Deposit, 12/22/11 2,955,000
-----------
$14,724,231
-----------
Broadcasting - 0.6%
2,500,000 B B2 Enterprise NewsMedia, LLC, Term, 6/30/12 $ 2,498,908
-----------
Cable - 8.7%
2,000,000 B NR Century Cable Holdings, LLC, Discretionary Term, 12/31/09 $ 1,987,708
2,000,000 NR NR Century Cable Holdings, LLC, Term, 6/30/09 1,988,750
15,950,000 CCC+ B2 Charter Communications Operating, LLC, Tranche Term B, 4/27/11 15,921,513
4,000,000 B+ B1 NTL Investment Holdings, Ltd., B2 Sub-Tranche, 4/14/12 4,040,000
5,000,000 NR B3 Olympus Cable Holdings, LLC, Term A, 6/30/10 4,952,345
2,833,333 BB- B1 Telewest Communications Networks, Ltd., B Facility, 11/30/12 2,868,396
2,166,667 BB- B1 Telewest Communications Networks, Ltd., C Facility, 11/30/13 2,194,563
2,970,000 CCC+ B2 WideOpenWest Finance, LLC, Term B, 12/22/10 2,989,801
-----------
$36,943,076
-----------
Chemicals - 1.2%
3,178,943 B+ B1 Celanese Holdings, LLC, Term B (Dollar TL), 4/6/11 $ 3,238,548
2,000,000 B B2 Huntsman, LLC, Term B, 3/31/10 2,035,500
-----------
$ 5,274,048
-----------
55
Consumer - Durables - 0.2%
1,000,000 BB- Ba3 National Bedding Co., Term B, 2/28/08 $ 1,014,688
-----------
Consumer - Non-durables - 2.6%
3,750,000 B B3 CEI Holdings, Inc. (Cosmetic Essence), First Lien Term, 12/3/10 $ 3,778,125
5,000,000 B+ B1 Jarden Corp., Term, 1/24/12 5,051,785
1,985,000 B+ B1 Solo Cup Co., Term, 2/27/11 2,022,840
-----------
$10,852,750
-----------
Diversified Media - 1.6%
4,000,000 BB- Ba3 Regal Cinemas, Inc., Term, 11/10/10 $ 4,051,668
2,818,354 BB Ba3 RH Donnelley, Tranche A-3 Term, 12/31/09 2,840,374
-----------
$ 6,892,042
-----------
Energy - 3.6%
6,000,000 BBB+ Ba3 Mainline, L.P., Term, 12/17/11 $ 6,052,500
3,000,000 NR B1 NSG Holdings II, LLC, Initial Term, 12/13/11 3,051,564
2,000,000 B+ B1 Regency Gas Services, LLC, Term, 6/1/10 2,037,500
4,000,000 BB- Ba2 Universal Compression, Inc., Term B, 2/15/12 4,056,252
-----------
$15,197,816
-----------
Food & Drug - 0.5%
2,000,000 BB- Ba3 Herbalife International, Inc., Term, 12/21/10 $ 2,034,376
-----------
Food & Tobacco - 5.1%
3,000,000 B NR Captain D's, LLC, First Lien Term, 12/27/10 $ 3,007,500
2,000,000 B NR Captain D's, LLC, Second Lien Term, 6/27/11 1,990,000
4,000,000 B+ B1 Carrols Corp., Term B, 12/31/10 4,070,000
4,000,000 BB Ba2 Constellation Brands, Inc., Tranche B Term, 11/30/11 4,055,000
2,000,000 BB- Ba2 Landry's Restaurants, Inc., Term, 12/28/10 2,022,500
997,468 B+ B2 Merisant Co., Tranche B Term, 1/11/10 1,001,832
5,471,275 B+ B1 Pinnacle Foods Holding Corp., Term, 11/25/10 5,475,833
-----------
$21,622,665
-----------
Forest Products - 0.5%
1,979,452 BB Ba3 Boise Cascade Holdings, LLC, Tranche C Term, 10/29/10 $ 1,984,175
-----------
Gaming & Leisure - 6.0%
4,000,000 B Ba3 CNL Hospitality Properties, Inc., Term Facility, 10/13/06 $ 4,065,000
1,000,000 B+ B1 Herbst Gaming, Inc., Term, 10/8/10 1,015,938
5,000,000 B+ Ba3 Knowledge Learning Corp., Term, 1/7/12 5,046,875
4,959,193 B- NR OpBiz, LLC, Term A, 8/31/10 4,909,601
y
56
11,623 B- NR OpBiz, LLC, Term B, 8/31/10 11,497
1,259,259 B B1 Playpower, Inc., Dollar Term, 12/18/09 1,275,000
4,000,000 NR Ba3 Universal City Development Partners, Ltd., Term, 6/9/11 4,065,000
4,000,000 B- B1 Wyndham International, Inc., Term I, 6/30/06 4,024,168
838,409 B+ B2 Wynn Las Vegas, LLC, Term, 12/14/11 850,199
-----------
$25,263,278
-----------
Healthcare - 2.2%
2,250,000 B B1 Aircast, Inc., First Lien Term, 12/7/10 $ 2,270,392
4,000,000 B+ B1 Alliance Imaging, Inc., Tranche C1 Term, 12/29/11 4,038,752
1,059,222 B B2 Hanger Orthopedic Group, Inc., Tranche Term B, 9/30/09 1,068,490
2,000,000 B+ B2 SFBC International, Inc., Term, 11/1/10 2,035,000
-----------
$ 9,412,634
-----------
57
PIONEER FLOATING RATE TRUST
SCHEDULE OF INVESTMENTS 1/31/05 (continued)(unaudited)
Principal S&P Moody's
Amount Rating Rating Value
--------- ------ ------- -----
Housing - 8.2%
$4,000,000 B+ B2 Associated Materials, Inc., Term, 8/29/10 $ 4,065,000
4,000,000 B B1 Atrium Companies, Inc., Term, 12/28/11 4,053,332
7,000,000 BBB- Ba2 General Growth Properties, Inc., Tranche Term B, 11/12/08 7,056,147
4,000,000 B+ B1 Headwaters, Inc., Term B, 4/30/11 4,057,500
3,792,500 B B1 Lake at Las Vegas Joint Venture, First Lien Term, 11/1/09 3,822,131
5,000,000 B B2 LNR Property Corp., Tranche Term B, 1/21/08 5,029,690
2,500,000 B+ B3 Propex Fabrics, Inc., Term, 12/31/11 2,509,375
4,000,000 BB- Ba3 Woodlands Commercial Properties Co., L.P., Bridge, 8/30/05 4,035,000
-----------
$34,628,175
-----------
Information Technology - 3.5%
5,000,000 B B1 AMKOR Technology, Inc., Second Lien Term, 10/27/10 $ 5,170,835
5,000,000 B B3 ON Semiconductor Corp., Tranche Term G, 12/15/11 5,031,250
480,000 B+ B3 Verifone, Second Lien Term, 12/31/11 495,300
4,000,000 B B2 Vertafore, First Lien Term, 12/22/10 4,030,000
-----------
$14,727,385
-----------
Manufacturing - 1.0%
3,000,000 B+ B2 Maxim Crane Works, L.P., First Lien Term, 1/28/10 $ 3,052,500
1,000,000 B+ B3 Maxim Crane Works, L.P., Second Lien Term, 1/28/12 1,030,000
-----------
$ 4,082,500
-----------
Metals & Minerals - 3.9%
4,620,694 B B3 CII Carbon, LLC, Term, 6/25/08 $ 4,562,936
3,500,000 B+ B1 International Mill Service, Inc., First Lien Tranche C Term, 12/31/10 3,561,250
3,500,000 NR B3 Murray Energy Corp., Tranche Term B, 1/28/10 3,513,750
1,826,923 BB- Ba2 Novelis, Inc., Canadian Term, 1/7/12 1,843,924
58
3,173,077 BB- Ba2 Novelis, Inc., US Term, 1/7/12 3,201,723
-----------
$16,683,583
-----------
Retail - 4.2%
4,000,000 BB Ba2 Blockbuster, Inc., Tranche B Term, 8/20/11 $ 3,990,500
5,000,000 B+ B1 Dollarama Group, L.P., Term B, 11/18/11 5,046,875
5,000,000 B+ B1 Harbor Freight Tools USA, Inc., Term, 7/15/10 5,018,125
3,968,254 B- B3 Home Interiors & Gifts, Initial Term, 3/31/11 3,847,222
-----------
$17,902,722
-----------
Service - 3.7%
2,500,000 NR B2 Alliance Laundry Systems, LLC, Term, 8/2/07 $ 2,515,625
3,000,000 B B1 Alliance Laundry Systems, LLC, Term, 1/27/12 3,038,751
1,013,550 BB B1 Allied Waste North America, Inc., New Tranche B Term, 1/15/10 1,029,748
981,531 BB B1 Allied Waste North America, Inc., New Tranche C Term, 1/15/10 997,277
1,500,000 BB B1 IESI Corp., Term, 1/21/12 1,524,375
6,883,853 NR NR NEFF Rental, Inc., Initial Term, 5/1/08 6,746,176
-----------
$15,851,952
-----------
Telecommunications - 7.5%
5,000,000 B+ B1 Alaska Communications Systems Holdings, Inc., Term, 2/1/12 $ 5,000,000
4,000,000 B- B1 Cricket Communications, Inc. (aka Leap Wireless), Term B, 1/10/11 4,008,332
5,000,000 BB B1 PanAmSat Corp., Tranche Term B, 8/20/11 5,044,470
4,000,000 CCC- B3 RCN Corp., Term, 12/21/11 4,030,000
3,500,000 B B1 United Online, Term, 12/13/08 3,548,125
1,000,000 B+ B3 Valor Telecommunications Enterprises, LLC, Second Lien Term, 11/3/11 1,031,125
5,000,000 NR Ba3 WestCom Corp., Tranche B Term, 12/17/10 5,084,375
4,000,000 B+ Caa1 WilTel Communications, LLC, Second Lien Term, 12/31/10 4,050,000
-----------
$31,796,427
-----------
Transportation - 3.5%
2,000,000 NR B2 Accuride Corp., Term B, 1/31/12 $ 2,000,000
392,157 BB- Ba2 Federal-Mogul Corp., Letter of Credit, 12/9/05 394,853
3,607,843 BB- B1 Federal-Mogul Corp., Term, 12/9/11 3,629,267
4,000,000 BB- B2 Key Plastics LLC/Key Safety Systems, Inc., Term C, 6/29/11 4,030,000
3,500,000 BB Ba3 Laidlaw International, Inc., Term B Facility, 6/19/09 3,516,954
1,216,306 B- Caa1 Quality Distribution, Inc., Term, 11/13/09 1,216,306
59
------------
$ 14,787,380
------------
Utility - 5.4%
4,000,000 B B1 Basic Energy Services, Term B, 10/3/09 $ 4,030,000
4,442,782 B+ B2 LSP Kendall Energy, LLC, Project, 11/22/06 4,253,963
1,792,891 NR Ba3 Magellan Midstream Holdings, Loan, 12/10/11 1,817,543
1,750,000 B+ Ba3 NRG Energy, Inc., Credit Linked Deposit, 12/24/07 1,756,563
2,250,000 B+ Ba3 NRG Energy, Inc., Term, 12/24/11 2,264,625
2,250,000 BB- B1 Pike Electric, Inc., Tranche Term B, 12/10/12 2,290,079
3,000,000 B+ B1 Reliant Energy, Inc., Term, 4/30/10 3,023,838
3,500,000 BB- Ba2 Texas Genco, LLC, Initial Term, 12/14/11 3,548,125
------------
$ 22,984,736
------------
Wireless Communication - 2.3%
2,000,000 B- B2 Centennial Cellular Operating Co., Term, 2/9/11 $ 2,017,968
7,500,000 B- B2 Triton PCS Holdings, Inc., Term, 11/18/09 7,610,160
------------
$ 9,628,128
------------
TOTAL SENIOR SECURED FLOATING RATE OBLIGATIONS
(Cost $335,161,362) (a) $336,787,675
------------
60
Pioneer Floating Rate Trust
SCHEDULE OF INVESTMENTS 1/31/05 (continued)(unaudited)
PRINCIPAL S&P MOODY'S
AMOUNT RATING RATING VALUE
----------- ------ ------- -------------
TEMPORARY CASH INVESTMENTS - 44.6% of
Net Assets
Repurchase Agreements - 44.6%
Bear Stearns, Inc., 2.42%, dated 1/31/05,
repurchase
price of $46,352,000 plus accrued
interest on 2/1/05 collateralized by $47,613,000 U.S.
$46,352,000 Treasury Bill, 2.48%, 5/12/05 $ 46,352,000
Bear Stearns, Inc., 2.42%, dated 1/31/05, repurchase
price of $16,648,000 plus accrued
interest on 2/1/05 collateralized by $17,179,000 U.S.
16,648,000 Treasury Bill, 2.651%, 7/7/05 16,648,000
Greenwich Capital Markets, 2.40%, dated 1/31/05,
repurchase price of $63,000,000 plus accrued
interest on 2/1/05 collateralized by $64,447,000 U.S.
63,000,000 Treasury Notes, 3.125%, 1/31/07 63,000,000
UBS Warburg, Inc., 2.44%, dated 1/31/05, repurchase
price of $38,600,000 plus accrued
interest on 2/1/05 collateralized by $45,952,000 U.S.
38,600,000 Treasury STRIPS, 3.606%, 5/15/09 38,600,000
UBS Warburg, Inc., 2.44%, dated 1/31/05, repurchase
price of $24,400,000 plus accrued
interest on 2/1/05 collateralized by $28,145,000 U.S.
24,400,000 Treasury STRIPS, 3.534%, 8/15/08 24,400,000
-------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $189,000,000) $ 189,000,000
-------------
TOTAL INVESTMENTS IN SECURITIES - 124.1%
(Cost $524,161,362) (a) $ 525,787,675
-------------
OTHER ASSETS AND LIABILITIES - (24.1)% $(102,224,666)
-------------
PREFERRED SHARES AT REDEMPTION VALUE - (0.0)% $ --
-------------
NET ASSETS APPLICABLE TO COMMON SHAREOWNERS - 100.0% $ 423,563,009
-------------
NRSecurity not rated by S&P or Moody's.
* Senior secured floating rate loans in which the Trust invests generally pay
interest at rates that are periodically redetermined by
61
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as LIBOR (London InterBank Offered Rate), (ii) the prime rate
offered by one or more major United States banks, (iii) the certificate of
deposit or (iv) other base lending rates used by commercial lenders.
(a) At January 31, 2005, the net unrealized loss on investments based on cost
for federal income tax purposes of $524,161,362 was as follows:
Aggregate gross unrealized gain for all investments
in which there is an excess of value over tax cost $1,994,023
Aggregate gross unrealized loss for all investments
in which there is an excess of tax cost over value (367,710)
----------
Net unrealized gain $1,626,313
----------
For financial reporting purposes net unrealized gain on investments was
$1,626,313 and cost of investments aggregated $524,161,362.
Purchases and sales of securities (excluding temporary cash investments)
for the period ended January 31, 2005, aggregated $346,181,505 and
$11,106,087, respectively.
62
PIONEER FLOATING RATE TRUST
NOTES TO FINANCIAL STATEMENTS 1/31/05 (unaudited)
1. Organization and Significant Accounting Policies
Pioneer Floating Rate Trust (the "Trust") was organized as a Delaware statutory
trust on October 6, 2004. Prior to commencing operations on December 23, 2004,
the Trust had no operations other than matters relating to its organization and
registration as a non-diversified, closed-end management investment company
under the Investment Company Act of 1940, as amended, and the sale and issuance
to Pioneer Funds Distributor, Inc., an affiliate of Pioneer Investment
Management, Inc. ("PIM"), the Trust's investment adviser, a wholly owned
indirect subsidiary of UniCredito Italiano S.p.A. (UniCredito Italiano), of
5,240 shares of beneficial interest at an aggregate purchase price of $100,084.
PIM has agreed to pay all the Trust's organizational expenses and to pay the
amount by which the aggregate offering costs (other than the sales load) exceed
$0.04 per share of the common share offering. The investment objective of the
Trust is to provide a high level of current income. The Trust will, as a
secondary objective, also seek preservation of capital to the extent consistent
with its primary goal of high current income.
The Trust invests primarily in senior floating rate loans ("Senior Loans"). The
Trust may also invest in other floating and variable rate instruments, including
second lien loans, and high yield, high risk corporate bonds. The Trust may
invest in Senior Loans and other securities of any credit quality, including
Senior Loans and other investments that are rated below investment grade, or are
unrated but are determined by the investment subadviser to be of equivalent
credit quality, commonly referred to as "junk bonds" and are considered
speculative. These securities 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 securities.
The Trust's financial statements have been prepared in conformity with U.S.
accounting principles generally accepted in the United States of America that
require the management of the Trust to, among other things, make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of income, expenses and gains and losses on
investments during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
followed by the Trust in preparation of its financial statements, which are
consistent with those generally accepted in the investment company industry:
A. Security Valuation
Security transactions are recorded as of trade date. Senior Loans are
valued in accordance with guidelines established by the Board of Trustees.
Senior Loans are valued at the mean between the last available bid and
asked prices from one or more brokers or dealers as obtained from Loan
Pricing Corporation. For the limited number of Senior Loans for which no
reliable price quotes are available, such Senior Loans will be valued by
Loan Pricing Corporation through the use of pricing matrices to determine
valuations. If the pricing service does not provide a value for the Senior
Loans, the subadviser will value the Senior Loans at fair value, which is
intended to approximate market value.
Debt securities are valued at prices supplied by independent pricing
services, which consider such factors as Treasury spreads, yields,
maturities and ratings. Valuations may be supplemented by dealers and other
sources, as required. Securities for which quotations are not readily
available are valued at their fair values as determined by, or under the
direction of, the Board of Trustees. The Trust may also use the fair value
of a security, including a non U.S. security, when the closing market price
on the principal exchange where the security is traded no longer accurately
reflects the value of the security as of the close of the exchange. As of
January 31, 2005, the Trust had no fair valued securities.
63
Interest income, including income on interest bearing cash accounts, is
recorded on an accrual basis. Temporary cash investments are valued at
amortized cost. Discount and premium on debt securities are accreted or
amortized daily, respectively, on an effective yield to maturity basis and
are included in interest income.
Gains and losses on sales of investments are calculated on the identified
cost method for both financial reporting and federal income tax purposes.
B. Federal Income Taxes
It is the Trust's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
all of its taxable income and net realized capital gains, if any, to its
shareowners. Therefore, no federal income tax provision is required.
C. Repurchase Agreements
With respect to repurchase agreements entered into by the Trust, the value
of the underlying securities (collateral), including accrued interest
received from counterparties, is required to be at least equal to or in
excess of the repurchase agreement at the time of purchase. The collateral
for all repurchase agreements is held in safekeeping in the customer-only
account of the Trust's custodian, or subcustodians. PIM is responsible for
determining that the value of the collateral remains at least equal to the
repurchase price.
D. Automatic Dividend Reinvestment Plan
All common shareowners automatically participate in the Automatic Dividend
Reinvestment Plan (the "Plan"), under which participants receive all
dividends and capital gain distributions (collectively, "dividends") in
full and fractional common shares of the Trust in lieu of cash. Shareowners
may elect not to participate in the Plan. Shareowners not participating in
the Plan receive all dividends and capital gain distributions in cash.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time by notifying Mellon Investor Services LLC, the agent
for shareowners in administering the Plan (the "Plan Agent"), in writing
prior to any dividend record date; otherwise such termination or resumption
will be effective with respect to any subsequently declared dividend or
other distribution. Whenever the Trust declares a dividend on common shares
payable in cash, participants in the Plan will receive the equivalent in
common shares acquired by the Plan Agent either (i) through receipt of
additional unissued but authorized common shares from the Trust or (ii) by
purchase of outstanding common shares on the New York Stock Exchange or
elsewhere. If, on the payment date for any dividend the net asset value per
common share is equal to or less than the market price per share plus
estimated brokerage trading fees ("market premium"), the Plan Agent will
invest the dividend amount in newly issued common shares. The number of
newly issued common shares to be credited to each account will be
determined by dividing the dollar amount of the dividend by the net asset
value per common share on the date the shares are issued, provided that the
maximum discount from the then current market price per share on the date
of issuance does not exceed 5%. If, on the payment date for any dividend,
the net asset value per common share is greater than the market value
("market discount"), the Plan Agent will invest the dividend amount in
common shares acquired in open-market purchases. There are no brokerage
charges with respect to newly issued common shares. However, each
participant will pay a pro rata share of brokerage trading fees incurred
with respect to the Plan Agent's open-market purchases. Participating in
the Plan does not relieve shareowners from any federal, state or local
taxes which may be due on dividends paid in any taxable year. Shareowners
holding Plan shares in a brokerage account may not be able to transfer the
shares to another broker and continue to participate in the Plan.
2. Management Agreement
64
The Trust has entered into an advisory agreement with PIM. Management fees are
calculated daily at the annual rate of 0.70% of the Trust's average daily
managed assets. "Managed assets" is the average daily value of the Trust's total
assets minus the sum of the Trust's liabilities, which liabilities exclude debt
related to leverage, short-term debt and the aggregate liquidation preference of
any outstanding preferred shares.
The Adviser has engaged Highland Capital Management, L.P. to act as the Trust's
investment subadviser ("Subadviser") and manage the Trust's investments. Under
the terms of the subadvisory agreement, for its services, the Subadviser is
entitled to a subadvisory fee from PIM at an annual rate of 0.35% of the Trust's
average daily managed assets. The fee will be paid monthly in arrears. The Trust
does not pay a fee to the Subadviser.
The Trust has entered into an administration agreement with the Adviser,
pursuant to which the Adviser will provide certain administrative and accounting
services to the Trust. The Adviser has appointed Princeton Administrators, L.P.
("Princeton") as the sub-administrator to the Trust to perform certain of the
Adviser's administration and accounting obligations to the Trust. Under the
administration agreement, the Trust pays the Adviser a monthly fee equal to
0.07% of the Trust's average daily managed assets up to $500 million and 0.03%
for average daily managed assets in excess of $500 million. The Adviser, and not
the Trust, is responsible for paying the fees of Princeton, which is affiliated
with Merrill, Lynch & Co., one of the underwriters of the Trust's offering of
common shares. Pursuant to a separate agreement, the Trust may compensate the
Adviser for providing certain legal and accounting services.
Also, PIM has agreed for the first three years of the Trust's investment
operations to limit the Trust's total annual expenses [excluding offering costs
for common and preferred shares, interest expense, the cost of defending or
prosecuting any claim or litigation to which the Trust is a party (together with
any amount in judgment or settlement), indemnification expenses or taxes
incurred due to the failure of the Trust to qualify as a regulated investment
company under the Code or any other non-recurring or non-operating expenses] to
0.95% of the Trust's average daily managed assets. The dividend on any preferred
shares is not an expense. For the period ended January 31, 2005, the Trust's
expenses were not reduced under such arrangements.
3. Unfunded Corporate Loans:
As of January 31, 2005, the Trust had unfunded loan commitments of approximately
$9,483,000, which would be extended at the option of the borrower, pursuant to
the following loan agreements:
Unfunded Commitment
Borrower (In Thousands)
-------- -------------------
Advanced Medical, Delayed Draw $1,000
Celanese Holdings, LLC, Delayed Draw $ 821
Cricket Communications, Inc., Revolve $1,000
Texas Genco, LLC, Delayed Draw $1,500
Wynn Las Vegas, LLC, Term Loan $5,162
4. Transfer Agents
Pioneer Investment Management Shareholder Services, Inc. ("PIMSS"), a wholly
owned indirect subsidiary of UniCredito Italiano, through a sub-transfer agency
agreement with Mellon Investor Services LLC, provides substantially all transfer
agent and shareowner services related to the Trust's common shares at negotiated
rates.
5. Trust Shares
There are an unlimited number of common shares of beneficial interest
authorized. Of the 22,555,240 common shares of beneficial interest outstanding
at January 31, 2005, PIM owned 5,240 shares.
65
Transactions in common shares of beneficial interest for the period December 23,
2004 (commencement of investment operations) to January 31, 2005 were as
follows:
Shares Issued in Connection with initial public offering 22,550,000
Shares outstanding at beginning of period 5,240
Shares outstanding at end of period 22,555,240
Offering Costs of $902,000 Incurred in Connection With the Trust's Offering of
Common Shares Have Been Charged to Paid-in Capital.
6. Subsequent Event
The underwriters elected to exercise a portion of the over-allotment option with
respect to common shares. This resulted in the issuance of 1,775,000 common
shares of beneficial interest on February 4, 2005. The net proceeds to the Trust
from the exercise of the underwriters' overallotment option were $33,902,500.
The proceeds were invested in accordance with the Trust's investment objectve.
66
APPENDIX A - DESCRIPTION OF RATINGS(1)
Moody's Prime Rating System
Moody's short-term ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. Such obligations generally have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment grade,
to indicate the relative repayment ability of rated issuers:
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
Broad margins in earnings coverage of fixed financial charges and high internal
cash generation.
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2: Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3: Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt-protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
In addition, in certain countries the prime rating may be modified by the
issuer's or guarantor's senior unsecured long-term debt rating.
MOODY'S DEBT RATINGS
Aaa: Bonds and preferred stock, which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds and preferred stock which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the Aaa securities.
A: Bonds and preferred stock which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
A-1
Ba: Bonds and preferred stock which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds and preferred stock which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca: Bonds and preferred stock which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's assigns ratings to individual debt securities issued from medium-term
note ("MTN") programs, in addition to indicating ratings to MTN programs
themselves. Notes issued under MTN programs with such indicated ratings are
rated at issuance at the rating applicable to all pari passu notes issued under
the same program, at the program's relevant indicated rating, provided such
notes do not exhibit any of the characteristics listed below. For notes with any
of the following characteristics, the rating of the individual note may differ
from the indicated rating of the program:
1) Notes containing features which link the cash flow and/or market value to
the credit performance of any third party or parties.
2) Notes allowing for negative coupons, or negative principal.
3) Notes containing any provision which could obligate the investor to make
any additional payments.
Market participants must determine whether any particular note is rated, and if
so, at what rating level.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the 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.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet 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: 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.
A-2
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.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
- Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
- Nature of and provisions of the obligation;
- Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than 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.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic 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.
A-3
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is currently highly
vulnerable to nonpayment. The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued. A C also will be assigned to a preferred stock
issue in arrears on dividends or sinking fund payments, but that is currently
paying.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign currency obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
A-4
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES OF PIONEER INVESTMENT
MANAGEMENT, INC.
B-1
TABLE OF CONTENTS
Overview ............................................................ B-3
Proxy Voting Procedures.............................................. B-3
Proxy Voting Service.............................................. B-3
Proxy Coordinator................................................. B-3
Referral Items.................................................... B-3
Conflicts of Interest............................................. B-4
Securities Lending................................................ B-4
Share-Blocking.................................................... B-4
Record Keeping.................................................... B-5
Disclosure........................................................ B-5
Proxy Voting Oversight Group...................................... B-5
Proxy Voting Policies................................................ B-5
Administrative.................................................... B-6
Auditors.......................................................... B-7
Board of Directors................................................ B-7
General Board Issues.............................................. B-7
Elections of Directors............................................ B-8
Capital Structure................................................. B-8
Compensation...................................................... B-9
Corporate Governance.............................................. B-11
Mergers and Restructurings........................................ B-11
Mutual Funds...................................................... B-12
Social Issues..................................................... B-12
Takeover-Related Measures............................................ B-12
B-2
OVERVIEW
Pioneer is a fiduciary that owes each of its client's duties of care and loyalty
with respect to all services undertaken on the client's behalf, including proxy
voting. When Pioneer has been delegated proxy-voting authority for a client, the
duty of care requires Pioneer to monitor corporate events and to vote the
proxies. To satisfy its duty of loyalty, Pioneer must cast the proxy votes in a
manner consistent with the best interest of its clients and must place the
client's interests ahead of its own. Pioneer will vote all proxies presented to
it in a timely manner on its behalf.
The Proxy Voting Policies and Procedures are designed to complement Pioneer's
investment policies and procedures regarding its general responsibility to
monitor the performance and/or corporate events of companies that are issuers of
securities held in accounts managed by Pioneer. These Proxy Voting Policies
summarize Pioneer's position on a number of issues solicited by underlying held
companies. The policies are guidelines that provide a general indication on how
Pioneer would vote but do not include all potential voting scenarios.
Pioneer's Proxy Voting Procedures detail monitoring of voting, exception votes,
and review of conflicts of interest and ensure that case-by-case votes are
handled within the context of the overall guidelines (i.e. best interest of
client). The overriding goal is that all proxies for US and non-US companies
that are received promptly will be voted in accordance with Pioneer's policies
or specific client instructions. All shares in a company held by Pioneer-managed
accounts will be voted alike, unless a client has given us specific voting
instructions on an issue or has not delegated authority to us or the Director of
Portfolio Management US determines, after consultation with the Proxy Voting
Oversight Group, that the circumstances justify a different approach.
ANY QUESTIONS ABOUT THESE POLICIES AND PROCEDURES SHOULD BE DIRECTED TO THE
PROXY COORDINATOR.
PROXY VOTING PROCEDURES
PROXY VOTING SERVICE
Pioneer has engaged an independent proxy voting service to assist in the voting
of proxies. The proxy voting service works with custodians to ensure that all
proxy materials are received by the custodians and are processed in a timely
fashion. To the extent applicable, the proxy voting service votes all proxies in
accordance with the proxy voting policies established by Pioneer. The proxy
voting service will refer proxy questions to the Proxy Coordinator (described
below) for instructions under circumstances where: (1) the application of the
proxy voting guidelines is unclear; (2) a particular proxy question is not
covered by the guidelines; or (3) the guidelines call for specific instructions
on a case-by-case basis. The proxy voting service is also requested to call to
the Proxy Coordinator's attention specific proxy questions that, while governed
by a guideline, appear to involve unusual or controversial issues.
PROXY COORDINATOR
Pioneer's Director of Investment Operations (the "Proxy Coordinator")
coordinates the voting, procedures and reporting of proxies on behalf of
Pioneer's clients. The Proxy Coordinator will deal directly with the proxy
voting service and, in the case of proxy questions referred by the proxy voting
service, will solicit voting recommendations and instructions from the Director
of Portfolio Management US. The Proxy Coordinator is responsible for ensuring
that these questions and referrals are responded to in a timely fashion and for
transmitting appropriate voting instructions to the proxy voting service. The
Proxy Coordinator is responsible for verifying with the Compliance Department
whether Pioneer's voting power is subject to any limitations or guidelines
issued by the client (or in the case of an employee benefit plan, the plan's
trustee or other fiduciaries).
REFERRAL ITEMS
From time to time, the proxy voting service will refer proxy questions to the
Proxy Coordinator that are described by Pioneer's policy as to be voted on a
case-by-case basis, that are not covered by Pioneer's guidelines or where
Pioneer's guidelines may be unclear with respect to the matter to be voted on.
Under such certain circumstances, the Proxy Coordinator will seek a written
voting recommendation from the Director of Portfolio Management US. Any such
recommendation will include: (i) the manner in which the proxies should be
voted; (ii) the rationale underlying
B-3
any such decision; and (iii) the disclosure of any contacts or communications
made between Pioneer and any outside parties concerning the proxy proposal prior
to the time that the voting instructions are provided. In addition, the Proxy
Coordinator will ask the Compliance Department to review the question for any
actual or apparent conflicts of interest as described below under "Conflicts of
Interest." The Compliance Department will provide a "Conflicts of Interest
Report," applying the criteria set forth below under "Conflicts of Interest," to
the Proxy Coordinator summarizing the results of its review. In the absence of a
conflict of interest, the Proxy Coordinator will vote in accordance with the
recommendation of the Director of Portfolio Management US.
If the matter presents a conflict of interest for Pioneer, then the Proxy
Coordinator will refer the matter to the Proxy Voting Oversight Group for a
decision. In general, when a conflict of interest is present, Pioneer will vote
according to the recommendation of the Director of Portfolio Management US where
such recommendation would go against Pioneer's interest or where the conflict is
deemed to be immaterial. Pioneer will vote according to the recommendation of
its proxy voting service when the conflict is deemed to be material and the
Pioneer's internal vote recommendation would favor Pioneer's interest, unless a
client specifically requests Pioneer to do otherwise. When making the final
determination as to how to vote a proxy, the Proxy Voting Oversight Group will
review the report from the Director of Portfolio Management US and the Conflicts
of Interest Report issued by the Compliance Department.
CONFLICTS OF INTEREST
Occasionally, Pioneer may have a conflict that can affect how its votes proxies.
The conflict may be actual or perceived and may exist when the matter to be
voted on concerns:
- An affiliate of Pioneer, such as another company belonging to the
UniCredito Italiano S.p.A. banking group;
- An issuer of a security for which Pioneer acts as a sponsor, adviser,
manager, custodian, distributor, underwriter, broker, or other similar
capacity; or
- A person with whom Pioneer (or any of its affiliates) has an existing,
material contract or business relationship that was not entered into
in the ordinary course of Pioneer's business.
Any associate involved in the proxy voting process with knowledge of any
apparent or actual conflict of interest must disclose such conflict to the Proxy
Coordinator and the Compliance Department. The Compliance Department will review
each item referred to Pioneer to determine whether an actual or potential
conflict of interest with Pioneer exists in connection with the proposal(s) to
be voted upon. The review will be conducted by comparing the apparent parties
affected by the proxy proposal being voted upon against the Compliance
Department's internal list of interested persons and, for any matches found,
evaluating the anticipated magnitude and possible probability of any conflict of
interest being present. For each referral item, the determination regarding the
presence or absence of any actual or potential conflict of interest will be
documented in a Conflicts of Interest Report to the Proxy Coordinator
SECURITIES LENDING
Proxies are not available to be voted when the shares are out on loan through
either Pioneer's Lending Program or a client's managed security lending program.
If the Portfolio Manager would like to vote a block of previously lent shares,
the Proxy Coordinator will work with the Portfolio Manager and Investment
Operations to recall the security, to the extent possible, to facilitate the
vote on the entire block of shares.
SHARE-BLOCKING
"Share-blocking" is a market practice whereby shares are sent to a custodian
(which may be different than the account custodian) for record keeping and
voting at the general meeting. The shares are unavailable for sale or delivery
until the end of the blocking period (typically the day after general meeting
date).
Pioneer will vote in those countries with "share-blocking." In the event a
manager would like to sell a security with "share-blocking", the Proxy
Coordinator will work with the Portfolio Manager and Investment Operations
B-4
Department to recall the shares (as allowable within the market time-frame and
practices) and/or communicate with executing brokerage firm. A list of countries
with "share-blocking" is available from the Investment Operations Department
upon request.
RECORD KEEPING
The Proxy Coordinator shall ensure that Pioneer's proxy voting service:
- Retains a copy of the proxy statement received (unless the proxy
statement is available from the SEC's Electronic Data Gathering,
Analysis, and Retrieval (EDGAR) system);
- Retains a record of the vote cast;
- Prepares Form N-PX for filing on behalf of each client that is a
registered investment company; and
- Is able to promptly provide Pioneer with a copy of the voting record
upon its request.
The Proxy Coordinator shall ensure that for those votes that may require
additional documentation (i.e. conflicts of interest, exception votes and
case-by-case votes) the following records are maintained:
- A record memorializing the basis for each referral vote cast;
- A copy of any document created by Pioneer that was material in making
the decision on how to vote the subject proxy; and
- A copy of any conflict notice, conflict consent or any other written
communication (including emails or other electronic communications) to
or from the client (or in the case of an employee benefit plan, the
plan's trustee or other fiduciaries) regarding the subject proxy vote
cast by, or the vote recommendation of, Pioneer.
Pioneer shall maintain the above records in the client's file for a period not
less than six (6) years.
DISCLOSURE
Pioneer shall take reasonable measures to inform its clients of the process or
procedures clients must follow to obtain information regarding how Pioneer voted
with respect to assets held in their accounts. In addition, Pioneer shall
describe to clients its proxy voting policies and procedures and will furnish a
copy of its proxy voting policies and procedures upon request. This information
may be provided to clients through Pioneer's Form ADV (Part II) disclosure, by
separate notice to the client, or by Pioneer's website.
PROXY VOTING OVERSIGHT GROUP
The members of the Proxy Voting Oversight Group are Pioneer's: Director of
Portfolio Management US, Head of Investment Operations, and Director of
Compliance. Other members of Pioneer will be invited to attend meetings and
otherwise participate as necessary.
The Proxy Voting Oversight Group is responsible for developing, evaluating, and
changing (when necessary) Pioneer's Proxy Voting Policies and Procedures. The
group meets at least annually to evaluate and review these policies and
procedures and the services of its third-party proxy voting service. In
addition, the Proxy Voting Oversight Group will meet as necessary to vote on
referral items and address other business as necessary.
PROXY VOTING POLICIES
Pioneer's sole concern in voting proxies is the economic effect of the proposal
on the value of portfolio holdings, considering both the short- and long-term
impact. In many instances, Pioneer believes that supporting the
B-5
company's strategy and voting "for" management's proposals builds portfolio
value. In other cases, however, proposals set forth by management may have a
negative effect on that value, while some shareholder proposals may hold the
best prospects for enhancing it. Pioneer monitors developments in the
proxy-voting arena and will revise this policy as needed.
All proxies for U.S. companies and proxies for non-U.S. companies that are
received promptly will be voted in accordance with the specific policies listed
below. All shares in a company held by Pioneer-managed accounts will be voted
alike, unless a client has given us specific voting instructions on an issue or
has not delegated authority to us. Proxy voting issues will be reviewed by
Pioneer's Proxy Voting Oversight Group, which consists of the Director of
Portfolio Management US, the Director of Investment Operations (the Proxy
Coordinator), and the Director of Compliance.
Pioneer has established Proxy Voting Procedures for identifying and reviewing
conflicts of interest that may arise in the voting of proxies.
Clients may request, at any time, a report on proxy votes for securities held in
their portfolios and Pioneer is happy to discuss our proxy votes with company
management. Pioneer retains a proxy voting service to provide research on proxy
issues and to process proxy votes.
ADMINISTRATIVE
While administrative items appear infrequently in U.S. issuer proxies, they are
quite common in non-U.S. proxies.
We will generally support these and similar management proposals:
- Corporate name change.
- A change of corporate headquarters.
- Stock exchange listing.
- Establishment of time and place of annual meeting.
- Adjournment or postponement of annual meeting.
- Acceptance/approval of financial statements.
- Approval of dividend payments, dividend reinvestment plans and other
dividend-related proposals.
- Approval of minutes and other formalities.
- Authorization of the transferring of reserves and allocation of
income.
- Amendments to authorized signatories.
- Approval of accounting method changes or change in fiscal year-end.
- Acceptance of labor agreements.
- Appointment of internal auditors.
Pioneer will vote on a case-by-case basis on other routine business; however,
Pioneer will oppose any routine business proposal if insufficient information is
presented in advance to allow Pioneer to judge the merit of the proposal.
Pioneer has also instructed its proxy voting service to inform Pioneer of its
analysis of any administrative
B-6
items inconsistent, in its view, with supporting the value of Pioneer portfolio
holdings so that Pioneer may consider and vote on those items on a case-by-case
basis.
AUDITORS
We normally vote for proposals to:
- Ratify the auditors. We will consider a vote against if we are
concerned about the auditors' independence or their past work for the
company. Specifically, we will oppose the ratification of auditors and
withhold votes from audit committee members if non-audit fees paid by
the company to the auditing firm exceed the sum of audit fees plus
audit-related fees plus permissible tax fees according to the
disclosure categories proposed by the Securities and Exchange
Commission.
- Restore shareholder rights to ratify the auditors.
We will normally oppose proposals that require companies to:
- Seek bids from other auditors.
- Rotate auditing firms.
- Indemnify auditors.
- Prohibit auditors from engaging in non-audit services for the company.
BOARD OF DIRECTORS
On issues related to the board of directors, Pioneer normally supports
management. We will, however, consider a vote against management in instances
where corporate performance has been very poor or where the board appears to
lack independence.
GENERAL BOARD ISSUES
Pioneer will vote for:
- Audit, compensation and nominating committees composed of independent
directors exclusively.
- Indemnification for directors for actions taken in good faith in
accordance with the business judgment rule. We will vote against
proposals for broader indemnification.
- Changes in board size that appear to have a legitimate business
purpose and are not primarily for anti-takeover reasons.
- Election of an honorary director.
We will vote against:
- Separate chairman and CEO positions. We will consider voting with
shareholders on these issues in cases of poor corporate performance.
- Minimum stock ownership by directors.
- Term limits for directors. Companies benefit from experienced
directors, and shareholder control is better achieved through annual
votes.
B-7
- Requirements for union or special interest representation on the
board.
- Requirements to provide two candidates for each board seat.
ELECTIONS OF DIRECTORS
In uncontested elections of directors we will vote against:
- Individual directors with absenteeism above 25% without valid reason.
We support proposals that require disclosure of director attendance.
- Insider directors and affiliated outsiders who sit on the audit,
compensation, stock option or nominating committees. For the purposes
of our policy, we accept the definition of affiliated directors
provided by our proxy voting service.
We will also vote against directors who:
- Have implemented or renewed a dead-hand or modified dead-hand poison
pill (a "dead-hand poison pill" is a shareholder rights plan that may
be altered only by incumbent or "dead" directors. These plans prevent
a potential acquirer from disabling a poison pill by obtaining control
of the board through a proxy vote).
- Have ignored a shareholder proposal that has been approved by
shareholders for two consecutive years.
- Have failed to act on a takeover offer where the majority of
shareholders have tendered their shares.
- Appear to lack independence or are associated with very poor corporate
performance.
We will vote on a case-by case basis on these issues:
- Contested election of directors.
- Prior to phase-in required by SEC, we would consider supporting
election of a majority of independent directors in cases of poor
performance.
- Mandatory retirement policies.
CAPITAL STRUCTURE
Managements need considerable flexibility in determining the company's financial
structure, and Pioneer normally supports managements' proposals in this area. We
will, however, reject proposals that impose high barriers to potential
takeovers.
Pioneer will vote for:
- Changes in par value.
- Reverse splits, if accompanied by a reduction in number of shares.
- Share repurchase programs, if all shareholders may participate on
equal terms.
- Bond issuance.
- Increases in "ordinary" preferred stock.
B-8
- Proposals to have blank-check common stock placements (other than
shares issued in the normal course of business) submitted for
shareholder approval.
- Cancellation of company treasury shares.
We will vote on a case-by-case basis on the following issues:
- Reverse splits not accompanied by a reduction in number of shares,
considering the risk of delisting.
- Increase in authorized common stock. We will make a determination
considering, among other factors:
- Number of shares currently available for issuance;
- Size of requested increase (we would normally approve increases of up
to 100% of current authorization);
- Proposed use of the additional shares; and
- Potential consequences of a failure to increase the number of
shares outstanding (e.g., delisting or bankruptcy).
- Blank-check preferred. We will normally oppose issuance of a new class
of blank-check preferred, but may approve an increase in a class
already outstanding if the company has demonstrated that it uses this
flexibility appropriately.
- Proposals to submit private placements to shareholder vote.
- Other financing plans.
We will vote against preemptive rights that we believe limit a company's
financing flexibility.
COMPENSATION
Pioneer supports compensation plans that link pay to shareholder returns and
believes that management has the best understanding of the level of compensation
needed to attract and retain qualified people. At the same time, stock-related
compensation plans have a significant economic impact and a direct effect on the
balance sheet. Therefore, while we do not want to micromanage a company's
compensation programs, we will place limits on the potential dilution these
plans may impose.
Pioneer will vote for:
- 401(k) benefit plans.
- Employee stock ownership plans (ESOPs), as long as shares allocated to
ESOPs are less than 5% of outstanding shares. Larger blocks of stock
in ESOPs can serve as a takeover defense. We will support proposals to
submit ESOPs to shareholder vote.
- Various issues related to the Omnibus Budget and Reconciliation Act of
1993 (OBRA), including:
- Amendments to performance plans to conform with OBRA;
- Caps on annual grants or amendments of administrative features;
- Adding performance goals; and
- Cash or cash-and-stock bonus plans.
B-9
- Establish a process to link pay, including stock-option grants, to
performance, leaving specifics of implementation to the company.
- Require that option repricings be submitted to shareholders.
- Require the expensing of stock-option awards.
- Require reporting of executive retirement benefits (deferred
compensation, split-dollar life insurance, SERPs, and pension
benefits).
- Employee stock purchase plans where the purchase price is equal to at
least 85% of the market price, where the offering period is no greater
than 27 months and where potential dilution (as defined below) is no
greater than 10%.
We will vote on a case-by-case basis on the following issues:
- Executive and director stock-related compensation plans. We will
consider the following factors when reviewing these plans:
- The program must be of a reasonable size. We will approve plans
where the combined employee and director plans together would
generate less than 15% dilution. We will reject plans with 15% or
more potential dilution.
Dilution = (A + B + C) / (A + B + C + D), where
A = Shares reserved for plan/amendment,
B = Shares available under continuing plans,
C = Shares granted but unexercised and
D = Shares outstanding.
- The plan must not:
- Explicitly permit unlimited option repricing authority or
that have repriced in the past without shareholder approval.
- Be a self-replenishing "evergreen" plan, plans that grant
discount options and tax offset payments.
- We are generally in favor of proposals that increase
participation beyond executives.
- All other employee stock purchase plans.
- All other compensation-related proposals, including deferred
compensation plans, employment agreements, loan guarantee programs and
retirement plans.
- All other proposals regarding stock compensation plans, including
extending the life of a plan, changing vesting restrictions, repricing
options, lengthening exercise periods or accelerating distribution of
awards and pyramiding and cashless exercise programs.
We will vote against:
- Limits on executive and director pay.
- Stock in lieu of cash compensation for directors.
- Pensions for non-employee directors. We believe these retirement plans
reduce director objectivity.
B-10
- Elimination of stock option plans.
CORPORATE GOVERNANCE
Pioneer will vote for:
- Confidential Voting.
- Equal access provisions, which allow shareholders to contribute their
opinion to proxy materials.
- Disclosure of beneficial ownership.
We will vote on a case-by-case basis on the following issues:
- Change in the state of incorporation. We will support reincorporations
supported by valid business reasons. We will oppose those that appear
to be solely for the purpose of strengthening takeover defenses.
- Bundled proposals. We will evaluate the overall impact of the
proposal.
- Adopting or amending the charter, bylaws or articles of association.
- Shareholder appraisal rights, which allow shareholders to demand
judicial review of an acquisition price. We believe that the courts
currently handle this situation adequately without this mechanism.
We will vote against:
- Shareholder advisory committees. While management should solicit
shareholder input, we prefer to leave the method of doing so to
management's discretion.
- Limitations on stock ownership or voting rights.
- Reduction in share ownership disclosure guidelines.
MERGERS AND RESTRUCTURINGS
Pioneer will vote on the following and similar issues on a case-by-case basis:
- Mergers and acquisitions.
- Corporate restructurings, including spin-offs, liquidations, asset
sales, joint ventures, conversions to holding company and conversions
to self-managed REIT structure.
- Debt restructurings.
- Conversion of securities.
- Issuance of shares to facilitate a merger.
- Private placements, warrants, convertible debentures.
- Proposals requiring management to inform shareholders of merger
opportunities.
We will normally vote against shareholder proposals requiring that the company
be put up for sale.
B-11
MUTUAL FUNDS
Many of our portfolios may invest in shares of closed-end mutual funds or
exchange-traded funds. The non-corporate structure of these investments raises
several unique proxy voting issues.
Pioneer will vote for:
- Establishment of new classes or series of shares.
- Establishment of a master-feeder structure.
Pioneer will vote on a case-by-case on:
- Changes in investment policy. We will normally support changes that do
not affect the investment objective or overall risk level of the Fund.
We will examine more fundamental changes on a case-by-case basis.
- Approval of new or amended advisory contracts.
- Changes from closed-end to open-end format.
- Authorization for, or increase in, preferred shares.
- Disposition of assets, termination, liquidation, or mergers.
SOCIAL ISSUES
Pioneer will abstain on proposals calling for greater disclosure of corporate
activities with regard to social issues. We believe these issues are important
and should receive management attention.
Pioneer will vote against proposals calling for changes in the company's
business. We will also normally vote against proposals with regard to
contributions, believing that management should control the routine disbursement
of funds.
TAKEOVER-RELATED MEASURES
Pioneer is generally opposed to proposals that may discourage takeover attempts.
We believe that the potential for a takeover helps ensure that corporate
performance remains high.
Pioneer will vote for:
- Cumulative voting.
- Increase ability for shareholders to call special meetings.
- Increase ability for shareholders to act by written consent.
- Restrictions on the ability to make greenmail payments.
- Submitting rights plans to shareholder vote.
- Rescinding shareholder rights plans ("poison pills").
- Opting out of the following state takeover statutes:
B-12
- Control share acquisition statutes, which deny large holders voting
rights on holdings over a specified threshold.
- Control share cash-out provisions, which require large holders to
acquire shares from other holders.
- Freeze-out provisions, which impose a waiting period on large holders
before they can attempt to gain control.
- Stakeholder laws, which permit directors to consider interests of
non-shareholder constituencies.
- Disgorgement provisions, which require acquirers to disgorge profits
on purchases made before gaining control.
- Fair price provisions.
- Authorization of shareholder rights plans.
- Labor protection provisions.
- Mandatory classified boards.
We will vote on a case-by-case basis on the following issues:
- Fair price provisions. We will vote against provisions requiring
supermajority votes to approve takeovers. We will also consider voting
against proposals that require a supermajority vote to repeal or amend
the provision. Finally, we will consider the mechanism used to
determine the fair price; we are generally opposed to complicated
formulas or requirements to pay a premium.
- Opting out of state takeover statutes regarding fair price provisions.
We will use the criteria used for fair price provisions in general to
determine our vote on this issue.
- Proposals that allow shareholders to nominate directors.
We will vote against:
- Classified boards.
- Limiting shareholder ability to remove or appoint directors. We will
support proposals to restore shareholder authority in this area. We
will review on a case-by-case basis proposals that authorize the board
to make interim appointments.
- Classes of shares with unequal voting rights.
- Supermajority vote requirements.
- Severance packages ("golden" and "tin" parachutes). We will support
proposals to put these packages to shareholder vote.
- Reimbursement of dissident proxy solicitation expenses. While we
ordinarily support measures that encourage takeover bids, we believe
that management should have full control over corporate funds.
- Extension of advance notice requirements for shareholder proposals.
- Granting board authority normally retained by shareholders (e.g.,
amend charter, set board size).
B-13
- Shareholder rights plans ("poison pills"). These plans generally allow
shareholders to buy additional shares at a below-market price in the
event of a change in control and may deter some bids.
B-14
APPENDIX C -- STATEMENT OF PREFERENCES OF AUCTION MARKET PREFERRED SHARES
PIONEER FLOATING RATE TRUST
STATEMENT OF PREFERENCES OF
AUCTION MARKET PREFERRED SHARES
C-1
TABLE OF CONTENTS
DEFINITIONS ............................................................... 4
PART I .................................................................... 36
Number of Authorized Shares ............................................... 36
Dividends ................................................................. 36
Designation of Special Dividend Periods ................................... 39
Voting Rights ............................................................. 40
1940 Act Preferred Share Asset Coverage ................................... 43
Preferred Shares Basic Maintenance Amount ................................. 44
Restrictions on Dividends and Other Distributions ......................... 45
Rating Agency Restrictions ................................................ 46
Redemption ................................................................ 50
Liquidation Rights ........................................................ 53
Miscellaneous ............................................................. 54
PART II ................................................................... 55
ORDERS .................................................................... 55
Submission of Orders by Broker-Dealers to Auction Agent ................... 56
C-2
Determination of Sufficient Clearing Bids, Winning Bids Rate and
Applicable Rate ........................................................ 58
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares ................................................... 59
Auction Agent ............................................................. 61
Transfer of AMPS .......................................................... 61
Global Certificate ........................................................ 61
Force Majeure ............................................................. 61
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PIONEER FLOATING RATE TRUST, a Delaware statutory trust (the "Trust"),
certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees of
the Trust by Article V of the Trust's Agreement and Declaration of Trust, dated
October 6, 2004 (which, as hereafter restated or amended from time to time is,
together with this Statement, herein called the "Declaration"), the Board of
Trustees adopts this Statement of Preferences of Auction Market Preferred Shares
(the "Statement"), authorizes the establishment, designation and issuance of an
unlimited number of shares of the Trust's Auction Market Preferred Shares,
liquidation preference $25,000 per share, having the designation or designations
set forth in this Statement (the "Auction Market Preferred Shares" or "AMPS").
Second: The Auction Market Preferred Shares shall be issuable in such
series as are designated from time to time by the Board and shall have the
preferences, voting powers, restrictions, limitations as to dividends,
qualifications, terms and conditions of redemption, and other rights and
limitations set forth in this Statement. As of March 10, 2005, the following
series of Auction Market Preferred Shares are established:
1. Auction Market Preferred Shares, Series M7 : An unlimited number of
Auction Market Preferred Shares, $0.0001 par value per share,
liquidation preference $25,000 per Auction Market Preferred Share plus
accumulated but unpaid dividends, if any, thereon (whether or not
earned or declared), is hereby designated "Auction Market Preferred
Shares, Series M7." Each Auction Market Preferred Share, Series M7
(sometimes referred to herein as "Series M7 AMPS") may be issued on a
date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate
and an Initial Dividend Payment Date as shall be determined in advance
of the issuance thereof by the Board of Trustees of the Trust or
pursuant to their delegated authority and have such other preferences
as provided herein or as may be determined in advance of the issuance
thereof by the Board of Trustees or pursuant to their delegated
authority. The Series M7 AMPS shall constitute a separate series of
Auction Market Preferred Shares, and each Series M7 AMPS shall be
identical.
2. Auction Market Preferred Shares, Series W7 : An unlimited number of
Auction Market Preferred Shares, $0.0001 par value per share,
liquidation preference $25,000 per Auction Market Preferred Share plus
accumulated but unpaid dividends, if any, thereon (whether or not
earned or declared), is hereby designated "Auction Market Preferred
Shares, Series W7." Each Auction Market Preferred Share, Series W7
(sometimes referred to herein as "Series W7 AMPS") may be issued on a
date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate
and an Initial Dividend Payment Date as shall be determined in advance
of the issuance thereof by the Board of Trustees of the Trust or
pursuant to their delegated authority and have such other preferences
as provided herein or as may be determined in advance of the issuance
thereof by the Board of Trustees or pursuant to their delegated
authority. The Series W7 AMPS shall constitute a separate series of
Auction Market Preferred Shares, and each Series W7 AMPS shall be
identical.
3. Auction Market Preferred Shares, Series TH7 : An unlimited number of
Auction Market Preferred Shares, $0.0001 par value per share,
liquidation preference $25,000 per Auction Market Preferred Share plus
accumulated but unpaid dividends, if any, thereon (whether or not
earned or declared), is hereby designated "Auction Market Preferred
Shares, Series TH7." Each Auction Market Preferred Share, Series TH7
(sometimes referred to herein as "Series TH7 AMPS") may be issued on a
date to be determined by the Board of Trustees of the Trust or
pursuant to their delegated authority; have an Initial Dividend Rate
and an Initial Dividend Payment Date as shall be determined in advance
of the issuance thereof by the Board of Trustees of the Trust or
pursuant to their delegated authority and have such other preferences
as provided herein or as may be determined in advance of the issuance
thereof by the Board of Trustees or pursuant to their delegated
authority. The Series TH7 AMPS shall constitute a separate series of
Auction Market Preferred Shares, and each Series TH7 AMPS shall be
identical.
C-4
Third: The preferences, voting powers restrictions, limitations as to
dividends, qualifications, terms and conditions of redemption, and other rights
and limitations of the shares of the Series M7 AMPS, Series W7 AMPS and Series
TH7 AMPS, and each other series of AMPS now or hereafter described in this
Statement are or shall be as set forth in this Statement. No fractional AMPS
shall be issued.
Fourth: That any provisions of the Declaration that conflict with or are
inconsistent with the provisions of this Statement are hereby amended to conform
to the terms of this Statement.
DEFINITIONS
As used in Parts I and 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:
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time, and the rules and regulations thereunder.
"1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act Preferred Share Asset Coverage (as required by Section 5 of Part I
of this Statement) as of the last Business Day of each month, shall mean the
last Business Day of the following month.
"1940 Act Preferred Share Asset Coverage" shall mean asset coverage, as
defined in Section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Trust which are shares of beneficial
interest including all Outstanding AMPS (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares or stock of a closed-end investment
company as a condition of declaring dividends on its common shares or stock).
"Affected Series" has the meaning set forth in Section 4(c) of Part I of
this Statement.
"Affiliate" means any Person known to the Auction Agent to be controlled
by, in control of, or under common control with, the Trust.
"Agent Member" means a member of, or participant in, the Securities
Depository that will act on behalf of a Beneficial Owner of one or more AMPS or
on behalf of a Potential Beneficial Owner.
"AMPS" means the Series M7 AMPS, Series W7 AMPS and Series TH7 AMPS.
"Annual Valuation Date" means the last Friday before the fiscal year end of
the Trust (or if the last Friday is a holiday, then the immediate prior business
day).
"Applicable Percentage" and "Applicable Spread" mean the percentage
determined based on the lower of the credit ratings assigned to the series of
AMPS on such date by Moody's and Fitch (or if Moody's and Fitch are not making
such rating available, the equivalent of such rating by a substitute rating
agency):
Moody's Credit Rating Fitch Credit Rating Applicable Percentage Applicable Spread
--------------------- ------------------- --------------------- -----------------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
C-5
The Applicable Percentage and the Applicable Spread as so determined shall
be further subject to upward but not downward adjustment in the discretion of
the Board of Trustees of the Trust after consultation with the Broker-Dealers,
provided that immediately following any such increase the Trust would be in
compliance with the Preferred Shares Basic Maintenance Amount. The Trust shall
take all reasonable action necessary to enable Moody's and Fitch to provide a
rating for each series of AMPS. If both Moody's and Fitch shall not make such a
rating available, the Trust shall select another Rating Agency to act as a
Substitute Rating Agency. However, the Trust shall not be required to have more
than one Rating Agency provide a rating for any series of the AMPS.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on the AMPS for any Dividend Period.
"Approved Price" means the "fair value" as determined by the Trust in
accordance with the valuation procedures adopted from time to time by the Board
of Trustees of the Trust and for which the Trust receives a marked-to-market
price (which, for the purpose of clarity, shall not mean Market Value) from an
independent source at least semi-annually.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Trust or a duly authorized
committee thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Date" with respect to any Dividend Period shall mean the Business
Day next preceding the first day of such Dividend Period.
"Auction Procedures" means the procedures for conducting Auctions set forth
in Part II of this Statement.
"Auditors' Confirmation" has the meaning set forth in Section 6(c) of Part
I of this Statement.
"Available AMPS" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
"Beneficial Owner" 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 AMPS or a Broker-Dealer that holds AMPS for its own account.
"Bid" and "Bids" shall have the respective meanings specified in paragraph
(a) of Section 1 of Part II of this Statement.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Trust 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 Trust may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
"Board of Trustees" means the Board of Trustees of the Trust.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in Part II of this
Statement, that has been selected by the Trust and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and
a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in Part II of this Statement.
C-6
"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 New
York City are authorized or obligated by law to close.
"Closing Transaction" has the meaning set forth in Section 8(b)(i) of Part
I of this Statement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. Each reference herein to a section of the Code shall be deemed to include
the United States Treasury Regulations in effect thereunder and applicable to
the AMPS or the use of proceeds thereof, and also includes all applicable
amendments or successor provisions unless the context requires otherwise.
"Common Shares" means the shares of beneficial interest designated as
common shares, no par value, of the Trust.
"Cure Date" shall mean the Preferred Shares Basic Maintenance Cure Date or
the 1940 Act Cure Date.
"Date of Original Issue" means, with respect to any AMPS, the date on which
the Trust first issues such share.
"Deposit Securities" means cash and portfolio securities rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"Discount Factor" means a Fitch Discount Factor or a Moody's Discount
Factor, as applicable.
"Discounted Value" of any asset of the Trust means the quotient of the
Market Value of an Eligible Asset divided by the applicable Discount Factor.
"Dividend Payment Date," with respect to AMPS, shall mean any date on which
dividends are payable on shares of such series pursuant to the provisions of
paragraph (d) of Section 2 of Part I of this Statement.
"Dividend Period" with respect to shares of a series of AMPS, shall mean
the period from and including the Date of Original Issue of shares of such
series to but excluding the initial Dividend Payment Date for shares of such
series and any period thereafter from and including one Dividend Payment Date
for shares of such series to but excluding the next succeeding Dividend Payment
Date for shares of such series.
"Eligible Asset" means a Fitch Eligible Asset (if Fitch is then rating the
AMPS), a Moody's Eligible Asset (if Moody's is then rating the AMPS) and/or any
asset included in the calculations used by any Rating Agency then rating the
AMPS for purposes of determining such Rating Agency's rating on the AMPS, as
applicable.
"Existing Holder" means a Broker-Dealer, or any such other Person that may
be permitted by the Trust, that is listed as the holder of record of AMPS in the
Share Books.
"Exposure Period" on a Valuation Date means the period commencing on such
date and ending 42 days thereafter for Fitch and 49 days thereafter for Moody's,
as such exposure period may be modified by resolution of the Board of Trustees;
provided, however, that the Trust shall have received confirmation in writing
from each Rating Agency that any such modification shall not adversely affect
such Rating Agency's then-current rating of the AMPS.
"Failure to Deposit," with respect to shares of a series of AMPS, shall
mean a failure by the Trust to pay to the Auction Agent, not later than 12:00
noon, New York City time, (A) on the Business Day next preceding any Dividend
Payment Date for shares of such series, in funds available on such Dividend
Payment Date in the City of New York, New York, the full amount of any dividend
(whether or not earned or declared) to be paid on such Dividend Payment Date on
any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in the City of New York, New
C-7
York, the Redemption Price to be paid on such redemption date for any share of
such Series after Notice of Redemption is mailed pursuant to paragraph (c) of
Section 9 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Trust's failure to pay the Redemption Price in
respect of AMPS when the related Notice of Redemption provides that redemption
of such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
"Fitch" means Fitch Ratings or its successors.
"Fitch Discount Factor" means, for purposes of determining the Discounted
Value of any Fitch Eligible Asset, the percentage determined as follows. The
Fitch Discount Factor for any Fitch Eligible Asset other than the securities set
forth below will be the percentage provided in writing by Fitch.
(i) Corporate Debt Securities: the Fitch Discount Factor for corporate debt
securities is 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.
FITCH DISCOUNT FACTORS FOR CORPORATE DEBT SECURITIES INCLUDING NON-INVESTMENT
GRADE BONDS
Terms to Maturity AAA AA A BBB BB B NOT RATED(1)
----------------- --- --- --- --- --- --- ------------
1 year or less ................. 106% 108% 110% 112% 130% 152% 152%
2 years or less (but longer than
1 year) ........................ 106% 108% 110% 112% 130% 152% 152%
3 years or less (but longer than
2 years) ....................... 106% 108% 110% 112% 130% 152% 152%
4 years or less (but longer than
3 years) ....................... 111% 113% 115% 117% 134% 152% 152%
5 years or less (but longer than
4 years) ....................... 111% 113% 115% 117% 134% 152% 152%
7 years or less (but longer than
5 years) ....................... 114% 116% 118% 120% 136% 152% 152%
10 years or less (but longer
than 7 years) .................. 116% 118% 120% 122% 137% 152% 152%
15 years or less (but longer
than (but longer than 10
years) ......................... 120% 122% 124% 124% 139% 152% 152%
30 years or less (but longer
than 15 years) ................. 124% 127% 129% 129% 145% 152% 152%
Greater than 30 years .......... 124% 127% 129% 129% 145% 152% 152%
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by only
one other Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount Factor (e.g.,
where the only rating on a security is an S&P rating of AAA, a Fitch rating
of AAA will be used, and where the only rating on a security is a Moody's
rating of Ba, a Fitch rating of BB will be used). If a security is not
rated by any Rating Agency, the Trust will use the percent set forth under
"not rated" in this table. Securities rated below B by Fitch shall be
treated the same as securities not rated by Fitch. The Fitch Discount
Factors presented in the immediately preceding table apply to corporate
debt securities that are performing and have a Market Value determined by a
Pricing Service of an Approved Price. The Fitch Discount Factor noted in
the table above for a debt security rated B by Fitch shall apply to any
non-performing debt security with a price equal to or greater than $0.90.
The Fitch Discount Factor noted in the table above for a debt security
rated below B by Fitch shall apply to any non-performing debt security with
a price less than $0.90 but equal to or greater than $0.20. If a debt
security does not have a Market Value determined by a Pricing Service or an
Approved
C-8
Price, a rating two rating categories below the actual rating on the debt
security will be used (e.g., where the actual rating is A-, the rating for
debt securities rated BB- will be used). The Fitch Discount Factor for a
debt security issued by a limited partnership that is not a Rule 144A
Security shall be the Discount Factor determined in accordance with the
table set forth above multiplied by 105%. Fitch Discount Factors for
corporate debt securities shall also be applied to any Swaps (including
Total Returns Swaps and Interest Rate Swaps).
The Fitch Discount Factors presented in the immediately preceding table will
also apply to corporate obligations backed by a guarantee, a letter of credit or
insurance issued by a third party. If the third-party credit rating is the basis
for the rating on the obligation, then the rating on the third party will be
used to determine the Fitch Discount Factor in the table.
(ii) Preferred stock: the Fitch Discount Factor applied to preferred stock
is the percentage determined by reference to the rating in accordance with the
table set forth below.
PREFERRED STOCK (1) DISCOUNT FACTOR
------------------- ---------------
AAA........................................................... 130%
AA............................................................ 133%
A............................................................. 135%
BBB........................................................... 139%
BB............................................................ 154%
Not rated or below BB......................................... 161%
Investment grade DRD.......................................... 164%
Not rated or below investment grade DRD....................... 200%
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A and the Moody's rating is Baa, a Fitch rating of
BBB will be used). If a security is not rated by Fitch but is rated by only
one other Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount Factor (e.g.,
where the only rating on a security is an S&P rating of AAA, a Fitch rating
of AAA will be used, and where the only rating on a security is a Moody's
rating of Ba, a Fitch rating of BB will be used). If a security is not
rated by any Rating Agency, the Trust will use the percent set forth under
"not rated" in this table. Securities rated below B by Fitch shall be
treated the same as securities not rated by Fitch.
(iii) Common stock and warrants: The Fitch Discount Factor applied to
common stock will be:
Large-cap stocks: 200%
Mid-cap stocks: 233%
Small-cap stocks: 286%
Others: 370%
See "Fitch Eligible Assets - common stocks" for definitions of large-cap,
mid-cap and small-cap stocks.
(iv) Convertible securities: the Fitch Discount Factor applied to
convertible securities is (A) 200% for investment grade convertibles and (B)
222% for below investment grade convertibles so long as such convertible debt
securities have neither (x) conversion premium greater than 100% nor (y) have a
yield to maturity or yield to worst of greater than 15% above the relevant
Treasury curve.
C-9
The Fitch Discount Factor applied to convertible debt securities which have
conversion premiums of greater than 100% is (A) 152% for investment grade
convertibles and (B) 179% for below investment grade convertibles so long as
such convertible debt securities do not have a yield to maturity or yield to
worse of greater than 15% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have a
yield to maturity or yield to worse of greater than 15% above the relevant
Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating Agencies,
then the lower of the ratings on the security from the two other Rating Agencies
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A and the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on a security
is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba, a Fitch rating of BB will be
used). If a security is not rated by any Rating Agency, the Trust will treat the
security as if it were below investment grade.
(v) U.S. Government Securities:
TIME REMAINING TO MATURITY DISCOUNT FACTOR
-------------------------- ---------------
1 year or less................................................ 101.5%
2 years or less (but longer than 1 year)...................... 103%
3 years or less (but longer than 2 years)..................... 105%
4 years or less (but longer than 3 years)..................... 107%
5 years or less (but longer than 4 years)..................... 109%
7 years or less (but longer than 5 years)..................... 112%
10 years or less (but longer than 7 years).................... 114%
15 years or less (but longer than 10 years)................... 122%
20 years or less (but longer than 15 years)................... 130%
25 years or less (but longer than 20 years)................... 146%
Greater than 30 years......................................... 154%
(vi) Short-Term Investments and Cash: the Fitch Discount Factor applied to
short-term portfolio securities, including without limitation Debt Securities,
Short Term Money Market Instruments and Municipal Debt Obligations, will be (A)
100%, so long as such portfolio securities mature or have a demand feature at
part exercisable within the Fitch Exposure Period; (B) 115%, so long as such
portfolio securities mature or have a demand feature at part no exercisable
within the Fitch Exposure Period; and (C) 125%, so long as such portfolio
securities neither mature nor have a demand feature at part exercisable within
the Fitch Exposure Period. A Fitch Discount Factor of 100% will be applied to
cash and investments in Rule 2a-7 money market funds.
(vii) Rule 144A Securities: the Fitch Discount Factor applied to Rule 144A
Securities shall be the Discount Factor determined in accordance with the table
above under "Corporate Debt Securities" in subsection (i), multiplied by 110%
until such securities are registered under the Securities Act. This Discount
Factor is only applicable to Rule 144A Securities without registration rights.
(viii) Senior Loans: The Fitch Discount Factor applied to senior, secured
floating rate Loans made to corporate and other business entities ("Senior
Loans") shall be the percentage specified in the table below opposite such Fitch
Loan Category:
C-10
FITCH LOAN CATEGORY DISCOUNT FACTOR
------------------- ---------------
A 115%
B 130%
C 152%
D 370%
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall within more
than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed
to fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.
(ix) Asset-backed and mortgage-backed securities: The percentage determined
by reference to the asset type in accordance with the table set forth below.
ASSET TYPE (WITH
TIME REMAINING TO MATURITY, IF APPLICABLE) DISCOUNT FACTOR
------------------------------------------ ---------------
U.S. Treasury/agency securities (10 years or less) 118%
U.S. Treasury/agency securities (greater than 10 years) 127%
U.S. agency sequentials (10 years or less) 128%
U.S. agency sequentials (greater than 10 years) 142%
U.S. agency principal only securities 236%
U.S. agency interest only securities (with Market Value
greater than $0.40) 696%
U.S. agency interest only securities (with Market Value less
than or equal to $0.40) 214%
AAA LockOut securities, interest only 236%
U.S. agency planned amortization class bonds (10 years or
less) 115%
U.S. agency planned amortization class bonds (greater than 10
years) 136%
AAA sequentials (10 years or less) 118%
AAA sequentials (greater than 10 years) 135%
AAA planned amortization class bonds (10 years or less) 115%
AAA planned amortization class bonds (greater than 10 years) 140%
Jumbo mortgage rated AAA(1) 123%
Jumbo mortgage rated AA(1) 130%
Jumbo mortgage rated A(1) 136%
Jumbo mortgage rated BBB(1) 159%
Commercial mortgage-backed securities rated AAA 131%
Commercial mortgage-backed securities rated AA 139%
Commercial mortgage-backed securities rated A 148%
Commercial mortgage-backed securities rated BBB 177%
Commercial mortgage-backed securities rated BB 283%
Commercial mortgage-backed securities rated B 379%
Commercial mortgage-backed securities rated CCC or not rated 950%
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity loans,
manufactured housing and prime mortgage-backed securities not issued by a
U.S. agency or instrumentality.
(x) Futures and call options: for purposes of the Preferred Shares Basic
Maintenance Amount, futures held by the Trust and call options sold by the Trust
shall not be included as Fitch Eligible Assets. However, such assets shall be
valued at Market Value by subtracting the good faith margin and the maximum
daily trading variance as of the Valuation Date. For call options purchased by
the Trust, the Market Value of the call option will be included as a Fitch
Eligible Asset subject to a Fitch Discount Factor mutually agreed to between the
Trust and Fitch based on the characteristics of the option contract such as its
maturity and the underlying security of the contract.
C-11
(xi) Securities lending: the Trust may engage in securities lending in an
amount not to exceed 10% of the Trust's total gross assets. For purposes of
calculating the Preferred Shares Basic Maintenance Amount, such securities lent
shall be included as Fitch Eligible Assets with the appropriate Fitch Discount
Factor applied to such lent security. The obligation to return such collateral
shall not be included as an obligation/liability for purposes of calculating the
Preferred Shares Basic Maintenance Amount. However, the Trust may reinvest cash
collateral for securities lent in conformity with its investment objectives and
policies and the provisions of these bylaws. In such event, to the extent that
securities lending collateral received is invested by the Trust in assets that
otherwise would be Fitch Eligible Assets and the value of such assets exceeds
the amount of the Trust's obligation to return the collateral on a Valuation
Date, such excess amount shall be included in the calculation of Fitch Eligible
Assets by applying the applicable Fitch Discount Factor to this amount and
adding the product to total Fitch Eligible Assets. Conversely, if the value of
assets in which securities lending collateral has been invested is less then the
amount of the Trust's obligation to return the collateral on a Valuation Date,
such difference shall be included as an obligation/liability of the Trust for
purposes of calculating the Preferred Shares Basic Maintenance Amount.
Collateral received by the Trust in a securities lending transaction and
maintained by the Trust in the form received shall not be included as a Fitch
Eligible Asset for purposes of calculating the Preferred Shares Basic
Maintenance Amount.
(xiii) Swaps (including Total Return Swaps and Interest Rate Swaps): Total
Return and Interest Rate Swaps are subject to the following provisions:
If the Trust has an outstanding gain from a swap transaction on a Valuation
Date, the gain will be included as a Fitch Eligible Asset subject to the Fitch
Discount Factor on the counterparty to the swap transaction. At the time a swap
is executed, the Trust will only enter into swap transactions where the
counterparty has at least a Fitch rating of A- or Moody's rating of A3.
(a) Only the cumulative unsettled profit and loss from a Total Return Swap
transaction will be calculated when determining the Preferred Shares Basic
Maintenance Amount. If the Trust has an outstanding liability from a swap
transaction on a Valuation Date, the Trust will count such liability as an
outstanding liability from the total Fitch Eligible Assets in calculating the
Preferred Shares Basic Maintenance Amount.
(b) In addition, for swaps other than Total Return Swaps, the Market Value
of the position (positive or negative) will be included as a Fitch Eligible
Asset. The aggregate notional value of all swaps will not exceed the Liquidation
Preference of the Outstanding AMPS.
(c)(1) The underlying securities subject to a credit default swap sold by
the Trust will be subject to the applicable Fitch Discount Factor for each
security subject to the swap; (2) If the Trust purchases a credit default swap
and holds the underlying security, the Market Value of the credit default swap
and the underlying security will be included as a Fitch Eligible Asset subject
to the Fitch Discount Factor assessed based on the counterparty risk; and (3)
the Trust will not include a credit default swap as a Fitch Eligible Asset
purchase by the Trust without the Trust holding the underlying security or when
the Trust buys a credit default swap for a basket of securities without holding
all the securities in the basket.
(xiv) Municipal Obligations: the Fitch Discount Factor for Municipal
Obligations is 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 Exposure Period, in accordance with the
table set forth below.
RATING CATEGORY
Exposure Period AAA* AA* A* BBB* F1** UNRATED***
--------------- ---- --- --- ---- ---- ----------
7 weeks................... 151% 159% 166% 173% 136% 225%
8 weeks or less but
greater than 7 weeks... 154% 161% 168% 176% 137% 231%
9 weeks or less but
greater than 8 weeks... 158% 163% 170% 177% 138% 240%
----------
C-12
* Fitch rating (or, if not rated by Fitch, see the definition of "Fitch
Eligible Asset" below).
** Municipal Obligations rated F1 by Fitch (or, if not rated by Fitch, see the
definition of "Fitch Eligible Asset" below), which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a
long-term rating.
*** Includes Municipal Obligations rated less than BBB by Fitch (or, if not
rated by Fitch, see the definition of "Fitch Eligible Asset" below) and
unrated securities.
Notwithstanding the foregoing, (i) the Fitch Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated at least F2 by Fitch (or, if not rated by Fitch, rated MIG-1, VMIG-1 or
P-1 by Moody's or at least A-1+ or SP-1+ by S&P) and mature or have a demand
feature at par exercisable in 30 days or less, and (ii) no Fitch Discount Factor
will be applied to cash or to Receivables for Municipal Obligations Sold.
"Fitch Eligible Assets" means:
(i) Cash (including interest and dividends due on assets rated (A) BBB or
higher by Fitch or the equivalent by another Rating Agency if the payment date
is within five (5) Business Days of the Valuation Date, (B) A or higher by Fitch
or the equivalent by another Rating Agency if the payment date is within thirty
(30) days of the Valuation Date, and (C) A+ or higher by Fitch or the equivalent
by another Rating Agency if the payment date is within the Fitch Exposure
Period) and receivables for Fitch Eligible Assets sold if the receivable is due
within five (5) Business Days of the Valuation Date, and if the trades which
generated such receivables are settled within five (5) Business Days;
(ii) Short Term Money Market Instruments so long as (A) such securities are
rated at least F1+ by Fitch or the equivalent by another Rating Agency, (B) in
the case of demand deposits, time deposits and overnight funds, the supporting
entity is rated at least A by Fitch or the equivalent by another Rating Agency,
or (C) in all other case, the supporting entity (1) is rated at least A by Fitch
or the equivalent by another Rating Agency and the security matures within one
month, (2) is rated at least A by Fitch or the equivalent by another Rating
Agency and the security matures within three months or (3) is rated at least AA
by Fitch or the equivalent by another Rating Agency and the security matures
within six months;
(iii) U.S. Government Securities;
(iv) Debt securities, if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws but
are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Trust's investment manager or portfolio manager acting
pursuant to procedures approved by the Board of Trustees of the Trust; and such
securities are issued by (1) a U.S. corporation, limited liability company or
limited partnership, (2) a corporation, limited liability company or limited
partnership domiciled in a member of the European Union, Argentina, Australia,
Brazil, Chile, Japan, Korea, and Mexico or other country if Fitch does not
inform the Trust that including debt securities from such foreign country will
adversely impact Fitch's rating of the AMPS (the "Approved Foreign Nations"),
(3) the government of any Approved Foreign Nation or any of its agencies,
instrumentalities or political subdivisions (the debt securities of Approved
Foreign Nation issuers being referred to collectively as "Foreign Bonds"), (4) a
corporation, limited liability company or limited partnership domiciled in
Canada or (5) the Canadian government or any of its agencies, instrumentalities
or political subdivisions (the debt securities of Canadian issuers being
referred to collectively as "Canadian Bonds"). Foreign Bonds held by the Trust
will qualify as Fitch Eligible Assets only up to a maximum of 20% of the
aggregate Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Trust will qualify as Fitch Eligible
Assets only up to a maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Notwithstanding the limitations in the two
preceding sentences, Foreign Bonds and Canadian Bonds held by the Trust will
qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate
Market Value of all assets constituting Fitch Eligible Assets. All debt
securities satisfying the foregoing requirements and restriction of this
paragraph are herein referred to as "Debt Securities."
C-13
(v) Preferred stocks if (1) 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, (2) the issuer or such a preferred stock has common stock listed on
either the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market, and (3) the issuer of such a preferred stock has a
senior debt rating or preferred stock rating from Fitch of BBB- or higher or the
equivalent rating by another Rating Agency. In addition, the preferred stocks
issue must be at least $50 million;
(vi) Rule 144A Securities;
(vii) Interest Rate Swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (1) the counterparty to the swap
transaction has a short-term rating of not less than F1 by Fitch or the
equivalent by another Rating Agency, or, if the swap counterparty does not have
a short-term rating, the counterparty's senior unsecured long-term debt rating
is AA or higher by Fitch or the equivalent by another Rating Agency and (2) the
originals aggregate notional amount of the Interest Rate Swap transaction or
transactions is not greater than the Liquidation Preference of the AMPS original
issued;
(viii) Swaps, including Total Return Swaps entered into according to ISDA;
(ix) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii)
of the 1940 Act, not otherwise provided for in this definition may be included
in Fitch Eligible Assets, but, with respect to any financial contract, only upon
receipt by the Trust of a writing from Fitch specifying any conditions on
including such financial contract in Fitch Eligible Assets and assuring the
Trust that including such financial contract in the manner so specified would
not affect the credit rating assigned by Fitch to the AMPS;
(x) asset-backed and mortgage-backed securities;
(xi) senior loans; and
(xii) Fitch Hedging Transactions.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of
the Investment Company Act, not otherwise provided for in this definition may be
included in Fitch Eligible Assets, but, with respect to any financial contract,
only upon receipt by the Trust of a writing from Fitch specifying any conditions
on including such financial contract in Fitch Eligible Assets and assuring the
Trust that including such financial contract in the manner so specified would
not affect the credit rating assigned by Fitch to the AMPS.
Where the Trust sells an asset and agrees to repurchase such asset in the
future, the Discounted Value of such asset will constitute a Fitch Eligible
Asset and the amount the Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Trust thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another Rating Agency and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Trust will not affect the status of such asset
as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (C) Liens to secure payment for
services rendered or cash advanced to the Trust by its investment manager or
portfolio manager, the Trust's custodian, transfer agent or registrar or the
Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
Fitch diversification limitations: portfolio holdings as described below
must be within the following diversification and issue size requirements in
order to be included in Fitch's Eligible Assets:
C-14
DEBT SECURITIES Maximum Single Maximum Single Minimum Issue Size
RATED AT LEAST Issuer (1) Industry (1)(2) ($ in million) (3)
--------------- -------------- --------------- ------------------
AAA............ 100% 100% $100
AA-............ 20% 75% $100
A-............. 10% 50% $100
BBB-........... 6% 25% $100
BB-............ 4% 16% $ 50
B-............. 3% 12% $ 50
CCC............ 2% 8% $ 50
(1) Percentages represent both a portion of the aggregate Market Value and
number of outstanding shares of the common stock portfolio.
(2) Industries are determined according to Fitch's Industry Classifications, as
defined herein.
(3) Preferred stock has a minimum issue size of $50 million, and mortgage pass
through issued by Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA") or the Government National
Mortgage Association ("GNMA"), which has no minimum issue size.
If a security is not rated by Fitch but is rated by two other Rating Agencies,
then the lower of the ratings on the security from the two other Rating Agencies
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A and the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on a security
is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba, a Fitch rating of BB will be
used). If a security is not rated by any Rating Agency, the Trust will treat the
security as if it were below investment grade.
"Fitch Hedging Transactions" has the meaning set forth in Section 8 of Part
I of this Statement.
"Fitch Industry Classifications" means, for the purposes of determining
Fitch Eligible Assets, each of the following industry classifications:
Aerospace & Defense
Automobiles
Banking, Finance & Real Estate
Broadcasting & Media
Building & Materials
Cable
Chemicals
C-15
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Gaming, Lodging & Restaurants
Healthcare & Pharmaceuticals
Industrial/Manufacturing
Insurance
Leisure & Entertainment
Metals & Mining
Miscellaneous
Packaging and Containers
Paper & Forest Products
Retail
Sovereign
Structured Finance Obligations
Supermarkets & Drugstores
Telecommunications
Textiles & Furniture
Transportation
Utilities
The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.
C-16
"Fitch Loan Category" means the following four categories (and, for
purposes of this categorization, the Market Value of a Fitch Eligible Asset
trading at par is equal to $1.00):
(i) "Fitch Loan Category A" means Performing Bank Loans, which have a
Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Fitch Loan Category B" means: (A) Performing Bank Loans which have a
Market Value or an Approved Price of greater than or equal to $0.80 but
less than $0.90; and (B) non-Performing Bank Loans which have a Market
Value or an Approved Price greater than or equal to $0.85.
(iii) "Fitch Loan Category C" means: (A) Performing Bank Loans which have a
Market Value or an Approved Price of greater than or equal to $0.70 but
less than $0.80; (B) non-Performing Bank Loans which have a Market Value or
an Approved Price of greater than or equal to $0.75 but less than $0.85;
and (C) Performing Bank Loans without an Approved Price rated BB- or higher
by Fitch. If a security is not rated by Fitch but is rated by two other
Rating Agencies, then the lower of the ratings on the security from the two
other Rating Agencies will be used to determine the Fitch Discount Factor
(e.g., where the S&P rating is A- and the Moody 's rating is Baa1, a Fitch
rating of BBB+ will be used). If a security is not rated by Fitch but is
rated by only one other Rating Agency, then the rating on the security from
the other Rating Agency will be used to determine the Fitch Discount Factor
(e.g., where the only rating on a security is an S&P rating of AAA, a Fitch
rating of AAA will be used, and where the only rating on a security is a
Moody's rating of Ba3, a Fitch rating of BB- will be used).
(iv) "Fitch Loan Category D" means Bank Loans not described in any of the
foregoing categories.
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch Loan
Category, to the extent that any Fitch Eligible Asset would fall within more
than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed
to fall into the Fitch Loan Category with the lowest applicable Fitch Discount
Factor.
"Forward Commitment" has the meaning set forth in Section 8(a)(vi) of Part
I of this Statement.
"Holder" means a Person identified as a holder of record of AMPS in the
Share Register.
"Hold Order" and "Hold Orders" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act
and serving as such for the Trust.
"Initial Dividend Period," with respect to shares of a series of AMPS,
shall have the meaning specified with respect to shares of such series in
Section 2(d) of Part I of this Statement.
"Late Charge" shall have the meaning specified in subparagraph (e)(i)(B) of
Section 2 of Part I of this Statement.
"LIBOR Dealer" means Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other dealer or dealers as the Trust from time to time may appoint or, in
lieu thereof, their respective affiliates and successors.
"LIBOR Rate," on any Auction Date, means (i) the rate for deposits in U.S.
dollars for the designated Dividend Period, which appears on display page 3750
of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as
may replace that page on that service, or such other service as may be selected
by the LIBOR Dealer or its successors that are LIBOR Dealers) as of 11:00 a.m.,
London time, on the day that is the London Business Day preceding the Auction
Date (the "LIBOR Determination Date"), or (ii) if such rate does not appear on
Telerate Page 3750 or such other page as may replace such Telerate Page 3750,
(A) the LIBOR Dealer shall
C-17
determine the arithmetic mean of the offered quotations of the Reference Banks
to leading banks in the London interbank market for deposits in U.S. dollars for
the designated Dividend Period in an amount determined by such LIBOR Dealer by
reference to requests for quotations as of approximately 11:00 a.m. (London
time) on such date made by such LIBOR Dealer to the Reference Banks, (B) if at
least two of the Reference Banks provide such quotations, the LIBOR Rate shall
equal such arithmetic mean of such quotations, (C) if only one or none of the
Reference Banks provide such quotations, the LIBOR Rate shall be deemed to be
the arithmetic mean of the offered quotations that leading banks in The City of
New York selected by the LIBOR Dealer (after obtaining the Trust's approval) are
quoting on the relevant LIBOR Determination Date for deposits in U.S. dollars
for the designated Dividend Period in an amount determined by the LIBOR Dealer
(after obtaining the Trust's approval) that is representative of a single
transaction in such market at such time by reference to the principal London
offices of leading banks in the London interbank market; provided, however, that
if one of the LIBOR Dealers does not quote a rate required to determine the
LIBOR Rate, the LIBOR Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute LIBOR Dealer or Substitute LIBOR Dealers
selected by the Trust to provide such rate or rates not being supplied by the
LIBOR Dealer; provided further, that if the LIBOR Dealer and Substitute LIBOR
Dealers are required but unable to determine a rate in accordance with at least
one of the procedures provided above, the LIBOR Rate shall be the LIBOR Rate as
determined on the previous Auction Date. If the number of Dividend Period days
shall be (i) 7 or more but fewer than 21 days, such rate shall be the seven-day
LIBOR rate; (ii) more than 21 but fewer than 49 days, such rate shall be the
one-month LIBOR rate; (iii) 49 or more but fewer than 77 days, such rate shall
be the two-month LIBOR rate; (iv) 77 or more but fewer than 112 days, such rate
shall be the three-month LIBOR rate; (v) 112 or more but fewer than 140 days,
such rate shall be the four-month LIBOR rate; (vi) 140 or more but fewer than
168 days, such rate shall be the five-month LIBOR rate; (vii) 168 or more but
fewer than 189 days, such rate shall be the six-month LIBOR rate; (viii) 189 or
more but fewer than 217 days, such rate shall be the seven-month LIBOR rate;
(ix) 217 or more but fewer than 252 days, such rate shall be the eight-month
LIBOR rate; (x) 252 or more but fewer than 287 days, such rate shall be the
nine-month LIBOR rate; (xi) 287 or more but fewer than 315 days, such rate shall
be the ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days, such
rate shall be the eleven-month LIBOR rate; and (xiii) 343 or more but fewer than
365 days, such rate shall be the twelve-month LIBOR rate.
"Lien" means any material lien, mortgage, pledge, security interest or
security agreement of any kind.
"Liquidation Preference," with respect to a given number of AMPS, means
$25,000 times that number.
"London Business Day" means any day on which commercial banks are generally
open for business in London.
"Long Term Dividend Period" means a Special Dividend Period consisting of a
specific period of one whole year or more but not greater than five years.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by a Pricing Service. Market Value of any asset shall include any
interest accrued thereon. A 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 a Pricing Service using methods which include consideration of: yields or
prices of securities of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. A
Pricing Service may employ electronic data processing techniques and/or a matrix
system to determine valuations. In the event a Pricing Service is unable to
value a security, the security shall be valued at the lower of two dealer bids
obtained by the Trust from dealers who are members of the National Association
of Securities Dealers, Inc. and who make a market in the security, at least one
of which shall be in writing. Futures contracts and options are valued at
closing prices for such instruments established by the exchange or board of
trade on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Board of Trustees of the Trust.
"Maximum Applicable Rate" with respect to AMPS for any Dividend Period will
be the higher of the Applicable Percentage of the Reference Rate or the
Reference Rate times the Applicable Spread. The Reference Rate will be the LIBOR
Rate (for a dividend period of fewer than 365 Days) or the Treasury Index
C-18
Rate (for a dividend period of 365 days or more). The Applicable Percentage and
the Applicable Spread for any regular dividend period will be determined based
on the credit ratings assigned to the AMPS by Moody's and Fitch on the auction
date for such period as set forth in the definition of "Applicable Percentage
and Applicable Spread". If Moody's and/or Fitch do not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a Substitute Rating Agency. In the case of a special rate period, (1)
the Maximum Applicable Rate will be specified by the Trust in the Notice of
Special Dividend Period for such Dividend Payment Period, (2) the Applicable
Percentage and Applicable Spread will be determined on the date two business
days before the first day of such Special Dividend Period, and (3) the Reference
Rate will be the LIBOR Rate (for a Dividend Period of fewer than 365 days) or
the Treasury Index Rate (for a Dividend Period of 365 days or more). The Auction
Agent will round each applicable Maximum Applicable Rate to the nearest
one-thousandth (0.001) of one percent per annum, with any such number ending in
five ten-thousandths of one percent being rounded upwards to the nearest
one-thousandth (0.001) of one percent.
"Minimum Dividend Period" shall mean any Dividend Period of seven (7) days.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percent 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) Non-Convertible Corporate Debt Securities: the percentage determined by
reference to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below:
Moody's Rating Category
Term to Maturity of -----------------------------------------------
Corporate Debt Security (2) Aaa Aa A Baa Ba B Unrated (1)
--------------------------- --- --- --- --- --- --- -----------
1 year or less ................................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) ....... 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2 years) ...... 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3 years) ...... 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4 years) ...... 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5 years) ...... 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7 years) ..... 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10 years) .... 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15 years) .... 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20 years) .... 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years .......................... 165% 173% 181% 189% 205% 240% 250%
(1) If a corporate debt security is unrated by Moody's, S&P or Fitch, the Trust
will use the percentage set forth under "Unrated" in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate
a Moody's rating equivalent. Split rated securities assigned by S&P and
Fitch will be accepted at the lower of the two ratings.
(2) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
C-19
(ii) Preferred stock: (A) The Moody's Discount Factor for taxable preferred
stock including convertible preferred stock shall be:
Aaa .................. 150%
Aa ................... 155%
A .................... 160%
Baa .................. 165%
Ba ................... 196%
Not Rated ............ 250%
(B) Moody's Discount Factor for DRD-eligible preferred stock:
INVESTMENT GRADE ......................... 165%
non-investment grade ..................... 216%
(iii) Convertible securities: (A) rated by Moody's S&P or Fitch
Equity- the convertibles is this group would have a delta that ranges
between 1-0.8. For investment grade bonds the discount factor would be 195% and
for below investment grade securities the discount factor would be 229%.
Total Return- the convertibles in this group would have a delta that ranges
between 0.8-0.4. For investment grade bonds the discount factor would be 192%
and for below investment grade securities the discount factor would be 226%.
Yield Alternative- the convertibles in this group would have a delta that
ranges between 0.4-0. For this category the discount factors used are based on
Moody's rating for corporate debt securities table.
(B) Unrated convertible bonds would receive a discount factor of 250%.
(iv) Short-term instruments: the Moody's Discount Factor applied to
short-term portfolio securities, including without limitation corporate debt
securities, Short Term Money 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 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 and investments in 2a-7 money market funds.
(v) U.S. Government Securities and U.S. Treasury Strips:
U.S. Government Securities U.S. Treasury Strips
Remaining Term to Maturity Discount Factor Discount Factor
-------------------------- -------------------------- --------------------
1 year or less.................................. 107% 107%
2 years or less (but longer than 1 year)........ 113% 115%
3 years or less (but longer than 2 years)....... 118% 121%
4 years or less (but longer than 3 years)....... 123% 128%
5 years or less (but longer than 4 years)....... 128% 135%
7 years or less (but longer than 5 years)....... 135% 147%
C-20
10 years or less (but longer than 7 years) ..... 141% 163%
15 years or less (but longer than 10 years) .... 146% 191%
20 years or less (but longer than 15 years) .... 154% 218%
30 years or less (but longer than 20 years) .... 154% 244%
(vi) Rule 144A Securities: the Moody's Discount Factor applied for Rule
144A Securities will be 120% of the Moody's Discount Factor which would apply
were the securities registered under the Securities Act. This Discount Factor is
only applicable to Rule 144A Securities without registration rights.
(vii) Bank Loans: The Moody's Discount Factor applied to secured floating
rate loans ("Bank Loans") shall be the percentage specified in accordance with
the table set forth below (or such lower percentage as Moody's may approve in
writing from time to time):
MOODY'S RATING CATEGORY
CAA AND BELOW
(INCLUDING
DISTRESSED
TYPE OF LOAN
TYPE OF LOAN AAA-A BAA AND BA(1) B(1) AND UNRATED)
------------ ----- ------------- ---- -------------
Senior Loans greater than $250 MM .... 118% 136% 149% 250%
Non-Senior Bank Loans greater than ... 128% 146% 159% 250%
$250 MM
Bank Loans less than $250 MM ......... 138% 156% 169% 270%
Second Lien Bank Loans ............... 168% 185% 200% 270%
Third and Fourth Lien Bank Loans ..... 218% 240% 260% 351%
=== === === ===
(1) If a Bank Loan is not rated by any of Moody's, S&P or Fitch Ratings, the
Trust will use the applicable percentage set forth under the column
entitled "Caa and below (including distressed and unrated)" in the table
above. Ratings assigned the S&P and/or Fitch are generally accepted by
Moody's face value. However, adjustments to face value may be made to
particular categories of securities for which the ratings by S&P and/or
Fitch do not seem to approximate a Moody's rating equivalent. Split-rated
securities assigned by S&P and Fitch (i.e., these Rating Agencies assign
different rating categories to the security) will be accepted at the lower
of the two ratings.
In addition, the Trust may make commitments to fund specified amounts and under
certain existing credit arrangements, there could be unfunded loan commitments.
The unfunded portion of those loan commitments is valued and the Moody's
Discount Factor applied to the net unrealized appreciation of those loan
commitments is 270%.
(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 in accordance with the
table set forth below:
Remaining Term to Maturity Discount Factor
-------------------------- ---------------
3 years or less................................... 133%
7 years or less (but longer than 3 years)......... 142%
10 years or less (but longer than 7 years)........ 158%
20 years or less (but longer than 10 years)....... 174%
Greater than 20 years............................. 205%
C-21
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 in accordance with the table set
forth below:
Coupon Discount Factor
------ ---------------
5% 166%
6% 162%
7% 158%
8% 154%
9% 151%
10% 148%
11% 144%
12% 142%
13% 139%
adjustable 165%
The Moody's Discount Factor applied to fixed-rate pass-through 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 in accordance with the table set
forth below:
Coupon Discount Factor
------ ---------------
5% 172%
6% 167%
7% 163%
8% 159%
9% 155%
10% 151%
11% 148%
12% 145%
13% 142%
adjustable 170%
(ix) 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 (i) 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 (i); 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.
(x) 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 Exposure Period, in
accordance with the table set forth below:
Exposure Period Aaa Aa A Baa MIG-1 (1) MIG-1 (2) Unrated (3)
--------------- --- --- --- --- --------- --------- -----------
7 weeks 151% 159% 160% 173% 135% 148% 225%
8 weeks or less but greater 154% 161% 168% 176% 137% 149% 231%
than seven weeks
9 weeks or less but greater 158% 163% 170% 177% 138% 150% 240%
than eight weeks
C-22
(1) Municipal debt obligations not rated by Moody's but rated equivalent to
MIG-1, VMIG-1 or P-1 by S& P and Fitch that have a maturity less than or
equal to 49 days.
(2) Municipal debt obligations not rated by Moody's but rated equivalent to
MIG-1, VMIG-1 or P-1 by S&P and Fitch that have a maturity greater than 49
days.
(3) If a Municipal Bond is rated Baa or below by Moody's or if unrated by
Moody's, S&P or Fitch, the Trust will use the percentage set forth under
"Unrated" in the table. Ratings assigned by S&P or Fitch are generally
accepted by Moody's at face value. However, adjustments to face value may
be made to particular categories of credits for which the S&P and/or Fitch
rating does not seem to approximate a Moody's rating equivalent. Split
rated securities assigned by S&P and Fitch will be accepted at the lower of
the two ratings.
Notwithstanding the foregoing, no Moody's Discount Factor will be applied
to cash or to Receivables for Municipal Obligations Sold that are due within
five Business Days of such Valuation Date. The Moody's Discount Factor for
Receivables for Municipal Obligations Sold that are due within six and 30
Business Days of such Valuation Date will be the Moody's Discount Factor
applicable to the Municipal Obligations sold.
"Moody's Eligible Assets" means:
(i) Cash (including interest and dividends) due on assets rated (A) Baa3 or
higher by Moody's or rated equivalently by other rating agency 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 rating of at least P-1 or equivalent rating from other
rating agencies;
(ii) Short-term Money Market Instruments so long as (A) such securities are
rated at least P-1 or equivalent short-term rating from other rating agencies,
(B) in the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A2 or equivalent long-term rating from other
rating agencies, or (C) in all other cases, the supporting entity (1) is rated
A2 or equivalent rating from other rating agencies and the security matures
within one month, (2) is rated A1 or equivalent rating from other rating
agencies and the security matures within three months or (3) is rated at least
Aa3 or equivalent rating from other rating agencies and the security matures
within six months;
C-23
(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 B3 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 or S&P or Fitch; (C) such securities have
been registered under the Securities Act or are restricted as to resale under
federal securities laws but are eligible for resale pursuant to Rule 144A under
the Securities Act as determined by the Trust's investment manager or portfolio
manager acting pursuant to procedures approved by the Board of Trustees, 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 (D) such
securities are not subject to extended settlement.
For corporate debt securities that do not pay interest in U.S. dollars, the
Trust sponsor will contact Moody's to obtain the applicable currency conversion
rates.
Notwithstanding the foregoing limitations, corporate debt securities rated by
neither Moody's nor S&P nor Fitch shall be considered to be Moody's Eligible
Assets only to the extent such securities are issued by entities which (i) have
not filed for bankruptcy within the past three years, (ii) are current on all
principal and interest in their fixed income obligations, (iii) are current on
all preferred stock dividends, and (iv) possess a current, unqualified auditor's
report without qualified, explanatory language.
(vii) Preferred stocks if (A) dividends on such preferred stock are
cumulative, (B) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars or euros, (C) the issuer of such a preferred
stock has common stock listed on either the New York Stock Exchange or the
American Stock Exchange, (D) the issuer of such a preferred stock has a senior
debt rating from Moody's of Baa1 or higher or a preferred stock rating from
Moody's of Baa3 or higher and (E) such preferred stock has paid consistent cash
dividends in U.S. dollars or euros over the last three years or has a minimum
rating of A1 (if the issuer of such preferred stock has other preferred issues
outstanding that have been paying dividends consistently for the last three
years, then a preferred stock without such a dividend history would also be
eligible). 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 Trust of each issue of preferred
stock is $500,000 and the maximum holding of preferred stock of each issue is $5
million. In addition, preferred stocks issued by transportation companies will
not be considered Moody's Eligible Assets;
(viii) Common stocks which (A) are traded on a nationally recognized stock
exchange or in the over the-counter market, (B) if cash dividend paying, pay
cash dividends in US dollars, (C) may be sold without restriction by the Trust;
provided, however, that common stock which, while a Moody's Eligible Asset owned
by the Trust, ceases paying any regular cash dividend will no longer be
considered a Moody's Eligible Asset until 71 days after the date of the
announcement of such cessation, unless the issuer of the common stock has senior
debt securities rated at least A3 by Moody's;
C-24
(ix) American Depository Receipts (ADRs): (A) denominated in any currency
other than the US dollar (B) securities of issuers formed under the laws of
jurisdictions other than the United States, its states and the District of
Columbia for which ADRs or their equivalents are traded in the United States on
exchanges or over-the-counter and are issued by banks formed under the laws of
the United States, its states or the District of Columbia, provided, however,
that the aggregate Market Value of the Trust's holdings of securities
denominated in currencies other than the US dollar and ADRs in excess of (A) 6%
of the aggregate Market Value of the Outstanding shares of common stock of such
issuer thereof or (B) 10% of the Market Value of the Trust's Moody's Eligible
Assets with respect to issuers formed under the laws of any single such non-U.S.
jurisdiction other than Australia, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain,
Sweden, Switzerland and the United Kingdom, shall not be a Moody's Eligible
Asset;
(x) Asset-backed and mortgage-backed securities:
(A) Asset-backed securities if (1) such securities are rated at least Aa3
by Moody's or at least AA- by S&P or Fitch, (2) the securities are part of an
issue that is $250 million or greater, or the issuer of such securities has a
total of $500 million or greater of asset-backed securities outstanding at the
time of purchase of the securities by the Trust 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 Trust (1) has
been rated Aaa by Moody's or AAA by S&P or Fitch, (2) does not have a coupon
which floats inversely, (3) is not portioned as an interest-only or
principal-only strip and (4) is part of an issuance that had an original issue
size of at least $100 million;
(C) Planned amortization class bonds ("PACs") and targeted amortization
class bonds ("TACs") provided that such PACs or TACs are (1) backed by
certificates of either the Federal National Mortgage Association ("FNMA"), the
Government National Mortgage Association ("GNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") representing ownership in single-family first
lien mortgage loans with original terms of 30 years, (2) part of an issuance
that had an original issue size of at least $10 million, (3) part of PAC or TAC
classes that have payment priority over other PAC or TAC classes, (4) if TACs,
TACs that do not support PAC classes, and (5) if TACs, not considered reverse
TACs (i.e., do not protect against extension risk);
(D) Consolidated senior debt obligations of FHLBs, senior long-term debt of
the FNMA, and consolidated system wide bonds and FCS Financial Assistance
Corporation Bonds of Federal Farm Credit Banks ("FFCBs") (collectively, "FHLB,
FNMA and FFCB Debentures"), provided that such FHLB, FNMA and FFCB Debentures
are (1) direct issuance corporate debt rated Aaa by Moody's, (2) senior debt
obligations backed by the FHLBs, FFCBs or FNMA, (3) part of an issue entirely
denominated in U.S. dollars and (4) not callable or exchangeable debt issues;
(E) Mortgage pass-throughs rated at least Aa by Moody's and pass-throughs
issued prior to 1987 (if rated AA by S&P 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
C-25
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 6 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) such loans are whole loans
and not participations; (2) for loans that do not satisfy the requirements set
forth in the foregoing clause (1), (a) non-owner occupied properties represent
no greater than 15% of the aggregate of either the adjustable-rate pool or the
fixed-rate pool, (b) multi-family properties (those with five or more units)
represent no greater than 15% of the aggregate of either the adjustable-rate
pool or the fixed-rate pool, (c) condominiums represent no greater than 10% of
the aggregate of either the adjustable-rate pool or the fixed-rate pool, and any
condominium project must be 80% occupied at the time the loan is originated, (d)
properties with loan-to-value ratios exceeding 80% represent no greater than 25%
of the aggregate of either the adjustable-rate pool or the fixed-rate pool and
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 0.15% and 0.25% for either cost-of-funds index and
between 0.175% and 0.325% 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; (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.
(xi) 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 $10,000,000. In addition, Municipal Obligations in the Trust's
portfolio must be within the following diversification requirements in order to
be included within Moody's Eligible Assets:
Minimum Maximum State
Issue Size Maximum Underlying Allowed
Rating ($ Millions) Obligor (%) (1) (%) (1)(3)
------ ------------ ------------------ -------------
Aaa...................... N/A 100 100
Aa....................... 10 20 60
A........................ 10 10 40
Baa...................... 10 6 20
Ba....................... 10 4 12
B........................ 10 3 12
Other (2)................ 10 2 12
----------
C-26
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Obligations rated Caa or below by Moody's, or if not rated by
Moody's rated the equivalent by S&P or Fitch and unrated securities.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described above, any
Municipal Obligations backed by the guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Obligations.
When the Trust sells a Municipal Obligation and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Obligation will constitute a
Moody's Eligible Asset and the amount the Trust is required to pay upon
repurchase of such Municipal Obligation will count as a liability for purposes
of calculating the Preferred Shares Basic Maintenance Amount. For so long as the
AMPS are rated by Moody's, the Trust will not enter into any such reverse
repurchase agreements unless it has received written confirmation from Moody's
that such transactions would not impair the rating then assigned the Preferred
Shares by Moody's. When the Trust purchases a Municipal Obligation and agrees to
sell it at a future date to another party, cash receivable by the Trust thereby
will constitute a Moody's Eligible Asset if the long-term debt of such other
party is rated at least A2 by Discounted Value of such Obligation will
constitute a Moody's Eligible Asset.
(xii) Structured Notes and rated TRACERs; and TRAINS.
(xiii) 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 Trust of a letter from Moody's specifying any
conditions on including such financial contract in Moody's Eligible Assets and
assuring the Trust that including such financial contract in the manner so
specified would not affect the credit rating assigned by Moody's to the AMPS.
Additionally, in order to merit consideration as an eligible asset, securities
should be issued by entities which:
- have not filed for bankruptcy within the past year;
- are current on all principle and interest in their fixed income
obligations;
- are current on all preferred stock dividends; and
- possess a current, unqualified auditor's report without
qualified, explanatory language.
Moody's Diversification Limitations. 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:
Debt Securities:
Maximum Single Maximum Single Minimum 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
CS (6) Baa 6% 20% $100
Ba 4% 12% $ 50 (7)
B1-B2 (8) 3% 8% $ 50 (7)
B3 or below and unrated (8) 2% 5% $ 50 (7)
C-27
(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 portfolio Market Value.
(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) CS refers to common stock which is diversified independently from its
rating level
(7) Portfolio holdings from issues ranging from $50 million to $100 million and
are limited to 20% of the Fund's total assets.
(8) Portfolio holdings rated B and below by Moody's or equivalent rating from
other rating agencies taken together with unrated securities in excess of
10% of the aggregate portfolio Market Value shall not be considered Moody's
Eligible Assets.
Where the Trust 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 Trust is required to pay upon repurchase of such asset
will count as a liability for the purposes of the Preferred Shares Basic
Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to
a third party in the future, cash receivable by the Trust thereby will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such purchased asset will constitute a Moody's
Eligible Asset. For the purposes of calculation of Moody's Eligible Assets,
portfolio securities which have been called for redemption by the issuer thereof
shall be valued at the lower of Market Value or the call price of such portfolio
securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it (i) has been irrevocably deposited for the
payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic
Maintenance Amount or to the extent it is subject to any Liens, except for (A)
Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Trust 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 Trust by its investment
manager or portfolio manager, the Trust's custodian, transfer agent or registrar
or the Auction Agent and (D) Liens arising by virtue of any repurchase
agreement, or (ii) has been segregated against obligations of the Trust in
connection with an outstanding derivative transaction.
"Moody's Hedging Transactions" has the meaning set forth in Section 8 of
Part I of this Statement.
"Moody's Industry Classification" means, for the purposes of determining
Moody's Eligible Assets, each of the following industry classifications (or such
other classifications as Moody's may from time to time approve for application
to the AMPS):
C-28
1. Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft
Manufacturing, Arms, and 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, 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-agricultural), Industrial
Gases, Sulfur, Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only): Soaps,
Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals: Fabricating,
Distribution
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and Waste
Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communicating Systems, Radios, TVs, Tape Machines, Speakers, Printers,
Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture Chemicals,
Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
18. Home and Office Furnishings, House wares, 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
C-29
21. Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing, Motion Picture Production Theaters, Motion Picture
Distribution
22. Machinery (Non-Agricultural, Non-Construction, Non-Electronic): Industrial,
Machine Tools, and 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 of the foregoing
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, T.V., Cable Broadcasting Equipment
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
28. Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
30. Personal Transportation: Air, Bus, Rail, Car Rental
31. Utilities: Electric, Water, Hydro Power, Gas
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national
Agencies
The Trust will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with the
Independent Accountant and Moody's, to the extent the Trust considers necessary.
"Municipal Obligations" means municipal obligations, including municipal
bonds and short-term municipal obligations, the interest from which is exempt
from federal income taxes.
"Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Non-Payment Period Rate" means, initially, 300% of the applicable
Reference Rate, provided that the Board of Trustees of the Trust shall have the
authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Trustees of the Trust determines and
Moody's and Fitch's (and any Substitute Rating Agency in lieu of Moody's or
Fitch in the event Moody's or Fitch shall not rate the AMPS) advise the Trust in
writing that such adjustment, modification, alteration or change will not
adversely affect its then current ratings on the AMPS.
"Notice Of Redemption" shall mean any notice with respect to the redemption
of AMPS pursuant to paragraph (c) of Section 9 of Part I of this Statement.
"Notice Of Special Dividend Period" shall mean any notice with respect to a
Special Dividend Period of AMPS pursuant to subparagraph (d)(i) of Section 3 of
Part I of this Statement.
C-30
"Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption plus any applicable redemption premium attributable to the
designation of a Premium Call Period.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
"Outstanding" means, as of any date (i) with respect to AMPS, AMPS
theretofore issued by the Trust except, without duplication, (A) any AMPS
theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to Section 9 of Part I of this Statement and (B) any AMPS as
to which the Trust or any Affiliate (other than an Affiliate that is a
Broker-Dealer) thereof shall be a Beneficial Owner, provided that AMPS held by
an Affiliate shall be deemed outstanding for purposes of calculating the
Preferred Shares Basic Maintenance Amount and (ii) with respect to other
preferred shares of beneficial interest of the Trust, the meaning equivalent to
that for AMPS as set forth in clause (i).
"Person" means and includes an individual, a partnership, a trust, an
unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of AMPS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
AMPS.
"Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring AMPS (or, in the case of an Existing Holder, additional AMPS).
"Preferred 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 Outstanding shares of each Series of AMPS on such date and the
Liquidation Preference (plus redemption premium, if any) per share of such
Series; (B) the aggregate amount of dividends that will have accumulated at the
respective Applicable Rates (whether or not earned or declared) to (but not
including) the first respective Dividend Payment Dates for each Series of AMPS
outstanding that follows such Valuation Date; (C) the aggregate amount of
dividends that would accumulate on Outstanding AMPS from such first Dividend
Payment Dates therefore referenced in (B) of this paragraph through the 45th day
after such Valuation Date at the respective Applicable Rates referenced in (B)
of this paragraph; (D) the amount of anticipated non-interest expenses of the
Trust for the 90 days subsequent to such Valuation Date; (E) the amount of the
current outstanding balances of any indebtedness or obligations of the Trust
senior in right of payment to the AMPS plus interest actually accrued together
with 30 days additional interest on the current outstanding balances calculated
at the current rate; and (F) any other current liabilities payable during the 30
days subsequent to such Valuation Date, including, without limitation,
indebtedness due within one year and any redemption premium due with respect to
the AMPS for which a Notice of Redemption has been sent, as of such Valuation
Date, to the extent not reflected in any of (i)(A) through (i)(E) (including,
without limitation, any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the sum of any cash plus the value of any of
the Trust's assets irrevocably deposited by the Trust for the payment of any of
(i)(A) through (i)(F) ("value," for purposes of this clause (ii), means the
Discounted Value of the security, except that if the security matures prior to
the relevant redemption payment date and is either fully guaranteed by the U.S.
Government or is rated P2 by Moody's and A2 by Fitch, it will be valued at its
face value).
"Preferred Shares Basic Maintenance Cure Date," with respect to the failure
by the Trust to satisfy the Preferred Shares Basic Maintenance Amount (as
required by Section 6 of Part I of this Statement) as of a given Valuation Date,
means the sixth Business Day following such Valuation Date.
C-31
"Preferred Shares Basic Maintenance Report" means a report as of the
related Valuation Date, the assets of the Trust, the Market Value and the
Discounted Value thereof (seriatim and in aggregate), and the Preferred Shares
Basic Maintenance Amount.
"Preferred Shares Paying Agent" means Deutsche Bank Trust Company Americas
unless and until another bank or trust company has been appointed as Preferred
Shares Paying Agent by a resolution of the Board of Trustees and thereafter such
substitute bank or trust company.
"Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."
"Pricing Service" means any pricing service designated by the Board of
Trustees of the Trust and approved by Fitch or Moody's, as applicable, for
purposes of determining whether the Trust has Eligible Assets with an aggregate
Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount.
"Rating Agency" means a nationally recognized statistical rating
organization.
"Receivables for Municipal Obligations Sold" shall mean for purposes of
calculation of Eligible Assets as of any Valuation Date, no more than the
aggregate of the following: (i) the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearing house firms with
respect to which the Trust has received prior written authorization from the
Rating Agency or (y) with counterparties having the Rating Agency's long-term
debt rating of at least Baa3; and (ii) the Rating Agency's Discounted Value of
Municipal Obligations sold as of or prior to such Valuation Date which generated
receivables, if such receivables are due within five business days of such
Valuation Date but do not comply with either of the conditions specified in (i)
above.
"Redemption Price" shall mean the applicable redemption price specified in
paragraph (a) or (b) of Section 9 of Part I of this Statement.
"Reference Banks" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citigroup Global Markets Inc., UBS Securities LLC or any other major bank in the
London interbank market chosen by the LIBOR Dealer or Substitute LIBOR Dealer.
"Reference Rate" means (i) with respect to a dividend period having 364 or
fewer days, the applicable LIBOR Rate and (ii) with respect to a dividend period
having 365 or more days, the applicable Treasury Index Rate.
"Rule 2a-7 Money Market Funds" means investment companies registered under
the 1940 Act that comply with Rule 2a-7 thereunder.
"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 Trust's investment manager or
portfolio manager acting pursuant to procedures approved by the Board of
Trustees of the Trust.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc., or its successors.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust as securities depository for the AMPS that agrees to follow the procedures
required to be followed by such securities depository in connection with the
AMPS.
"Sell Order" and "Sell Orders" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
C-32
"Series M7 AMPS" means the Auction Market Preferred Shares, Series M7.
"Series W7 AMPS" means the Auction Market Preferred Shares, Series W7.
"Series TH7 AMPS" means the Auction Market Preferred Shares, Series TH7.
"Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the AMPS.
"Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the AMPS.
"Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days, evenly divisible by seven and not fewer than
fourteen nor more than 364.
"Special Dividend Period," with respect to shares of a series of AMPS,
shall have the meaning specified in paragraph (a) of Section 3 of Part I of this
Statement.
"Special Redemption Provisions" shall have the meaning specified in
subparagraph (a)(i) of Section 9 of Part I of this Statement.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or both of (i) a period (a "Non-Call Period") determined by the
Trust, after consultation with the Auction Agent and the Broker-Dealers, during
which the AMPS subject to such Dividend Period shall not be subject to
redemption at the option of the Trust and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years and determined by the Trust,
after consultation with the Auction Agent and the Broker-Dealers, during each
year of which the AMPS subject to such Dividend Period shall be redeemable at
the Trust's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Trust after consultation with the Auction Agent and the
Broker-Dealers.
"Submission Deadline" shall mean 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" And "Submitted Bids" shall have the respective meanings
specified in paragraph (a) of Section 3 of Part II of this Statement.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
"Submitted Order" and "Submitted Orders" shall have the respective meanings
specified in paragraph (a) of section 3 of part II of this Statement.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
"Subsequent Dividend Period," with respect to shares of a series of AMPS,
shall mean the period from and including the first day following the Initial
Dividend Period of shares of such series to but excluding the next Dividend
Payment Date for shares of such Series and any period thereafter from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series; provided,
however, that if any Subsequent Dividend Period is also a Special Dividend
Period, such term shall mean the period commencing on the first day of such
Special Dividend Period and ending on the last day of the last Dividend Period
thereof.
C-33
"Substitute LIBOR Dealer" means any LIBOR dealer selected by the Fund as to
which Moody's, Fitch or any other Rating Agency then rating the AMPS shall not
have objected; provided, however, that none of such entities shall be a LIBOR
Dealer.
"Substitute Rating Agency" means a Rating Agency selected by the Trust to
act as the substitute Rating Agency to determine the credit ratings of the AMPS.
"Substitute U.S. Government Securities Dealer" means any U.S. Government
securities dealer selected by the Fund as to which Moody's, Fitch or any other
Rating Agency then rating the AMPS shall not have objected; provided, however,
that none of such entities shall be a U.S. Government Securities Dealer.
"Sufficient Clearing Bids" has the meaning set forth in Section 3 of Part
II of this Statement.
"Swap" means a derivative transaction between two parties who contractually
agree to exchange the returns (or differentials in rates of return) to be
exchanges or "swapped" between the parties, which returns are calculated with
respect to a "notional amount," i.e., a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index.
(i) "Interest Rate Swap" means an arrangement whereby two parties (called
counterparties) enter into an agreement to exchange periodic interest payments.
The dollar amount the counterparties pay to each other is an agreed-upon
periodic interest rate multiplied by some predetermined dollar principal, called
the notional principal amount. No principal is exchanged between parties to the
transaction; only interest is exchanged.
(ii) "Total Return Swap" means an agreement between counterparties in which
one party agrees to make payments of the total return from underlying asset(s),
which may include securities, baskets of securities, or securities indices
during the specified period, in return for payments equal to a fixed or floating
rate of interest or the total return from other underlying asset(s).
"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 U.S.
Government Securities Dealers selected by the Fund; provided further, however,
that if one of the U.S. Government Securities Dealers does not quote a rate
required to determine the Treasury Index Rate, the Treasury Index Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute U.S. Government Securities Dealer or Substitute U.S. Government
Securities Dealers selected by the Fund to provide such rate or rates not being
supplied by the U.S. Government Securities Dealer; provided further, that if the
U.S. Government Securities Dealer and Substitute U.S. Government Securities
Dealers are required but unable to determine a rate in accordance with at least
one of the procedures provided above, the Treasury Index Rate shall be the
Treasury Index Rate as determined on the previous Auction Date.
"U.S. Government Securities" means direct obligations of the United States
or of its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than Treasury Bills, provide for the
periodic payment of interest and the full payment of principal at maturity or
call for redemption.
"U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan Guaranty Trust
Company of New York and any other U.S. Government Securities dealer selected by
the Fund as to which Moody's (if Moody's is then rating the AMPS) and Fitch (if
Fitch is then rating the AMPS) shall not have objected or their respective
affiliates or successors, if such entity is a U.S. Government securities dealer.
C-34
"U.S. Treasury Securities" means direct obligations of the United States
Treasury that are entitled to the full faith and credit of the United States.
"U.S. Treasury Strips" means securities based on U.S. Treasury Securities
created through the Separate Trading of Registered Interest and Principal of
Securities program.
"Valuation Date" means, for purposes of determining whether the Trust is
maintaining the Preferred Shares Basic Maintenance Amount, the last Business Day
of each week commencing with the Date of Original Issue.
"Voting Period" has the meaning set forth in Section 4 of Part I of this
Statement.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
PART I.
1. NUMBER OF AUTHORIZED SHARES.
The number of authorized AMPS constituting the Series M7 AMPS shall be
unlimited, of which 3,130 shares shall be issued on March 28, 2005, or such
other date as the officers of the Trust shall determine. The number of
authorized AMPS constituting the Series W7 AMPS shall be unlimited, of which
3,125 shares shall be issued on March 28, 2005, or such other date as the
officers of the Trust shall determine. The number of authorized AMPS
constituting the Series TH7 AMPS shall be unlimited, of which 3,125 shares shall
be issued on March 28, 2005, or such other date as the officers of the Trust
shall determine.
2. DIVIDENDS.
(a) Ranking. The shares of a series of the AMPS shall rank on parity with
each other, with shares of any other series of the AMPS and with shares of any
other series of preferred shares as to the payment of dividends by the Trust.
(b) Cumulative Cash Dividends. The Holders of any series of AMPS shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with this Statement and
applicable law, cumulative cash dividends at the Applicable Rate for shares of
such series, determined as set forth in paragraph (e) of this Section 2, and no
more, payable on the Dividend Payment Dates with respect to shares of such
series determined pursuant to paragraph (d) of this Section 2. Holders of AMPS
shall not be entitled to any dividend, whether payable in cash, property or
shares, in excess of full cumulative dividends, as herein provided, on AMPS. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on AMPS which may be in arrears, and, except to
the extent set forth in subparagraph (e)(i) of this Section 2, no additional sum
of money shall be payable in respect of any such arrearage. To the extent
permitted under the Code, dividends on AMPS will be designated as
exempt-interest dividends. For the purposes of this section, the term "net
tax-exempt income" shall exclude capital gains of the Trust.
(c) Dividends Cumulative From Date of Original Issue. Dividends on any
series of AMPS shall accumulate at the Applicable Rate for shares of such series
from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustment Thereof. (A) The Dividend Payment
Dates with respect to the AMPS, for the Initial Dividend Period, shall be as set
forth in the following table:
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SERIES INITIAL DIVIDEND PAYMENT DATE
---------- -----------------------------
Series M7 April 5, 2005
Series W7 April 7, 2005
Series TH7 April 8, 2005
(B) The Dividend Payment Date for any Subsequent Dividend Period shall be
(i) with respect to any Minimum Dividend Period and any Short Term Dividend
Period of 35 or fewer days, on the Business Day next succeeding the last day of
such Subsequent Dividend Period, and (ii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, monthly on the first Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend Period and on the Business Day
next succeeding the last day of such Subsequent Dividend Period (each such date
referred to in clause (i) or (ii) being herein referred to as a "Normal Dividend
Payment Date"), except that if such Normal Dividend Payment Date is not a
Business Day, then the Dividend Payment Date shall be the first Business Day
next succeeding such Normal Dividend Payment Date. Although any particular
Dividend Payment Date may not occur on the originally scheduled date because of
the exceptions discussed above, the next succeeding Dividend Payment Date,
subject to such exceptions, will occur on the next following originally
scheduled date; and
(C) Notwithstanding the foregoing, the Trust in its discretion may
establish Dividend Payment Dates other than as provided in paragraph (d) of this
Section 2 of Part I of this Statement in respect of any Special Dividend Period
of shares of a series of AMPS consisting of more than a Minimum Rate Period (a
"Special Dividend Payment Date"); provided, however, that such Special Dividend
Payment Dates shall be set forth in the Notice of Special Dividend Period
relating to such Special Dividend Period, as delivered to the Auction Agent,
which Notice of Special Dividend Period shall be filed with the Secretary of the
Trust; and further provided that (1) any such Special Dividend Payment Date
shall be a Business Day and (2) the last Special Dividend Payment Date in
respect of such Special Dividend Period shall be the Business Day immediately
following the last day thereof.
(D) The Dividend Payment Dates for any series of AMPS subsequently
established by the Trust shall be as set forth in resolutions of the Board of
Trustees establishing such series.
(e) Dividend Rates and Calculation of Dividends.
(A) (i) Dividend Rates. the dividend rate on the AMPS during the period from
and after the Date of Original Issue of shares of such series to and
including the last day of the Initial Dividend Period of shares of such
series shall be equal to the rate per annum set forth below:
SERIES INITIAL DIVIDEND RATE
---------- ---------------------
Series M7 3.00%
Series W7 3.00%
Series TH7 3.00%
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The initial dividend rate on any series of AMPS subsequently established by
the Trust shall be the rate set forth in or determined in accordance with
the resolutions of the Board of Trustees establishing such series.
For each Subsequent Dividend Period of shares of such series thereafter,
the dividend rate on shares of such series shall be equal to the rate per
annum that results from an Auction for shares of such series on the Auction
Date next preceding such Subsequent Dividend Period; provided, however,
that if:
(A) an Auction for any such Subsequent Dividend Period is not held for any
reason other than as described below, the dividend rate on shares of such series
for such Subsequent Dividend Period will be the Maximum Applicable Rate for
shares of such series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to shares of
such series during any Dividend Period thereof, but, prior to 12:00 Noon, New
York City time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall have been cured in
accordance with paragraph (f) of this Section 2 and the Trust shall have paid to
the Auction Agent a late charge ("Late Charge") equal to the sum of (1) if such
Failure to Deposit consisted of the failure timely to pay to the Auction Agent
the full amount of dividends with respect to any Dividend Period of the shares
of such series, an amount computed by multiplying (x) 300% of the Reference Rate
for the Dividend Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a fraction, the numerator
of which shall be the number of days for which such Failure to Deposit has not
been cured in accordance with paragraph (f) of this Section 2 (including the day
such Failure to Deposit occurs and excluding the day such Failure to Deposit is
cured) and the denominator of which shall be 360, and applying the rate obtained
against the aggregate Liquidation Preference of the outstanding shares of such
Series and (2) if such Failure to Deposit consisted of the failure timely to pay
to the Auction Agent the Redemption Price of the shares, if any, of such series
for which Notice of Redemption has been mailed by the Trust pursuant to
paragraph (c) of Section 9 of this Part I, an amount computed by multiplying (x)
300% of the Reference Rate for the Dividend Period during which such Failure to
Deposit occurs on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is not cured in
accordance with paragraph (f) of this Section 2 (including the day such Failure
to Deposit occurs and excluding the day such Failure to Deposit is cured) and
the denominator of which shall be 360, and applying the rate obtained against
the aggregate Liquidation Preference of the outstanding shares of such series to
be redeemed, and no Auction will be held in respect of shares of such series for
the Subsequent Dividend Period thereof and the dividend rate for shares of such
series for such Subsequent Dividend Period will be the Maximum Applicable Rate
for shares of such series on the Auction Date for such Subsequent Dividend
Period; or
(C) any Failure to Deposit shall have occurred with respect to shares of
such series during any Dividend Period thereof, and, prior to 12:00 Noon, New
York City time, on the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall not have been cured
in accordance with paragraph (f) of this Section 2 or the Trust shall not have
paid the applicable Late Charge to the Auction Agent, no Auction will be held in
respect of shares of such series for the first Subsequent Dividend Period
thereafter (or for any Dividend Period thereafter to and including the Dividend
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Trust pays the applicable Late
Charge to the Auction Agent (the condition set forth in this clause (2) to apply
only in the event Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York City time,
on the fourth Business Day prior to the end of such Dividend Period), and the
dividend rate for shares of such series for each such Subsequent Dividend Period
shall be a rate per annum equal to the Non-Payment Period Rate for shares of
such series on the Auction Date for such Subsequent Dividend Period.
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(ii) Calculation of Dividends. The amount of dividends per share
payable on shares of a series of AMPS on any date on which dividends shall
be payable on shares of such series shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends have not
been paid, by a fraction, the numerator of which shall be the number of
days in such Dividend Period or Dividend Periods or part thereof and the
denominator of which shall be 360, and applying the rate obtained against
$25,000, and rounding the amount obtained to the nearest cent.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to
shares of a series of AMPS shall have been cured (if such Failure to Deposit is
not solely due to the willful failure of the Trust to make the required payment
to the Auction Agent) with respect to any Dividend Period of shares of such
series if, within the respective time periods described in subparagraph (e)(i)
of this Section 2, the Trust shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends and Late Charges on shares of such Series and
(B) without duplication, the Redemption Price for shares, if any, of such series
for which Notice of Redemption has been mailed by the Trust pursuant to
paragraph (c) of Section 9 of Part I of this Statement; provided, however, that
the foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of AMPS when the related Notice of Redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such Notice of Redemption.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to the
Auction Agent, not later than 12:00 Noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for shares of a series of AMPS, an
aggregate amount of funds available on the next Business Day in the City of New
York, New York, equal to the dividends to be paid to all Holders of shares of
such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted by
law, be repaid to the Trust at the end of 90 days from the date on which such
moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on AMPS shall be paid on the
Dividend Payment Date therefor to the Holders thereof as their names appear on
the record books of the Trust on the Business Day next preceding such Dividend
Payment Date.
(j) Dividends Credited Against Earliest Accumulated but Unpaid Dividends.
Any dividend payment made on AMPS shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such shares. 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 record books of the Trust on such date, not exceeding 15
days preceding the payment date thereof, as may be fixed by the Board of
Trustees.
3. DESIGNATION OF SPECIAL DIVIDEND PERIODS.
(a) The Trust, at its option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, may request that the next succeeding
Dividend Period for any series of AMPS will be a number of days (other than
seven)
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evenly divisible by seven, and not more than 364 in the case of a Short Term
Dividend Period or one whole year or more but not greater than five years in the
case of a Long Term Dividend Period, specified in such notice, provided that the
Trust may not give a Request for Special Dividend Period (and any such request
will be null and void) unless, for any Auction occurring after the initial
Auction, (i) an Auction for shares of such series is held on the Auction date
immediately preceding the first day of such proposed Special Dividend Period,
(ii) Sufficient Clearing Bids were made in such Auction, and (iii) full
cumulative dividends and any amounts due with respect to redemptions have been
paid in full, and provided further that the Trust may not request a Special
Dividend Period unless the Trust shall have received written confirmation from
each Rating Agency that the Trust's election of the proposed Special Dividend
Period would not impair the rating then assigned by such Rating Agency of the
applicable series of AMPS and the lead Broker-Dealer designated by the Trust,
initially Merrill Lynch, Pierce, Fenner & Smith Incorporated, does not object to
the declaration of such Special Dividend Period. Such Request for Special
Dividend Period, in the case of a Short Term Dividend Period, shall be given on
or prior to the second Business Day but not more than seven Business Days prior
to an Auction Date for the AMPS of that series and, in the case of a Long Term
Dividend Period, shall be given on or prior to the second Business Day but not
more than 28 days prior to an Auction Date for the AMPS of that series. Upon
receiving such Request for Special Dividend Period, the Broker-Dealers jointly
shall determine the Optional Redemption Price of the AMPS of that series during
such Special Dividend Period and the Specific Redemption Provisions and shall
give the Trust and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
date. In making such determination, the Broker-Dealers will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the AMPS, (iv) industry and financial conditions which
may affect the AMPS of that series, (v) the investment objectives of the Trust
and (vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the AMPS would remain or become beneficial holders.
(b) After providing the Request for Special Dividend Period to the Auction
Agent and each Broker-Dealer as set forth above, the Trust, by no later than the
second Business Day prior to such Auction Date, may give a notice (a "Notice of
Special Dividend Period") to the Auction Agent, the Securities Depository, each
Broker-Dealer and the Rating Agency which notice will specify the duration of
the Special Dividend Period. The Trust will not give a Notice of Special
Dividend Period and, if such Notice of Special Dividend Period was given
already, will give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, the Securities Depository
and the Rating Agency on or prior to the Business Day prior to the relevant
Auction Date if (x) either the 1940 Act Preferred Shares Asset Coverage or the
Preferred Shares Basic Maintenance Amount is not satisfied, on each of the two
Business Days immediately preceding the Business Day prior to the relevant
Auction Date or (y) sufficient funds for the payment of 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 Auction Date immediately preceding such Dividend Payment Date. The
Trust also shall provide a copy of such Notice of Special Dividend Period to
each Rating Agency. If the Trust is prohibited from giving a Notice of Special
Dividend Period as a result of the factors enumerated in clause (x) or (y) above
or if the Trust gives a Notice of Revocation with respect to a Notice of Special
Dividend Period, the next succeeding Dividend Period for that series of AMPS
will be a Minimum Dividend Period. In addition, in the event Sufficient Clearing
Bids are not made in an Auction, or if an Auction is not held for any reason,
the next succeeding Dividend Period will be a Minimum Dividend Period, and the
Trust may not again give a Notice of Special Dividend Period (and any such
attempted notice will be null and void) until Sufficient Clearing Bids have been
made in an Auction with respect to a Minimum Dividend Period.
4. VOTING RIGHTS.
(a) One Vote Per Share of AMPS. Except as otherwise provided in the
Declaration or as otherwise required by law, (i) each Holder of AMPS shall be
entitled to one vote for each share of AMPS held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding preferred shares, including each share of AMPS, and of Common Shares
shall vote together as a single class; provided, however, that, at any meeting
of Shareholders of the Trust held for the election of Trustees, the holders of
outstanding preferred shares, including the AMPS, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all
C-39
other securities and classes of shares of beneficial interest of the Trust, to
elect two Trustees of the Trust out of the entire Board of Trustees (regardless
of the number of Trustees), each share of preferred shares entitling the holder
thereof to one vote; provided, further, that if the Board of Trustees shall be
divided into one or more classes, the Board of Trustees shall determine to which
class or classes the Trustees elected by the holders of preferred shares shall
be assigned and the holders of the AMPS shall only be entitled to elect the
Trustees so designated as being elected by the holders of the AMPS, when their
term shall have expired; provided, finally, that such Trustees appointed by the
holders of preferred shares shall be allocated as evenly as possible among the
classes of Trustees. Subject to paragraph (b) of this Section 4, the holders of
outstanding Common Shares and preferred shares voting together as a single
class, shall elect the balance of the Trustees.
(b) Voting For Additional Trustees.
(i) Voting Period. Except as otherwise provided in the Declaration or as
otherwise required by law, during any period in which any one or more of
the conditions described in subparagraphs (A) or (B) of this subparagraph
(b)(i) shall exist (such period being referred to herein as a "Voting
Period"), the number of Trustees constituting the Board of Trustees shall
be automatically increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of preferred shares,
including the AMPS, would constitute a majority of the Board of Trustees as
so increased by such smallest number, and the holders of preferred shares,
including the AMPS, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Trust), to
elect such smallest number of additional Trustees, together with the two
Trustees that such holders are in any event entitled to elect. A Voting
Period shall commence:
(A) if at the close of business on any dividend payment date accumulated
dividends (whether or not earned or declared) on any outstanding AMPS,
equal to at least two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such accumulated dividends; or
(B) if at any time holders of preferred shares, including the AMPS, are
entitled under the 1940 Act to elect a majority of the Trustees of the
Trust.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the accrual of
any right of the holders of preferred shares, including the AMPS, to elect
additional Trustees as described in subparagraph (b)(i) of this Section 4,
the Trust shall notify the Auction Agent and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such special
meeting to such holders, such meeting to be held not less than 10 nor more
than 20 days after the date of mailing of such notice. If the
C-40
Trust fails to send such notice to the Auction Agent or if the Auction
Agent does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled
to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice
is mailed. At any such special meeting and at each meeting of holders of
preferred shares, including the AMPS, held during a Voting Period at which
Trustees are to be elected, such holders, voting together as a class (to
the exclusion of the holders of all other securities and classes of shares
of beneficial interest of the Trust), shall be entitled to elect the number
of Trustees prescribed in subparagraph (b)(i) of this Section 4 on a
one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office of all
persons who are Trustees of the Trust at the time of a special meeting of
Holders 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 the Holders and such other holders,
together with the two incumbent Trustees elected by the Holders and such
other holders of preferred shares and the remaining incumbent Trustees
elected by the holders of the Common Shares and AMPS, shall constitute the
duly elected Trustees of the Trust.
(iv) Terms of Office of Certain Trustees to Terminate Upon Termination of
Voting Period. Simultaneously with the termination of a Voting Period, the
terms of office of the additional Trustees elected by the Holders and
holders of other AMPS pursuant to subparagraph (b)(i) of this Section 4
shall terminate, the remaining Trustees shall constitute the Trustees of
the Trust and the voting rights of the Holders and such other holders to
elect additional Trustees pursuant to subparagraph (b)(i) of this Section 4
shall cease, subject to the provisions of the last sentence of subparagraph
(b)(i) of this Section 4.
(c) Holders of AMPS to Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any AMPS are outstanding, the
Trust shall not, without the affirmative vote or consent of the Holders of
at least a majority of the AMPS outstanding at the time, in person or by
proxy, either in writing or at a meeting, voting as a separate class: (a)
authorize, create or issue any class or series of shares ranking prior to
or on a parity with the AMPS with respect to the payment of dividends or
the distribution of assets upon
C-41
dissolution, liquidation or winding up of the affairs of the Trust, or
authorize, create or issue additional shares of any series of AMPS (except
that, notwithstanding the foregoing, but subject to the provisions of
paragraph (c)(i) of Section 9 of this Part I, the Board of Trustees,
without the vote or consent of the Holders of AMPS, may from time to time
authorize and create, and the Trust may from time to time issue, additional
shares of any series of AMPS or classes or series of other preferred shares
ranking on a parity with AMPS with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust, if the Trust obtains written confirmation from
Moody's (if Moody's is then rating the AMPS), Fitch (if Fitch is then
rating the AMPS) or any Substitute Rating Agency (if any such Substitute
Rating Agency is then rating the AMPS) that the issuance of a class or
series would not impair the rating then assigned by such rating agency to
the AMPS and the Trust continues to comply with Section 13 of the 1940 Act,
the 1940 Act Preferred Share Asset Coverage and the Preferred Shares Basic
Maintenance Amount requirements); or (b) amend, alter or repeal the
provisions of the Declaration or this Statement, whether by merger,
consolidation or otherwise, so as to adversely affect any preference, right
or power of such AMPS or the Holders thereof; provided, however, that (i)
none of the actions permitted by the exception to (a) above will be deemed
to affect such preferences, rights or powers, (ii) a division of AMPS will
be deemed to affect such preferences, rights or powers only if the terms of
such division adversely affect the Holders of AMPS and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the AMPS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, will be deemed to affect such preferences, rights or
powers only if Moody's or Fitch is then rating the AMPS and such issuance
would, at the time thereof, cause the Trust not to satisfy the 1940 Act
Preferred Share Asset Coverage or the Preferred Shares Basic Maintenance
Amount. So long as any shares of the AMPS are outstanding, the Trust shall
not, without the affirmative vote or consent of the Holders of at least 66
2/3% of the AMPS outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar
application under state law for so long as the Trust is solvent and does
not foresee becoming insolvent. If any action set forth above would
adversely affect the rights of
C-42
one or more series (the "Affected Series") of AMPS in a manner different
from any other series of AMPS, the Trust will not approve any such action
without the affirmative vote or consent of the Holders of at least a
majority of the shares of each such Affected Series outstanding at the
time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is provided for in the
Declaration, (A) the affirmative vote of the Holders of at least a majority
of the AMPS outstanding at the time, voting as a separate class, shall be
required to approve any conversion of the Trust from a closed-end to an
open-end investment company, (B) the affirmative vote of the Holders of at
least a majority of the AMPS outstanding at the time, voting as a separate
class, shall be required to amend the provisions of the Declaration which
provide for the classification of the Board of Trustees into three classes,
and (C) the affirmative vote of the Holders of a "majority of the
outstanding AMPS," voting as a separate class, shall be required to approve
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares. The affirmative vote of the holders of a "majority
of the outstanding AMPS," voting as a separate class, shall be required to
approve any action not described in the first sentence of this Section
4(c)(ii) requiring a vote of security holders of the Trust under section
13(a) of the 1940 Act. For purposes of the foregoing, "majority of the
outstanding AMPS" 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 AMPS is required pursuant to the
provisions of section 13(a) of the 1940 Act, the Trust shall, not later
than ten Business Days prior to the date on which such vote is to be taken,
notify Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch is
then rating the AMPS) that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken. The Trust shall, not
later than ten Business Days after the date on which such vote is taken,
notify Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch is
then rating the AMPS) of the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The Board
of Trustees, without the vote or consent of the shareholders of the Trust, may
from time to time amend, alter or repeal any or all of the
C-43
definitions of the terms listed below, any provisions of Section 8 of Part I of
this Statement and any provision of this Statement viewed by Moody's or Fitch as
a predicate for any such definition or its rating of the AMPS, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of AMPS or the Holders thereof; provided, however, that the
Board of Trustees receives written confirmation from Moody's or Fitch (such
confirmation being required to be obtained only in the event Moody's or Fitch is
rating the AMPS) that any such amendment, alteration or repeal would not impair
the ratings then assigned by Moody's or Fitch, as the case may be, to the AMPS:
Annual Valuation Date Market Value
Applicable Percentage Maximum Applicable Rate
Auditor's Confirmation Moody's Discount Factor
Closing Transaction Moody's Eligible Asset
Deposit Securities Moody's Hedging Transaction
Discount Factor Moody's Industry Classification
Discounted Value Outstanding
Eligible Asset Preferred Shares Basic Maintenance Amount
Exposure Period Preferred Shares Basic Maintenance Cure Date
Failure to Deposit Preferred Shares Basic Maintenance Report
Fitch Discount Factor Pricing Service
Fitch Eligible Asset Receivables for Municipal Obligations Sold
Fitch Hedging Transaction Reference Rate
Fitch Loan Category Swap
Fitch Industry Classification Valuation Date
Forward Commitment 1940 Act Cure Date
Independent Accountant 1940 Act Preferred Share Asset Coverage
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless otherwise
required by law, the Holders of AMPS shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein.
(f) No Preemptive Rights Or Cumulative Voting. The Holders of AMPS shall
have no preemptive rights or rights to cumulative voting.
(g) Voting For Trustees Sole Remedy For Trust's Failure To Pay Dividends.
In the event that the Trust fails to pay any dividends on the AMPS, the
exclusive remedy of the Holders shall be the right to vote for trustees pursuant
to the provisions of this Section 4.
(h) Holders Entitled To Vote. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this Statement,
by the other provisions of the Declaration, by statute or otherwise, no Holder
shall be entitled to vote any share of AMPS and no share of AMPS shall be deemed
to be "outstanding" for the purpose of voting or determining the number of
shares required to constitute a quorum if, prior to or concurrently with the
time of determination of shares entitled to vote or shares deemed outstanding
for quorum purposes, as the case may be, the requisite Notice of Redemption with
respect to such shares shall have been mailed as provided in paragraph (c) of
Section 9 of this Part I and the Redemption Price for the redemption of such
shares shall have been deposited in trust with the Auction Agent for that
purpose. No share of AMPS held by the Trust or any affiliate of the Trust
(except for shares held by a Broker-Dealer that is an affiliate of the Trust for
the account of its customers) shall have any voting rights or be deemed to be
outstanding for voting or other purposes.
5. 1940 ACT PREFERRED SHARE ASSET COVERAGE.
The Trust shall maintain, as of the last Business Day of each month in which any
AMPS are Outstanding, the 1940 Act Preferred Share Asset Coverage.
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6. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as AMPS are Outstanding, the Trust shall maintain, on each
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date (i) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount (if
Moody's is then rating the AMPS) and Fitch Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount (if Fitch is then rating the AMPS).
(b) On or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the
Trust shall complete and deliver to Moody's (if Moody's is then rating the
AMPS), Fitch (if Fitch is then rating the AMPS) and the Auction Agent (if either
Moody's or Fitch is then rating the AMPS) a Preferred Shares Basic Maintenance
Report as of the date of such failure or such Preferred Shares Basic Maintenance
Cure Date, as the case may be, which will be deemed to have been delivered to
the Auction Agent if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof and on the same day the Trust mails to
the Auction Agent for delivery on the next Business Day the full Preferred
Shares Basic Maintenance Report. The Trust shall also deliver a Preferred Shares
Basic Maintenance Report to (i) the Auction Agent (if either Moody's or Fitch is
then rating the AMPS) as of the last Friday of each calendar month (or, if such
day is not a Business Day, the immediately prior Business Day), (ii) Moody's (if
Moody's is then rating the AMPS) and Fitch (if Fitch is then rating the AMPS) as
of the last Friday of each calendar month (or, if such day is not a Business
Day, the immediately prior Business Day), in each case on or before the third
Business Day after such day. A failure by the Trust to deliver a Preferred
Shares Basic Maintenance Report pursuant to the preceding sentence shall be
deemed to be delivery of a Preferred Shares Basic Maintenance Report indicating
the Discounted Value for all assets of the Trust is less than the Preferred
Shares Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
6 relating to an Annual Valuation Date, the Trust shall cause the Independent
Accountant to confirm in writing to Moody's (if Moody's is then rating the
AMPS), Fitch (if Fitch is then rating the AMPS) and the Auction Agent (if either
Moody's or Fitch is then rating the AMPS) (i) the mathematical accuracy of the
calculations reflected in such Preferred Shares Basic Maintenance Report (and in
any other Preferred Shares Basic Maintenance Report, randomly selected by the
Independent Accountant, that was prepared by the Trust during the quarter ending
on such Quarterly Valuation Date), (ii) that, in such Preferred Shares Basic
Maintenance Report (and in such randomly selected Preferred Shares Basic
Maintenance Report), the Trust correctly determined in accordance with this
Statement the assets of the Trust which constitute Moody's Eligible Assets (if
Moody's is then rating the AMPS) and Fitch Eligible Assets (if Fitch is then
rating the AMPS), (iii) that, in such Preferred Shares Basic Maintenance Report
(and in such randomly selected Preferred Shares Basic Maintenance Report), the
Trust determined whether the Trust had, at such Quarterly Valuation Date (and at
the Valuation Date addressed in such randomly selected Report) in accordance
with this Statement, Moody's Eligible Assets of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount and Fitch Eligible
Assets of an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount, (iv) with respect to the S&P ratings on portfolio
securities of the Trust, the issuer name, issue size and coupon rate, if any,
listed in such Report, that the Independent Accountant has requested that S&P
verify such information and the Independent Account and shall provide a listing
in its letter of any differences, (v) with respect to the Fitch ratings on
portfolio securities of the Trust, the issuer name, issue size and coupon rate,
if any, listed in such Preferred Shares Basic Maintenance Report, that such
information has been verified by Fitch (in the event such information is not
verified by Fitch, the Independent Accountant will inquire of Fitch what such
information is, and provide a listing in its letter of any differences), (vi)
with respect to the Moody's ratings on portfolio securities of the Trust, the
issuer name, issue size and coupon rate, if any, listed in such Preferred Shares
Basic Maintenance Report, that such information has been verified by Moody's (in
the event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences) and (vii) with respect to the bid or
mean price (or such alternative permissible factor used in calculating the
Market Value) provided by the custodian of the Trust's assets to the Trust for
purposes of valuing securities in the Trust's portfolio,
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the Independent Accountant has traced the price used in such Preferred Shares
Basic Maintenance Report to the bid or mean price listed in such Preferred
Shares Basic Maintenance Report as provided to the Trust and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
(such confirmation is herein called the "Auditor's Confirmation").
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
6 relating to any Valuation Date on which the Trust failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Trust shall cause the Independent
Auditors to provide to Moody's (if Moody's is then rating the AMPS), Fitch (if
Fitch is then rating the AMPS) and the Auction Agent (if either Moody's or Fitch
is then rating the AMPS) an Auditors' Confirmation as to such Preferred Shares
Basic Maintenance Report.
(e) If any Auditors' Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 6 shows that an error was made in the Preferred Shares Basic
Maintenance Report for a particular Valuation Date for which such Auditor's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all Moody's Eligible Assets (if Moody's is
then rating the AMPS) or Fitch Eligible Assets (if Fitch is then rating the
AMPS), as the case may be, of the Trust was determined by the Independent
Accountant, the calculation or determination made by such Independent Accountant
shall be final and conclusive and shall be binding on the Trust, and the Trust
shall accordingly amend and deliver the Preferred Shares Basic Maintenance
Report to Moody's (if Moody's is then rating the AMPS), Fitch (if Fitch is then
rating the AMPS) and the Auction Agent (if either Moody's or Fitch is then
rating the AMPS) promptly following receipt by the Trust of such Auditors'
Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any AMPS, the Trust shall complete and
deliver to Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch is
then rating the AMPS) a Preferred Shares Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Trust shall cause the Independent Accountant to
confirm in writing to the Auction Agent (if either Moody's or Fitch is then
rating the AMPS), Moody's (if Moody's is then rating the AMPS) and Fitch (if
Fitch is then rating the AMPS) (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the Discounted Value of Fitch Eligible
Assets reflected thereon equals or exceeds the Preferred Shares Basic
Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the ratio
of the Discounted Value of Moody's Eligible Assets or the Fitch Eligible Assets
to the Preferred Shares Basic Maintenance Amount is less than or equal to 105%,
or (iii) whenever requested by Moody's or Fitch, the Trust shall complete and
deliver to Moody's (if Moody's is then rating the AMPS) or Fitch (if Fitch is
then rating the AMPS), as the case may be, a Preferred Shares Basic Maintenance
Report as of the date of such event.
7. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) Dividends on Shares Other Than the AMPS. Except as set forth in the
next sentence, no dividends shall be declared or paid or set apart for payment
on the shares of any class or series of shares of beneficial interest of the
Trust ranking, as to the payment of dividends, on a parity with the AMPS for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of the AMPS through its most
recent Dividend Payment Date. When dividends are not paid in full upon the
shares of each series of the AMPS through its most recent Dividend Payment Date
or upon the shares of any other class or series of shares of beneficial interest
of the Trust ranking on a parity as to the payment of dividends with the AMPS
through their most recent respective dividend payment dates, all dividends
declared upon the AMPS and any other such class or series of shares of
beneficial interest ranking on a parity as to the payment of dividends with AMPS
shall be declared pro rata so that the amount of dividends declared per share on
AMPS and such other class or series of shares of beneficial interest shall in
all cases bear to each other the same ratio that accumulated dividends per share
on the Trust and such other class or series of shares of beneficial
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interest bear to each other (for purposes of this sentence, the amount of
dividends declared per share of AMPS shall be based on the Applicable Rate for
such share for the Dividend Periods during which dividends were not paid in
full).
(b) Dividends and Other Distributions with Respect to Common Shares Under
the 1940 Act. The Board of Trustees shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the AMPS
have, at the time of any such declaration or purchase, an asset coverage (as
defined in and determined pursuant to the 1940 Act) of at least 200% (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares or stock of
a closed- end investment company as a condition of declaring dividends on its
common shares or stock) after deducting the amount of such dividend,
distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long as
any AMPS are outstanding, and except as set forth in paragraph (a) of this
Section 7 and paragraph (c) of Section 9 of this Part I, (A) the Trust shall not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or in options, warrants or
rights to subscribe for or purchase, Common Shares or other shares, if any,
ranking junior to the AMPS as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up) in respect of the Common
Shares or any other shares of the Trust ranking junior to or on a parity with
the AMPS as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, 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 Trust
ranking junior to the AMPS as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), or any such parity
shares (except by conversion into or exchange for shares of the Trust ranking
junior to or on a parity with AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless (i)
full cumulative dividends on shares of each series of AMPS through its most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (ii) the Trust has redeemed the full number of AMPS required to be redeemed
by any provision for mandatory redemption pertaining thereto, and (B) the Trust
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of Common Shares or any other shares of the Trust ranking junior to AMPS as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, 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 Trust ranking junior to
AMPS as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the AMPS) and Fitch Eligible Assets (if Fitch is then rating the AMPS)
would at least equal the Preferred Shares Basic Maintenance Amount.
8. RATING AGENCY RESTRICTIONS.
(a) For so long as any shares of AMPS are rated by Moody's, the Trust may
buy or sell option contracts or write call options on portfolio securities,
swaps and securities lending, however if the Trust intends to buy or sell
financial futures contracts, write, purchase or sell call options on financial
futures contracts or purchase put options on financial futures contracts it must
receive written confirmation from Moody's to engage in such transactions as they
could impair the ratings then assigned to the shares of AMPS by Moody's,
(collectively "Moody's Hedging Transactions"), subject to the following
limitations:
(i) FUTURE AND CALL OPTIONS: For purposes of the Preferred Shares Basic
Maintenance Amount, futures held by the Trust and call options sold by the Trust
shall not be included as Moody's Eligible Assets. Likewise, assets held in
segregated accounts, including assets used to cover good faith margin deposits
and maximum daily variation payments, in connection with such futures and any
uncovered call options shall not be included as Moody's Eligible Assets. For
call options purchased by the Trust, the Market Value of the call options will
be
C-47
included as Moody's Eligible Asset subject to a Moody's Discount Factor mutually
agreed to between the Trust and Moody's.
(ii) SECURITIES LENDING: The Trust may engage in securities lending in an
amount not to exceed 10% of the Trust's total gross assets or such other
percentage as the Trust and Moody's may agree. For purposes of calculating the
Preferred Shares Basic Maintenance Amount, such securities lent shall be
included as Moody's Eligible Assets with the appropriate Moody's Discount Factor
(for Corporate Debt Securities in subsection (ii) under the definition of
Moody's Discount Factor above) applied to each such lent security. The
obligation to return such collateral shall not be included as an
obligation/liability for purposes of calculating the Preferred Shares Basic
Maintenance Amount. Moreover, the Trust may reinvest cash collateral for
securities lent in conformity with its investment objectives and policies and
the provisions of these By-laws in securities that otherwise would qualify as
Moody's Eligible Assets. As collateral for securities lent, the Trust also may
receive securities that otherwise would qualify as Moody's Eligible Assets. In
either such event, to the extent that the securities lending collateral
constitutes Moody's Eligible Assets, if the value of such collateral exceeds,
whether due to appreciation or otherwise, the value of the securities lent, in
each case after applying the appropriate Moody's Discount Factor, such excess
shall be included as a Moody's Eligible Asset. Conversely, if the discounted
value of such securities lending collateral is less than the discounted value of
the securities lent, such difference shall be included as an
obligation/liability of the Trust for purposes of calculating the Preferred
Shares Basic Maintenance Amount.
(iii) SWAPS (INCLUDING TOTAL RETURN SWAPS, INTEREST RATE SWAPS AND CREDIT
DEFAULT SWAPS): Total Return and Interest Rate Swaps are subject to the
following provisions:
(A) Only the cumulative unsettled profit and loss from a Total Return Swap
transaction will be calculated when determining the Preferred Shares Basic
Maintenance Amount. If the Trust has an outstanding gain from a swap transaction
on a Valuation Date, the gain will be included as a Moody's Eligible Asset
subject to the Moody's Discount Factor on the counterparty to the swap
transaction. If the Trust has an outstanding liability from a swap transaction
on a Valuation Date, the Trust will subtract the outstanding liability from the
total Moody's Eligible Assets in calculating the Preferred Shares Basic
Maintenance Amount.
In addition, for swaps other than Total Return Swaps, the Market Value of
the position (positive or negative) will be included as a Moody's Eligible
Asset. The aggregate notional value of all swaps will not exceed the Liquidation
Preference of the outstanding shares of AMPS. At the time a swap is executed,
the Trust will only enter into swap transactions where the counterparty has at
least a Fitch rating of A- or Moody's rating of A3.
(B) (1) The underlying securities subject to a credit default swap sold by
the Trust will be subject to the applicable Moody's Discount Factor (for
Corporate Debt Securities in subsection (ii) under the definition of Moody's
Discount Factor above) for each security subject to the swap;
(2) If the Trust purchases a credit default swap and holds the underlying
security, the Market Value of the credit default swap and the underlying
security will be included as a Moody's Eligible Asset subject to the Moody's
Discount Factor (for Corporate Debt Securities in subsection (ii) under the
definition of Moody's Discount Factor above) assessed based on the counterparty
rating; and
(3) The Trust will not include a credit default swap as a Moody's Eligible
Asset purchased by the Trust without the Trust holding the underlying security
or when the Trust buys a credit default swap for a basket of securities without
holding all the securities in the basket.
If not otherwise provided for in (a)(i)-(iii) above, derivative instruments
shall be treated as follows: Any derivative instruments will be valued pursuant
to the Trust's Valuation Procedures on a Valuation Date. The amount of the net
payment obligation and the cost of a closing transaction, as appropriate, on any
derivative instrument on a Valuation Date will be counted as a liability for
purposes of determining the Preferred Shares Basic Maintenance Amount. Any
derivative instrument with respect to which the Trust is owed payment on the
Valuation Date that is not based upon an individual security or securities that
are Moody's Eligible Assets will either have a mutually agreed upon valuation by
Moody's and the Trust for purposes of determining Moody's Eligible Assets or
will be excluded from Moody's Eligible Assets. Any derivative instrument with
respect to which the Trust is owed
C-48
payment on the Valuation Date that is based upon an individual security or
securities that are Moody's Eligible Assets (e.g., a purchased call option on a
bond that is in-the-money) will be valued as follows for purposes of determining
Moody's Eligible Assets: (A) For such derivative instruments that are exchange
traded, the value of the in-the-money amount of the payment obligation to the
Trust will be reduced by applying the Moody's Discount Factor (as it would apply
to the underlying security or securities) and then added to Moody's Eligible
Assets; and (B) for such derivative instruments that are not exchange traded,
the value of the in-the-money amount of the payment obligation to the Trust will
be (1) reduced as described in (A) and (2) further reduced by applying to the
remaining amount the Moody's Discount Factor determined by reference to the
credit rating of the derivative counterparty, with the remaining amount after
these reductions then added to Moody's Eligible Assets.
For purposes of determining whether the Trust has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Trust is a party and of all securities deliverable to the Trust pursuant to such
Forward Commitments shall be zero.
(iv) If the Trust purchases or sells any exchange-traded futures, option or
option on futures contract based on an index approved by Moody's, it is subject
to the following limitations (exempt are transactions that are terminating
contracts already held by the Trust):
- For financial futures contracts based on an index the total number of
contracts purchased should not exceed 10% of the average open interest for
the 30 days preceding the purchase of such transaction as reported by The
Wall Street Journal or other respectable news source approved by Moody's;
- Financial futures contracts based on an index approved by Moody's are
limited to 80% of Moody's Eligible Assets or 50% of the Trust's holdings,
whichever is greater; and
- Financial futures contracts based on an index should be limited to
clearinghouses that are rated no lower than A by Moody's (or, if not rated
by Moody's but rated by S&P or Fitch, rated A by S&P or Fitch).
The Trust may engage in financial futures contracts to close out any
outstanding financial futures contract based on any index approved by Moody's,
if the average open interest for the 30 days preceding the transaction as
reported by The Wall Street Journal or any other respectable news source
approved by Moody's is equal to or greater than the amount to be closed as
determined by Moody's and the Trust.
The Trust will engage in a Closing Transaction to close out any outstanding
financial futures contract by no later than the fifth Business Day of the month
in which such contract expires and will engage in a Closing Transaction to close
out any outstanding option on a financial futures contract by no later than the
first Business Day of the month in which such option expires;
The Trust will engage in Moody's Hedging Transactions only with respect to
financial futures contracts or options thereon having the next settlement date
or the settlement date immediately thereafter;
The Trust will not:
(A) Engage in options and futures transactions for leveraging or
speculative purposes;
(B) Write any call option or sell any financial futures contracts for the
purpose of hedging an anticipated purchase of an asset;
(C) Enter into an option or futures transaction unless Moody's has been
notified of the Trust's intentions. In addition, the Trust must present to
Moody's that it will continue to have Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount.
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For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the Trust is obligated to deliver to Moody's shall be as follows:
(A) The call option written by the Trust must be either exchange-traded and
"readily reversible" or expires within 49 days after the date of valuation and
should be valued at the lesser of:
(I) The Discounted Value, or
(II) The exercise price of the call option written by the Trust;
(B) Assets subject to call options written by the Trust not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) Assets subject to put options written by the Trust shall be valued at
the lesser of:
(I) The exercise price of the put option, or
(II) The Discounted Value of the subject security; and
(D) Where delivery of a security or class of securities may be made to the
Trust, it shall take delivery of the security or class of securities with the
lowest Discounted Value.
(v) For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the Trust:
(A) 10% of the exercise price of a written call option;
(B) The exercise price of any written put option;
(C) The settlement price of the underlying futures contract if the Trust
writes put options on a futures contract; and
(D) 105% of the Market Value of the underlying futures contracts if the
Trust writes call options on a futures contract and does not own the underlying
contract.
(vi) For so long as any AMPS are rated by Moody's, the Trust may enter into
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time ("Forward Commitments"), provided that:
(A) The Trust will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated P-1, MTG-1,
MIG-1, or Baa or higher by Moody's or, if not rated by Moody's, rated A1+/AA,
SP-1+/AA, A or AA or higher by S&P, and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of the
Trust's obligations under any Forward Commitment to which it is from time to
time a party or long-term fixed income securities with a Market Value that
equals or exceeds the amount of the Trust's obligations under any Forward
Commitment to which it is from time to time a party; and
(B) The Trust will not enter into a Forward Commitment unless, after giving
effect thereto, the Trust would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount.
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For purposes of determining whether the Trust has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of Forward Commitments will be
calculated by applying the respective Moody's Discount Factor.
(b) For so long as any AMPS are rated by Fitch, the Trust will not buy or
sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Fitch that engaging in such transactions would not impair the
ratings then assigned to such AMPS by Fitch, except that the Trust may enter
into Interest Rate Swaps, purchase or sell exchange-traded financial futures
contracts based on any index approved by Fitch, LIBOR or Treasury Bonds, and
purchase, write or sell exchange-traded put options on such futures contracts,
and purchase, write or sell exchange-traded call options on such financial
futures contracts, and put and call options on such financial futures contracts
("Fitch Hedging Transactions"), subject to the following limitations:
(i) The Trust may not engage in any Fitch Hedging Transaction based on
any index approved by Fitch (other than transactions that terminate a
futures contract or option held by the Trust by the Trust's taking the
opposite position thereto ("closing transactions")) that would cause the
Trust at the time of such transaction to own or have sold outstanding
financial futures contracts based on such index exceeding in number 10% of
the average number of daily traded financial futures contracts based on
such index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal.
(ii) The Trust will not engage in any Fitch Hedging Transaction based
on Treasury Bonds or LIBOR (other than closing transactions) that would
cause the Trust at the time of such transaction to own or have sold:
(A) Outstanding financial futures contracts based on Treasury Bonds or
LIBOR with such contracts having an aggregate Market Value exceeding 60% of
the aggregate Market Value of Fitch Eligible Assets owned by the Trust and
at least rated AA by Fitch (or, if not rated by Fitch Ratings, rated at
least Aa by Moody's; or, if not rated by Moody's, rated AAA by S & P); or
(B) Outstanding financial futures contracts based on Treasury Bonds or
LIBOR with such contracts having an aggregate Market Value exceeding 40% of
the aggregate Market Value of all Fitch Eligible Assets owned by the Trust
(other than Fitch Eligible Assets already subject to a Fitch Hedging
Transaction) and rated at least A or BBB by Fitch (or, if not rated by
Fitch Ratings, rated at least Baa by Moody's; or, if not rated by Moody's,
rated at least A or AA by S&P) (for purposes of the foregoing clauses (i)
and (ii), the Trust shall be deemed to own futures contracts that underlie
any outstanding options written by the Trust);
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(iii) The Trust may engage in closing transactions to close out any
outstanding financial futures contract based on any index approved by Fitch
if the amount of open interest in such index as reported by The Wall Street
Journal is less than an amount to be mutually determined by Fitch and the
Trust.
(iv) The Trust may not enter into an option or futures transaction
unless, after giving effect thereto, the Trust would continue to have Fitch
Eligible Assets with an aggregate Discounted Value equal to or greater than
the Preferred Shares Basic Maintenance Amount.
(c) For so long as shares of AMPS are rated by either Moody's or Fitch, the
Trust will not, unless it has received written confirmation from Moody's, as the
case may be, that such action would not impair the ratings then assigned to
shares of AMPS by Moody's or Fitch, as the case may be, (i) borrow money except
for the purpose of clearing transactions in portfolio securities (which
borrowings shall under any circumstances be limited to the lesser of $10 million
and an amount equal to 5% of the Market Value of the Trust's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets to be less than the Preferred Shares Basic Maintenance
Amount), (ii) engage in short sales of securities, (iii) issue any class or
series of stock ranking prior to or on a parity with the AMPS with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Trust, (iv) reissue any AMPS previously
purchased or redeemed by the Trust, (v) merge or consolidate into or with any
other Trust or entity, (vi) change the Pricing Service or (vii) engage in
reverse repurchase agreements.
9. REDEMPTION.
(a) Optional Redemption.
(i) To the extent permitted under the 1940 Act and Delaware law, the
Trust at its option may, without the consent of the holders of AMPS, redeem
AMPS having a Dividend Period of one year or less, in whole or in part, on
the business day after the last day of such Dividend Period upon not less
than 15 calendar days' and not more than 40 calendar days' prior notice.
The optional redemption price per share will be the Liquidation Preference
per share, plus an amount equal to accumulated but unpaid Dividends thereon
(whether or not earned or declared) to the date fixed for redemption. AMPS
having a Dividend Period of more than one year are redeemable at the option
of the Trust, in whole or in part, prior to the end of the relevant
Dividend Period, subject to any
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specific redemption provision, which may include the payment of redemption
premiums to the extent required under any applicable specific redemption
provisions. The Trust will not make any optional redemption unless, after
giving effect thereto (i) the Trust has available certain Deposit
Securities with maturities 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 the AMPS by reasons of
the redemption of the AMPS on such date fixed for the redemption and (ii)
the Trust has eligible assets with an aggregate discounted value at least
equal to the Preferred Shares Basic Maintenance Amount. Notwithstanding the
foregoing, AMPS may not be redeemed at the option of the Trust unless all
dividends in arrears on the outstanding AMPS, and all other outstanding
preferred shares have been or are being contemporaneously paid or set aside
for payment. A Notice of Special Dividend Period relating to a Special
Dividend Period of shares of a series of AMPS, as delivered to the Auction
Agent and filed with the Secretary of the Trust, may provide that shares of
such series shall not be redeemable during the whole or any part of such
Special Dividend Period or shall be redeemable during the whole or any part
of such Special Dividend Period only upon payment of such redemption
premium or premiums as shall be specified therein ("Special Redemption
Provisions").
(ii) If fewer than all of the outstanding shares of a series of AMPS
are to be redeemed pursuant to subparagraph (i) of this paragraph (a), the
number of shares of such series to be redeemed shall be determined by the
Board of Trustees, and such shares shall be redeemed pro rata from the
Holders of shares of such series in proportion to the number of shares of
such series held by such Holders.
(iii) The Trust may not on any date mail a Notice of Redemption
pursuant to paragraph (c) of this Section 9 in respect of a redemption
contemplated to be effected pursuant to this paragraph (a) unless on such
date (A) the Trust has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium)
due to Holders of AMPS by reason of the redemption of such shares on such
redemption date, and (B) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the AMPS) and Fitch Eligible Assets (if Fitch is
then rating the AMPS) each at least equals the Preferred Shares Basic
Maintenance Amount, and would at least
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equal the Preferred Shares Basic Maintenance Amount immediately subsequent
to such redemption if such redemption were to occur on such date. For
purposes of determining in clause (B) of the preceding sentence whether the
Discounted Value of Moody's Eligible Assets at least equals the Preferred
Shares Basic Maintenance Amount, the Moody's Discount Factors applicable to
Moody's Eligible Assets shall be determined by reference to the first
Exposure Period longer than the Exposure Period then applicable to the
Trust, as described in the definition of Moody's Discount Factor herein.
(b) Mandatory Redemption. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the AMPS, if the Trust fails to
have either Moody's Eligible Assets or Fitch Eligible Assets with a Discounted
Value greater than or equal to the Preferred Shares Basic Maintenance Amount or
fails to maintain the 1940 Act Preferred Share Asset Coverage, in accordance
with the requirements of the rating agency or agencies then rating the AMPS, and
such failure is not cured on or before the Preferred Shares Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be. The number of AMPS to
be redeemed shall be equal to the lesser of (i) the minimum number of AMPS,
together with all other preferred shares subject to redemption or retirement,
the redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, would have resulted in the Trust's having
Moody's Eligible Assets and Fitch Eligible Assets with a Discounted Value
greater than or equal to the Preferred Shares Basic Maintenance Amount or
maintaining the 1940 Act Preferred Shares Asset Coverage, as the case may be, on
such Cure Date (provided, however, that if there is no such minimum number of
AMPS and other preferred shares the redemption or retirement of which would have
had such result, all AMPS and other preferred shares then outstanding shall be
redeemed), and (ii) the maximum number of AMPS, together with all other
preferred shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor in accordance with the
Declaration and applicable law. In determining the AMPS required to be redeemed
in accordance with the foregoing, the Trust shall allocate the number required
to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the
1940 Act Preferred Share Asset Coverage, as the case may be, pro rata among AMPS
and other preferred shares (and, then, pro rata among each series of AMPS)
subject to redemption or retirement. The Trust shall effect such redemption on
the date fixed by the Trust therefor, which date shall not be earlier than 20
days nor later than 40 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the required
number of the AMPS and other preferred shares which are subject to redemption or
retirement or the Trust otherwise is unable to effect such redemption on or
prior to 40 days after such Cure Date, the Trust shall redeem those AMPS and
other preferred shares which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption. If fewer than all of the
outstanding shares of a series of AMPS are to be redeemed pursuant to this
paragraph (b), the shares of such series to be redeemed shall be selected by lot
or such other method that the Trust deems fair and equitable.
(c) Notice of Redemption. If the Trust shall determine or be required to
redeem shares of a series of AMPS pursuant to paragraph (a) or (b) of this
Section 9, it shall mail a Notice of Redemption with respect to such redemption
by first-class mail, postage prepaid, to each Holder of the shares of such
series to be redeemed, at such Holder's address as the same appears on the
record books of the Trust on the record date established by the Board of
Trustees and to the Auction Agent. Such Notice of Redemption shall be so mailed
not less than 15 nor more than 40 days prior to the date fixed for redemption.
Each such Notice of Redemption shall state: (i) the redemption date; (ii) the
number of AMPS to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; (vii) that the Holders of any shares of a series of AMPS being
so redeemed shall not participate in the Auction, if any, immediately preceding
the redemption date; and (viii) the provisions of this Section 9 under which
such redemption
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is made. If fewer than all shares of a series of AMPS held by any Holder are to
be redeemed, the Notice of Redemption mailed to such Holder shall also specify
the number of shares of such series to be redeemed from such Holder. The Trust
may provide in any Notice of Redemption relating to a redemption contemplated to
be effected pursuant to paragraph (a) of this Section 9 that such redemption is
subject to one or more conditions precedent and that the Trust shall not be
required to effect such redemption unless each such condition shall have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 9, if any dividends on
shares of a series of AMPS (whether or not earned or declared) are in arrears,
no shares of such series shall be redeemed unless all outstanding shares of such
Series are simultaneously redeemed, and the Trust shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series 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 shares of such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem AMPS
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Trust shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been mailed;
provided, however, that the foregoing shall not apply in the case of the Trust's
failure to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Trust may not have redeemed AMPS for which a
Notice of Redemption has been mailed, dividends may be declared and paid on AMPS
and shall include those AMPS for which a Notice of Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All moneys
paid to the Auction Agent for payment of the Redemption Price of AMPS called for
redemption shall be held in trust by the Auction Agent for the benefit of
Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given Are no Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 9, upon the deposit with the Auction Agent (on the
Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the AMPS that are the subject of such notice, dividends on
such shares shall cease to accumulate and such shares shall no longer be deemed
to be outstanding for any purpose, and all rights of the Holders of the shares
so called for redemption shall cease and terminate, except the right of such
Holders to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section 2 of
this Part I. The Auction Agent shall pay the Redemption Price to the Holders of
AMPS subject to redemption upon surrender of the certificates for the shares
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the Notice of Redemption shall so state) to be redeemed in
accordance with the Notice of Redemption. In the case that fewer than all of the
shares represented by any such certificate are redeemed, a new certificate shall
be issued, representing the unredeemed shares, without cost to the Holder
thereof. The Trust shall be entitled to receive from the Auction Agent, promptly
after the date fixed for redemption, any cash deposited with the Auction Agent
in excess of (i) the aggregate Redemption Price of the AMPS called for
redemption on such date and (ii) all other amounts to which Holders of AMPS
called for redemption may be entitled. Any funds so deposited that are unclaimed
at the end of 90 days from such redemption date shall, to the extent permitted
by law, be repaid to the Trust, after which time the Holders of AMPS so called
for redemption may look only to the Trust for payment of the Redemption Price
and all other amounts to which they may be entitled.
(h) Compliance with Applicable Law. In effecting any redemption pursuant to
this Section 9, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the
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1940 Act and any applicable Delaware law, but shall effect no redemption except
in accordance with the 1940 Act and any applicable Delaware law.
(i) Only Whole AMPS May be Redeemed. In the case of any redemption pursuant
to this Section 9, only whole AMPS 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) Modification of Redemption Procedures. Notwithstanding any of the
foregoing provisions of this Section 9, the Trust may modify any or all of the
requirements relating to the Notice of Redemption without the consent of the
holders of the AMPS or Common Shares, provided that (i) any such modification
does not materially and adversely affect any Holder of the relevant series of
AMPS, and (ii) the Trust receives written notice from Moody's (if Moody's is
then rating the AMPS) and Fitch (if Fitch is then rating the AMPS) that such
modification would not impair the ratings assigned by Moody's and Fitch to
shares of AMPS.
10. LIQUIDATION RIGHTS.
(a) Ranking. The shares of a series of AMPS shall rank on a parity with
each other, with shares of any other series of preferred shares and with shares
of any other series of AMPS as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of AMPS then outstanding shall be entitled to receive and to be paid out
of the assets of the Trust available for distribution to its shareholders,
before any payment or distribution shall be made on the Common Shares or on any
other class of shares of the Trust ranking junior to the AMPS upon dissolution,
liquidation or winding up, an amount equal to the Liquidation Preference with
respect to such shares plus an amount equal to all dividends thereon (whether or
not earned or declared) accumulated but unpaid to (but not including) the date
of final distribution in same day funds. After the payment to the Holders of the
AMPS of the full preferential amounts provided for in this paragraph (b), the
Holders of AMPS as such shall have no right or claim to any of the remaining
assets of the Trust.
(c) Pro Rata Distributions. In the event the assets of the Trust available
for distribution to the Holders of AMPS upon any dissolution, liquidation, or
winding up of the affairs of the Trust, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such Holders are entitled
pursuant to paragraph (b) of this Section 10, no such distribution shall be made
on account of any shares of any other class or series of preferred shares
ranking on a parity with the AMPS with respect to the distribution of assets
upon such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the AMPS, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the AMPS
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, after payment shall have been made in
full to the Holders of the AMPS as provided in paragraph (b) of this Section 10,
but not prior thereto, any other series or class or classes of shares ranking
junior to the AMPS with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the Holders
of the AMPS shall not be entitled to share therein.
(e) Certain Events Not Constituting Liquidation. Neither the sale of all or
substantially all the property or business of the Trust, nor the merger or
consolidation of the Trust into or with any business trust or corporation nor
the merger or consolidation of any business trust or corporation into or with
the Trust shall be a dissolution, liquidation or winding up, whether voluntary
or involuntary, for the purposes of this Section 10.
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11. MISCELLANEOUS.
(a) Amendment to Add Additional Series. 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 AMPS or additional shares of a series of AMPS (and
terms relating thereto) to the Series and AMPS theretofore described thereon.
Each such additional Series and all such additional shares shall be governed by
the terms of this statement.
(b) No Fractional Shares. No fractional shares of AMPS shall be issued.
(c) Status of AMPS Redeemed, Exchanged or Otherwise Acquired by the Trust.
AMPS, which are redeemed, exchanged or otherwise acquired by the Trust, shall
return to the status of authorized and unissued preferred shares without
designation as to series.
(d) Board May Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of AMPS prior to
the issuance of shares of such series.
(e) Headings Not Determinative. The headings contained in this Statement
are for convenience of reference only shall not affect the meaning or
interpretation of this statement.
(f) Notices. All notices or communications, unless otherwise specified in
the By-Laws of the Trust or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.
(g) Certificate for AMPS. The certificates representing shares of the AMPS
shall be executed by the President, any Vice President, Treasurer, or any
Assistant Treasurer of the Trust and by the Secretary or an Assistant Secretary
of the Trust and shall be in the form attached hereto as Annex A with such
changes thereto as the officers of the Trust executing such certificate shall
determine to be necessary or desirable.
PART II.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of AMPS:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of such series for
the next succeeding Dividend Period of such shares;
(B) the number of Outstanding shares, if any, of such series to be
purchased or held by such Beneficial Owner, if the Applicable Rate for
shares of such series for the next Dividend Period is not less than the
rate specified in the bid, and which such Beneficial Owner offers to sell
if the Applicable Rate for shares of
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such series for the next succeeding Dividend Period of shares of such
series shall be less than the rate per annum specified by such Beneficial
Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next
succeeding Dividend Period of shares of such 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 such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Dividend Period of shares of such
series shall not be less than the rate per annum specified by such 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."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of AMPS subject to an Auction on any Auction Date shall constitute
an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such
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 such series
determined on such Auction Date shall be equal to the rate specified
therein; or
(C) the number of Outstanding shares of such series specified in such
Bid if the rate specified therein shall be higher than the Maximum
Applicable Rate for shares of such series, or such number or a lesser
number of Outstanding shares of such 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 Applicable Rate for
shares of such Series and Sufficient Clearing Bids for shares of such
series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of AMPS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
Series as set forth in clause (iii) of paragraph (b) of Section 4 of this
Part II if Sufficient Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a series of AMPS shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph (c) of Section 2 of this Part II if (1) such shares
were transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee
person, if permitted by the Trust) with the provisions of Section 6 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 such
Broker-Dealer's records, such Broker Dealer believes it is not the Existing
Holder of such shares.
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(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of AMPS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such
Series as set forth in clause (v) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of AMPS other than whole shares shall be
valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for AMPS of a series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Trust) 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 such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares
of such series:
(A) the number of shares, if any, of such series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid of
such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such
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 such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding AMPS of a series
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of such series held by such 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 such 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 91 days, the Auction Agent shall deem a Sell order to have been submitted
by or on behalf of such Existing Holder covering the number of outstanding
shares of such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
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(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 AMPS of a
series subject to an Auction held by such Existing Holder, such Orders shall be
considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if the
number of shares of such series subject to such Hold Orders exceeds the
number of Outstanding shares of such series held by such Existing Holder,
the number of shares subject to each such Hold Order shall be reduced pro
rata to cover the number of Outstanding shares of such series held by such
Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such
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 such series is submitted to the Auction Agent with the
same rate and the number of Outstanding shares of such series subject to
such Bids is greater than such excess, such Bids shall be considered valid
up to and including the amount of such excess, and the number of shares of
such series subject to each Bid with the same rate shall be reduced pro
rata to cover the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent
with different rates, such Bids shall be considered valid in the ascending
order of their respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such Outstanding shares
of such series subject to any portion of Bids considered not valid in whole
or in part under this clause (ii) shall be treated as the subject of a Bid
for shares of such Series by or on behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (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 AMPS is
submitted to the Auction Agent by or on behalf of any Potential Holder,
each such 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 BIDS RATE AND APPLICABLE
RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of AMPS, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer
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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 such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available AMPS"
of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal to
or lower than the Maximum Applicable Rate for shares of such series;
exceeds or is equal to the sum of;
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher than
the Maximum Applicable Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders (in the event such excess or such equality exists
(other than because the number of shares of such series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), such Submitted Bids in subclause (A)
above being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for shares
of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing Holders
to continue to hold the shares of such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such 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 such series which, when added to the number of
Outstanding shares of such series to be purchased by such Potential Holders
described in subclause (B) above, would equal not less than the Available
AMPS of such 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 Trust of
the Maximum Applicable Rate for shares of the series of AMPS for which an
Auction is being held on the Auction Date and, based on such determination the
Applicable Rate for shares of such series for the next succeeding Dividend
Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that
the Applicable Rate for all shares of such series for the next succeeding
Dividend Period thereof shall be equal to the Winning Bid Rate for shares
of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), that the Applicable Rate for all
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shares of such series for the next succeeding Dividend Period thereof shall
be equal to the Maximum Applicable Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the Dividend Period to which such Auction
relates shall be a Minimum Dividend Period and the Applicable Rate for all
shares of such series for the next succeeding Dividend Period thereof shall
be 90% of the applicable Reference Rate on such Auction Date.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.
Existing Holders shall continue to hold the AMPS that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of AMPS have been
made, all Submitted Sell Orders with respect to shares of such 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 such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of
such series shall be accepted, thus requiring each such Existing Holder to
sell the AMPS subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be rejected, thus entitling each such Existing Holder to
continue to hold the AMPS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue
to hold the AMPS subject to such Submitted Bid, unless the number of
Outstanding AMPS subject to all such Submitted Bids shall be greater than
the number of AMPS ("remaining shares") in the excess of the Available AMPS
of such series over the number of AMPS subject to Submitted Bids described
in clauses (ii) and (iii) of this paragraph (a), in which event such
Submitted Bid of such Existing Holder shall be rejected in part, and such
Existing Holder shall be entitled to continue to hold AMPS subject to such
Submitted
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Bid, but only in an amount equal to the number of AMPS of such series
obtained by multiplying the number of remaining shares by a fraction, the
numerator of which shall be the number of Outstanding AMPS held by such
Existing Holder subject to such Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding AMPS subject to such Submitted
Bids made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the
excess of the Available AMPS of such series over the number of AMPS subject
to Submitted Bids described in clauses (ii) through (iv) of this paragraph
(a) by a fraction, the numerator of which shall be the number of
Outstanding AMPS subject to such Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding AMPS subject to such Submitted
Bids made by all such Potential Holders that specified a rate equal to the
Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of AMPS have not
been made (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), subject to the provisions of paragraph (d) of
this Section 4, Submitted Orders for shares of such series shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Applicable
Rate for shares of such series shall be rejected, thus entitling such
Existing Holders to continue to hold the AMPS subject to such Submitted
Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Applicable
Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Applicable Rate for
shares of such series and the Submitted Sell Orders for shares of such
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series
subject to such 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 such series subject to
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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 such series held by such Existing Holder subject to such Submitted Bid
or Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such Submitted
Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of AMPS are subject to
Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of AMPS on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of AMPS of such series to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of shares so purchased or
sold by each Existing Holder or Potential Holder on such Auction Date shall be
whole AMPS.
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of AMPS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate AMPS of such series for purchase among Potential Holders so
that only whole shares of AMPS of such Series are purchased on such Auction Date
as a result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing AMPS of such series on
such Auction Date.
(f) Based on the results of each Auction for shares of a series of AMPS,
the Auction Agent shall determine the aggregate number of shares of such series
to be purchased and the aggregate number of shares of such series to be sold by
Potential Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that such aggregate number of shares
to be purchased and such aggregate number of shares to be sold differ, determine
to which other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing Holder(s) they shall receive,
as the case may be, AMPS of such series. Notwithstanding any provision of the
Auction Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of a series of AMPS with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such 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 such shares against payment therefor, partial deliveries of AMPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) None of the Trust, the Adviser, nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver AMPS of any series or
to pay for AMPS of any series sold or purchased pursuant to the Auction
Procedures or otherwise.
5. AUCTION AGENT.
For so long as any AMPS are outstanding, the Auction Agent, duly appointed
by the Trust to so act, shall be in each case a commercial bank, trust company
or other financial institution independent of the Trust and its Affiliates
(which however may engage or have engaged in business transactions with the
Trust or its Affiliates) and at no time shall the Trust or any of its affiliates
act as the Auction Agent in connection with the Auction Procedures. If the
Auction Agent resigns or for any reason its appointment is terminated during any
period that any AMPS are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent.
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The Auction Agent's registry of Existing Holders of a series of AMPS shall be
conclusive and binding on the Broker-Dealers. A Broker-Dealer may inquire of the
Auction Agent between 3:00 p.m. on the Business Day preceding an Auction for a
series of AMPS and 9:30 a.m. on the Auction Date for such Auction to ascertain
the number of shares of such series in respect of which the Auction Agent has
determined such Broker-Dealer to be an Existing Holder. If such Broker-Dealer
believes it is the Existing Holder of fewer shares of such series than specified
by the Auction Agent in response to such Broker-Dealer's inquiry, such
Broker-Dealer may so inform the Auction Agent of that belief. Such Broker-Dealer
shall not, in its capacity as Existing Holder of shares of such series, submit
Orders in such Auction in respect of shares of such series covering in the
aggregate more than the number of shares of such series specified by the Auction
Agent in response to such Broker-Dealer's inquiry.
6. TRANSFER OF AMPS.
Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of AMPS only in whole shares and
only pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the procedures described in this Part II or to a Broker-Dealer; provided,
however, that (a) a sale, transfer or other disposition of AMPS from a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 6 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to
whom such transfer is made shall advise the Auction Agent of such transfer.
7. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of AMPS outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository or its nominee
and (ii) no registration of transfer of shares of a series of AMPS shall be made
on the books of the Trust to any Person other than the Securities Depository or
its nominee.
8. FORCE MAJEURE.
(a) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for business
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the Auction Agent is not able to conduct
an Auction in accordance with the Auction Procedures for any such reason, then
the Auction Rate for the next Dividend Period shall be the Auction Rate
determined on the previous Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the dividend payable on such date can
not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Trust and its paying agent, if any,
are able to cause the dividend to be paid using their reasonable best
efforts;
(ii) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had
remained the scheduled date; and
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(iii) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the
Dividend Payment Date remained the scheduled date.
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APPENDIX D -- SETTLEMENT PROCEDURES
SETTLEMENT PROCEDURES
Capitalized terms used herein shall have the respective meanings specified
in the Statement of Preferences.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's auction processing system the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of Preferred
Shares, if any, to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Beneficial Owner, the number of Preferred Shares, if
any, to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of Preferred Shares to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order exceeds the aggregate number of Preferred Shares to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid,
the name or names of one or more Buyer's Broker-Dealers (and the name of the
Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one or more
purchasers of such excess number of Preferred Shares and the number of such
shares to be purchased from one or more Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Potential Beneficial Owners on whose behalf
each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by
all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid exceeds the aggregate number of Preferred Shares to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order, the name or names of one or more Seller's Broker-Dealers (and the name of
the Agent Member, if any, of each such Seller's Broker-Dealer) acting for one or
more sellers of such excess number of Preferred Shares and the number of such
shares to be sold to one or more Potential Beneficial Owners on whose behalf
such Broker-Dealer acted by one or more Beneficial Owners on whose behalf each
of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to
the Preferred Shares.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to purchase
the number of Preferred Shares to be purchased pursuant to such Bid against
receipt of such shares and advise such Potential Beneficial Owner of the
Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or a Bid that was accepted,
in whole or in part, to instruct such Beneficial Owner's Agent Member to deliver
to such Broker-Dealer (or its Agent Member) through the Securities Depository
the number of Preferred Shares to be sold pursuant to such Order against payment
therefor and advise any such Beneficial Owner that will continue to hold
Preferred Shares of the Applicable Rate for the next succeeding Dividend Period;
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(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(i) above and any Preferred Shares received by it pursuant to
(b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf
such Broker-Dealer submitted Bids, the Beneficial Owners, if any, on whose
behalf such Broker-Dealer submitted Bids that were accepted or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may
be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Beneficial Owner delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the shares
to be purchased pursuant to (b)(i) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of the
purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(ii)
above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in (d)(iii)
above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling Preferred Shares in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole Preferred Shares that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner. In
such event, the number of Preferred Shares to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall represent
any departure from the results of an Auction, as determined by the Auction
Agent, shall
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be of no effect unless and until the Auction Agent shall have been notified of
such delivery or non-delivery in accordance with the provisions of the Auction
Agency Agreement and the Broker-Dealer Agreements.
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