AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 2004
1933 ACT FILE NO. 333-114726
1940 ACT FILE NO. 811-21494
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO. ____
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
[X] AMENDMENT NO. 7
NUVEEN FLOATING RATE INCOME FUND
Exact Name of Registrant as Specified in Declaration of Trust
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
JESSICA R. DROEGER
VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
DAVID A. STURMS ERIC F. FESS SARAH E. COGAN
JOHN T. BLATCHFORD CHAPMAN AND CUTLER LLP SIMPSON THACHER & BARTLETT LLP
VEDDER, PRICE, KAUFMAN & KAMMHOLZ, 111 W. MONROE 425 LEXINGTON AVENUE
P.C. CHICAGO, IL 60603 NEW YORK, NY 10017
222 N. LASALLE STREET
CHICAGO, IL 60601
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
---------------------
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[ ] when declared effective pursuant to section 8(c)
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
BEING REGISTERED BEING REGISTERED UNIT PRICE FEE(1)(2)
-----------------------------------------------------------------------------------------------------------------
FundPreferred Shares, $0.01
par value.................. 16,000 Shares $25,000 $400,000,000 $50,680
-----------------------------------------------------------------------------------------------------------------
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(1) $126.70 has been previously paid.
(2) Transmitted prior to filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
This information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 13, 2004
PROSPECTUS
(NUVEEN INVESTMENTS LOGO)
$400,000,000
NUVEEN FLOATING RATE INCOME FUND
FUNDPREFERRED(TM) SHARES
4,000 SHARES, SERIES M
4,000 SHARES, SERIES T
4,000 SHARES, SERIES W
4,000 SHARES, SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen Floating Rate Income Fund ("the Fund") is a recently organized,
diversified, closed-end management investment company. The Fund's investment
objective is to achieve a high level of current income.
Under normal market circumstances, the Fund will invest at least 80% of its
Managed Assets (as defined on page 2 of the prospectus) in adjustable rate
secured senior loans and adjustable rate unsecured senior loans, which unsecured
senior loans will be, at the time of investment, investment grade quality.
The Fund will invest at least 65% of its Managed Assets in adjustable rate
senior loans that are secured by specific collateral. Senior loans are made to
U.S. or non-U.S. corporations, partnerships and other business entities that
operate in various industries and geographical regions. Senior loans pay
interest at rates that are redetermined periodically at short-term intervals on
the basis of an adjustable base lending rate plus a premium. The Fund may invest
a substantial portion of its Managed Assets in senior loans and other debt
instruments that are, at the time of investment, rated below investment grade or
unrated but judged to be of comparable quality. Securities of below investment
grade quality are regarded as having predominately speculative characteristics
with respect to capacity to pay interest and repay principal and are commonly
referred to as junk bonds. Because of the protective features of senior loans
(being senior in a borrower's capital structure and, in certain instances,
secured by specific collateral), the Fund's subadviser believes, based on its
experience, that senior loans tend to have more favorable loss recovery rates
compared to most other types of below investment grade obligations that are
subordinated and unsecured.
Nuveen Institutional Advisory Corp., the Fund's investment adviser, is
responsible for determining the Fund's overall investment strategy and its
implementation, including the use of leverage and hedging. Symphony Asset
Management, LLC is the Fund's subadviser responsible for managing the Fund's
Managed Assets.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7900. You should read this
prospectus, which contains important information about the Fund, before deciding
whether to invest and retain it for future reference. A Statement of Additional
Information, dated , 2004, and as it may be amended or supplemented,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 55 of this
prospectus, by calling (800) 257-8787 or by writing to the Fund, or you may
obtain a copy (and other information regarding the Fund) from the Securities and
Exchange Commission's web site (http://www.sec.gov).
---------------------
INVESTING IN FUNDPREFERRED SHARES INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 23.
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.
---------------------
PER SHARE TOTAL
--------- ------------
Public Offering Price....................................... $25,000
Sales Load(1)............................................... $
Proceeds to the Fund(2)..................................... $
------------
(1) One-half of the sales load from this offering will be paid to certain
underwriters based on their participation in the Fund's offering of common
shares.
(2) Does not include offering expenses payable by the Fund estimated to be
$ .
The underwriters expect to deliver the FundPreferred shares in book-entry
form, through the facilities of The Depository Trust Company, to purchasers on
or about , 2004.
---------------------
CITIGROUP NUVEEN INVESTMENTS, LLC
A.G. EDWARDS WACHOVIA SECURITIES
, 2004
The Fund is offering 4,000, 4,000, 4,000 and 4,000 shares of Series M,
Series T, Series W and Series F FundPreferred shares, respectively. The shares
are referred to in this prospectus as "FundPreferred shares." The FundPreferred
have a liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. The FundPreferred shares also have priority over the Fund's common
shares as to distribution of assets as described in this prospectus. The
dividend rate for the initial dividend rate period will be %, %,
% and % for FundPreferred shares Series M, Series T, Series W and
Series F, respectively. The initial rate period is from the date of issuance
through , 200 , , 200 , , 200 and , 200
for FundPreferred shares Series M, Series T, Series W and Series F,
respectively. For subsequent rate periods, FundPreferred shares pay dividends
based on a rate set at auction, usually held weekly. Prospective purchasers
should carefully review the auction procedures described in the prospectus and
should note: (1) a buy order (called a "bid order") or sell order is a
commitment to buy or sell FundPreferred shares based on the results of an
auction; (2) auctions will be conducted by telephone, electronically or in
writing; and (3) purchases and sales will be settled on the next business day
after the auction. FundPreferred shares are not listed on an exchange. You may
only buy or sell FundPreferred shares through an order placed at an auction with
or through a broker-dealer that has entered into an agreement with the auction
agent and the Fund, 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.
The FundPreferred shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 10
The Fund.................................................... 11
Use of Proceeds............................................. 11
Capitalization.............................................. 12
Portfolio Composition....................................... 12
The Fund's Investments...................................... 13
Use of Leverage............................................. 20
Hedging Transactions........................................ 20
Risk Factors................................................ 23
Management of the Fund...................................... 30
Description of FundPreferred Shares......................... 31
The Auction................................................. 44
Description of Borrowings................................... 47
Description of Common Shares................................ 48
Certain Provisions in the Declaration of Trust.............. 48
Repurchase of Fund Shares; Conversion to Open-End Fund...... 49
Federal Income Tax Matters.................................. 49
Custodian, Transfer Agent, Auction Agent, Dividend
Disbursing Agent and Redemption Agent..................... 52
Underwriting................................................ 53
Legal Opinions.............................................. 54
Available Information....................................... 54
Table of Contents for the Statement of Additional
Information............................................... 55
i
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this prospectus and in the Statement of Additional
Information (the "SAI"), including the Fund's Statement Establishing and Fixing
the Rights and Preferences of FundPreferred Shares (the "Statement") attached as
Appendix A to the SAI. Capitalized terms used but not defined in this prospectus
shall have the meanings given to such terms in the Statement.
The Fund...................... Nuveen Floating Rate Income Fund (the "Fund")
is a recently organized, diversified,
closed-end management investment company. The
Fund's common shares, $.01 par value, are
traded on the New York Stock Exchange (the
"Exchange") under the symbol "JFR." See
"Description of Common Shares." As of May 11,
2004, the Fund had 47,157,000 common shares
outstanding and net assets applicable to common
shares of $672,274,243.
Investment Objective and
Policies...................... The Fund's investment objective is to achieve a
high level of current income. The Fund's
investment objective and certain investment
policies are considered fundamental and may not
be changed without shareholder approval. The
Fund cannot assure you that it will attain its
investment objective. See "The Fund's
Investments" and "Risk Factors."
Under normal market circumstances, the Fund
will invest at least 80% of its Managed Assets
in adjustable rate secured senior loans and
adjustable rate unsecured senior loans
(collectively referred to as "Senior Loans"),
which unsecured Senior Loans will be, at the
time of investment, investment grade quality.
The Fund will invest at least 65% of its
Managed Assets in Senior Loans that are secured
by specific collateral. Senior Loans pay
interest at rates that are redetermined
periodically at short-term intervals by
reference to a base lending rate, primarily the
London-Interbank Offered Rate ("LIBOR"), plus a
premium. The Fund may invest a substantial
portion of its Managed Assets in Senior Loans
and other debt instruments that are, at the
time of investment, rated below investment
grade or unrated but judged to be of comparable
quality. Securities (which term for purposes of
this prospectus includes Senior Loans) of below
investment grade quality are regarded as having
predominately speculative characteristics with
respect to capacity to pay interest and repay
principal and are commonly referred to as "junk
bonds." Senior Loans are made to U.S. or
non-U.S. corporations, partnerships and other
business entities ("Borrowers") that operate in
various industries and geographical regions. It
is anticipated that the proceeds of the Senior
Loans in which the Fund will invest will be
used by Borrowers to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock
repurchases, refinancings, internal growth and
for other corporate purposes.
The Fund may invest up to 20% of its Managed
Assets in (i) other debt securities such as
investment and non-investment grade debt
securities, convertible securities and
structured notes (other than structured notes
that are designed to provide returns and risks
that emulate those of Senior Loans, which may
be treated as an investment in Senior Loans for
purposes of the 80% requirement set forth
1
above), (ii) mortgage-related and other
asset-backed securities (including
collateralized loan obligations and
collateralized debt obligations), and (iii)
debt securities and other instruments issued by
government, government-related or supranational
issuers (commonly referred to as sovereign debt
securities). No more than 5% of the Fund's
Managed Assets may be invested in each of
convertible securities, mortgage-related and
other asset-backed securities, and sovereign
debt securities. The debt securities in which
the Fund may invest may have short-term,
intermediate-term or long-term maturities. The
Fund also may receive warrants and equity
securities issued by a Borrower or its
affiliates in connection with the Fund's other
investments in such entities.
Investment grade quality securities are those
securities that, at the time of investment, are
(i) rated by at least one nationally recognized
statistical rating organization ("NRSRO")
within the four highest grades (BBB- or Baa3 or
better by Standard & Poor's Corporation, a
division of The McGraw-Hill Companies ("S&P"),
Moody's Investors Service, Inc. ("Moody's") or
Fitch Ratings ("Fitch")), or (ii) unrated but
judged to be of comparable quality. The Fund
may purchase Senior Loans and other debt
securities that are rated below investment
grade or that are unrated but judged to be of
comparable quality. No more than 10% of the
Fund's Managed Assets may be invested in Senior
Loans and other debt securities that are, at
the time of investment, rated CCC+ or Caa or
below by S&P, Moody's or Fitch or that are
unrated but judged to be of comparable quality.
See "The Fund's Investments -- Investment
Objectives and Policies" and "Risk
Factors -- General Risks of the Fund -- Below
Investment Grade Risk."
The Fund's assets, including assets
attributable to any FundPreferred shares that
may be outstanding and the principal amount of
any Borrowings (as defined below), are called
"Managed Assets."
Nuveen Institutional Advisory Corp. ("NIAC"),
the Fund's adviser, is responsible for
determining the Fund's overall investment
strategy and its implementation, including the
use of leverage and hedging. Symphony Asset
Management, LLC ("Symphony") is the Fund's
subadviser responsible for managing the Fund's
Managed Assets.
Under normal circumstances:
- The Fund expects to maintain an average
duration of one year or less for its
portfolio investments in Senior Loans and
other debt instruments. See "The Fund's
Investments -- Investment Objective and
Policies" for a description of duration.
- The Fund will not invest in inverse floating
rate securities.
- The Fund may invest up to 20% of its Managed
Assets in securities of non-U.S. issuers
(which term for purposes of this prospectus
includes Borrowers) that are U.S. dollar or
non-U.S. dollar denominated. Initially, the
Fund does not intend to invest in non-U.S.
dollar denominated securities. The Fund's
Managed Assets to be invested in Senior Loans
and other debt
2
instruments of non-U.S. issuers may include
debt securities of issuers located, or
conducting their business in, emerging
markets countries. Initially, the Fund does
not intend to invest in securities of
emerging markets issuers.
- The Fund may not invest more than 20% of its
Managed Assets in securities from an industry
which (for the purposes of this prospectus)
generally refers to the classification of
companies in the same or similar lines of
business such as the automotive, textiles and
apparel, hotels, media production and
consumer retailing industries.
- The Fund may invest more than 20% of its
Managed Assets in sectors which (for the
purposes of this prospectus) generally refers
to broader classifications of industries,
such as the consumer discretionary sector
which includes the automotive, textiles and
apparel, hotels, media production and
consumer retailing industries, provided the
Fund's investment in a particular industry
within the sector does not exceed the
industry limitation.
- The Fund may invest up to 50% of its Managed
Assets in securities and other instruments
that, at the time of investment, are illiquid
(i.e., securities that are not readily
marketable).
In pursuing its objective of high current
income, the Fund will invest in Senior Loans
and other debt instruments that may involve
significant credit risk. As part of its efforts
to manage this risk and the potential impact of
such risk on the overall value and returns of
the Fund's portfolio, Symphony will implement
its credit management strategy that includes
(i) a focus on Senior Loans that are secured by
specific assets, (ii) rigorous and on-going
bottom-up fundamental analysis of issuers, and
(iii) overall portfolio diversification.
Symphony will perform its own credit and
research analysis of issuers, taking into
consideration, among other things, the entity's
financial resources and operating history, its
sensitivity to economic conditions and trends,
the ability of its management, its debt
maturity schedules and borrowing requirements,
its anticipated cash flow, interest and asset
coverage, and its earnings prospects. Even with
these efforts, because of the greater degree of
credit risk within the portfolio, the Fund's
net asset value could decline over time. In an
effort to help preserve the Fund's overall
capital, Symphony will seek to enhance
portfolio value by investing in securities it
believes to be undervalued, which, if
successful, can mitigate the potential loss of
value due to credit events over time.
During temporary defensive periods or in order
to keep the Fund's cash fully invested, the
Fund may deviate from its investment objective
and invest all or a portion of its assets in
investment grade debt securities, including
obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities.
In addition, upon Symphony's recommendation
that a change would be in the best interests of
the Fund and upon concurrence by NIAC, and
subject to approval of the Board of Trustees of
the Fund, Symphony may deviate from its
investment guidelines noted above. For
3
a more complete discussion of the Fund's
portfolio composition, see "The Fund's
Investments."
Investment Adviser and
Subadviser.................... NIAC is the Fund's investment adviser,
responsible for determining the Fund's overall
investment strategy and its implementation,
including the use of leverage and hedging.
NIAC, a registered investment adviser, is a
wholly owned subsidiary of Nuveen Investments,
Inc. Founded in 1898, Nuveen Investments, Inc.
and its affiliates had approximately $100.9
billion of assets under management as of March
31, 2004. According to Thomson Wealth
Management, Nuveen is the leading sponsor of
closed-end exchange-traded funds as measured by
the number of funds (108) and the amount of
fund assets under management (approximately
$48.8 billion) as of March 31, 2004.
Symphony, a registered investment adviser, is
an indirect wholly owned subsidiary of Nuveen
Investments, Inc. Founded in 1994, Symphony had
approximately $3.8 billion in assets under
management as of March 31, 2004. Symphony
specializes in the management of market neutral
equity and debt strategies and Senior Loan and
other debt portfolios.
NIAC and Symphony will sometimes individually
be referred to as an "Adviser" and collectively
be referred to as the "Advisers."
NIAC will receive an annual fee, payable
monthly, in a maximum amount equal to .85% of
the Fund's average daily Managed Assets (as
previously defined, Managed Assets include
assets attributable to any FundPreferred shares
that may be outstanding and the principal
amount of any Borrowings), with lower fee
levels for assets that exceed $500 million.
NIAC will pay a portion of that fee to
Symphony. The Advisers have contractually
agreed to reimburse the Fund for fees and
expenses in the amount of .32% of average daily
Managed Assets of the Fund for the first five
full years of the Fund's operations (through
March 31, 2009), and in a declining amount for
an additional three years (through March 31,
2012). For more information on fees and
expenses, including fees attributable to common
shares, see "Management of the Fund."
Use of Leverage............... The Fund intends to use financial leverage,
including issuing the FundPreferred shares, for
investment purposes. The Fund currently
anticipates its use of leverage will represent
approximately 38% of its total assets,
including the proceeds of such leverage. In
addition to the issuance of FundPreferred
shares, the Fund may make further use of
financial leverage through borrowing, including
the issuance of commercial paper or notes.
Throughout this prospectus, commercial paper,
notes or other borrowings sometimes may be
collectively referred to as "Borrowings." Any
Borrowings will have seniority over the
FundPreferred shares. Payments to holders of
FundPreferred shares in liquidation or
otherwise will be subject to the prior payment
of all outstanding indebtedness, including
Borrowings.
Because both Senior Loans and the Fund's
FundPreferred shares and Borrowings generally
pay interest or dividends based on
4
short-term market interest rates, the Fund's
investments in Senior Loans may potentially
offset the leverage risks borne by the Fund
relating to the fluctuations on common share
income due to variations in the FundPreferred
share dividend rate and/or the interest rate on
Borrowings. See "Use of Leverage."
Hedging Transactions.......... The Fund may use derivatives or other
transactions for the purpose of hedging the
portfolio's exposure to common stock risk, high
yield credit risk, foreign currency exchange
rate risk and the risk of increases in interest
rates. The specific derivative instruments to
be used, or other transactions to be entered
into, each for hedging purposes may include (i)
options and futures contracts, including
options on common stock, stock indexes, bonds
and bond indexes, stock index futures, bond
index futures and related instruments, (ii)
structured notes and similar instruments, (iii)
credit derivative instruments, and (iv)
currency exchange transactions. Some, but not
all, of the derivative instruments may be
traded and listed on an exchange.
The positions in derivatives will be
marked-to-market daily at the closing price
established on the relevant exchange or at a
fair value. See "The Fund's
Investments -- Portfolio Composition and Other
Information -- Hedging Transactions" and "Risk
Factors -- General Risks of the Fund -- Hedging
Risk and -- Counterparty Risk."
The Offering.................. The Fund is offering 4,000, 4,000, 4,000 and
4,000 shares of FundPreferred shares Series M,
Series T, Series W and Series F, respectively,
at a purchase price of $25,000 per share.
FundPreferred shares are being offered by the
underwriters listed under "Underwriting."
Risk Factors Summary.......... Risk is inherent in all investing. Therefore,
before investing in the Fund you should
consider certain risks carefully. The primary
risks of investing in FundPreferred shares 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
FundPreferred shares, you may receive less
than the price you paid for your shares if
you sell them outside of the auction,
especially when market interest rates are
rising;
- a rating agency could downgrade FundPreferred
shares, which could affect liquidity;
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances;
- in extraordinary circumstances the Fund may
not earn sufficient income from its
investments to pay dividends;
- any Borrowings may constitute a substantial
lien and burden on the FundPreferred shares
by reason of its prior claim against the
income of the Fund and against the net assets
of the Fund in liquidation; and
5
- if the Fund leverages through Borrowings, the
Fund may not be permitted to declare
dividends or other distributions with respect
to the FundPreferred shares or purchase
FundPreferred shares unless at the time
thereof the Fund meets certain asset coverage
requirements and the payment of principal and
interest on any such Borrowings are not in
default.
For additional general risks of investing in
the FundPreferred shares and general risks of
investing in the Fund, see "Risk Factors."
Trading Market................ FundPreferred shares are not listed on an
exchange. Instead, you may buy or sell
FundPreferred shares at an auction that
normally is held weekly by submitting orders to
a broker-dealer that has entered into an
agreement with the auction agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in
FundPreferred shares outside of auctions, but
may discontinue this activity at any time.
There is no assurance that a secondary market
will be established, or, if established, will
provide shareholders with liquidity. You may
transfer shares outside of auctions only to or
through a Broker-Dealer, or a broker-dealer
that has entered into a separate agreement with
a Broker-Dealer.
The table below shows the first auction date
for each series of FundPreferred shares and the
day on which each subsequent auction will
normally be held for each series of
FundPreferred shares. The first auction date
for the series of FundPreferred shares will be
the Business Day before the dividend payment
date for the initial dividend period for each
series of FundPreferred shares.
The start date for subsequent rate periods
normally will be the Business Day following the
auction date unless the then-current rate
period is a special rate period, or the day
that normally would be the auction date or the
first day of the subsequent rate period is not
a Business Day.
FIRST AUCTION SUBSEQUENT
SERIES DATE* AUCTION DAY
------ -------------- -----------
M...................... Monday
T...................... Tuesday
W...................... Wednesday
F...................... Friday
---------------------------------------------
* All dates are 2004.
Dividends and Rate Periods.... The table below shows the dividend rate for the
initial rate period of the FundPreferred shares
offered in this prospectus. For subsequent rate
periods, FundPreferred shares will pay
dividends based on a rate set at auctions,
normally held every seven (7) days. In most
instances, dividends are also paid every seven
(7) days, on the day following the end of the
rate period. See "Description of FundPreferred
Shares -- Dividends and Dividend
Periods -- Determination of Dividend Rate" and
"The Auction."
6
The table below also shows the date from which
dividends on the FundPreferred shares will
accumulate at the initial rate, the dividend
payment date for the initial rate period and
the day on which dividends will normally be
paid. If dividends are payable on a Monday or
Friday and that day is not a Business Day, then
your dividends will generally be paid on the
first Business Day that falls after that. If
dividends are payable on a Tuesday, Wednesday
or Thursday and that day is not a Business Day,
then your dividends generally will be paid on
the first Business Day prior to that day.
Finally, the table below shows the number of
days of the initial dividend period for the
FundPreferred shares. Subsequent rate periods
generally will be seven (7) days. The dividend
payment date for special rate periods of other
than seven (7) days will be set out in the
notice designating a special dividend period.
See "Description of FundPreferred
Shares -- Dividends and Dividend
Periods -- Determination of Dividend Rate."
PAYMENT NUMBER
DATE OF DATE FOR SUBSEQUENT OF DAYS
INITIAL ACCUMULATION INITIAL DIVIDEND OF INITIAL
DIVIDEND AT INITIAL DIVIDEND PAYMENT DIVIDEND
SERIES RATE RATE* PERIOD* DAY PERIOD
------ -------- ------------ -------- ---------- ----------
M.................... Tuesday
T.................... Wednesday
W.................... Thursday
F.................... Monday
---------------------------------------------
* All dates are 2004.
Determination of Maximum
Applicable Rates.............. Except during a dividend default period, the
applicable rate for any dividend period for
FundPreferred shares will not be more than the
maximum rate. The maximum rate for the
FundPreferred shares will depend on the credit
rating assigned to such FundPreferred shares
and on the duration of the dividend period. The
maximum rate will be the higher of the
applicable percentage of the reference rate or
the applicable spread plus the reference rate.
The reference rate is the applicable LIBOR Rate
(for a dividend period of fewer than 365 days)
or the applicable Treasury Rate Index (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 Board of Trustees after consultation with
the Broker-Dealers. There is no minimum rate in
respect of any dividend period. See
"Description of FundPreferred
Shares -- Dividends and Dividend
Periods -- Determination of Dividend Rate."
Ratings....................... It is a condition of the underwriters'
obligation to purchase the FundPreferred shares
that shares of each series of FundPreferred
receive a rating of "Aaa" from Moody's and
"AAA" from S&P.
Restrictions on Dividend
Redemption and Other
Payments...................... If the Fund issues any Borrowings that
constitute senior securities representing
indebtedness (as defined in the 1940 Act),
under the 1940 Act, the Fund would not be
permitted to declare any dividend on
FundPreferred shares unless, after giving
effect to such
7
dividend, asset coverage with respect to such
Borrowings that constitute senior securities
representing indebtedness, if any, is at least
200%. In addition, the Fund would not be
permitted to declare any other distribution on
or purchase or redeem FundPreferred shares
unless, after giving effect to such
distribution, purchase or redemption, asset
coverage with respect to such Borrowings that
constitute senior securities representing
indebtedness, if any, is at least 300%.
Dividends or other distributions on, or
redemptions or purchases of, FundPreferred
shares would also be prohibited at any time
that an event of default under any Borrowings
has occurred and is continuing. See
"Description of FundPreferred
Shares -- Restrictions on Dividend, Redemption
and Other Payments."
Asset Maintenance............. The Fund must maintain the FundPreferred Shares
Basic Maintenance Amount as of each Valuation
Date. The Fund also must maintain asset
coverage for the FundPreferred shares on a non-
discounted basis of at least 200% as of the
last business day of each month. See
"Description of FundPreferred Shares -- Asset
Maintenance."
The guidelines for calculating whether the
FundPreferred Shares Basic Maintenance Amount
has been satisfied have been established by
Moody's and S&P in connection with the Fund's
receipt from Moody's and S&P of the "Aaa" and
"AAA" Credit Ratings, respectively, with
respect to the FundPreferred shares on their
Date of Original Issue.
The Fund estimates that on the Date of Original
Issue, the 1940 Act FundPreferred Shares Asset
Coverage, based on the composition of its
portfolio as of April 30, 2004, assuming the
issuance of 2,350,000 Common Shares as of May
11, 2004, less the offering costs related
thereto, and after giving effect to the
issuance of the FundPreferred shares offered
hereby ($400,000,000) and the deduction of
sales loads and estimated offering expenses for
such FundPreferred shares ($8,425,000), will be
267%.
In addition, there may be additional asset
coverage requirements imposed in connection
with any Borrowings. See "Description of
Borrowings."
Redemption.................... Although the Fund will not ordinarily redeem
FundPreferred shares, it may be required to
redeem shares if, for example, the Fund does
not meet an asset coverage ratio required by
law or in order to correct a failure to meet
rating agency guidelines in a timely manner.
The Fund may voluntarily redeem FundPreferred
shares in certain circumstances. See
"Description of FundPreferred
Shares -- Redemption."
Liquidation Preference........ The liquidation preference of the shares of
each series of FundPreferred shares will be
$25,000 per share plus accumulated but unpaid
dividends, if any, thereon. See "Description of
FundPreferred Shares -- Liquidation Rights."
8
Voting Rights................. Except as otherwise indicated, holders of
FundPreferred shares have one vote per share
and vote together with holders of common shares
as a single class.
In connection with the election of the Board of
Trustees, the holders of outstanding preferred
shares of beneficial interest ("Preferred
Shares"), including FundPreferred shares, as a
class, shall be entitled to elect two trustees
of the Fund. The holders of outstanding shares
of common shares and Preferred Shares,
including FundPreferred shares, voting
together, shall elect the remainder. However,
upon the Fund's failure to pay dividends on the
Preferred Shares in an amount equal to two full
years of dividends, the holders of Preferred
Shares have the right to elect, as a class, the
smallest number of additional Trustees as shall
be necessary to assure that a majority of the
Trustees has been elected by the holders of
Preferred Shares. The terms of the additional
Trustees shall end when the Fund pays or
provides for all accumulated and unpaid
dividends. See "Description of FundPreferred
Shares -- Voting Rights."
Federal Income Taxes.......... Distributions with respect to the FundPreferred
shares will generally be subject to U.S.
federal income taxation. The Fund anticipates
that all or substantially all of its dividends
will be subject to federal income taxation at
ordinary income tax rates. Dividends will
generally not constitute "qualified dividend
income" subject to reduced rates of federal
income tax for individual and other
noncorporate shareholders. Distributions
designated by the Fund as net capital gains, if
any, will be subject to rates applicable to
long-term capital gains. The Internal Revenue
Service ("IRS") currently requires that a
regulated investment company, which has two or
more classes of stock, allocate to each such
class proportionate amounts of each type of its
income (such as ordinary income and net capital
gain) based upon the percentage of total
dividends distributed to each class for the tax
year. Accordingly, the Fund intends each year
to allocate ordinary income dividends, capital
gain distributions, dividends qualifying for
the corporate dividends received deduction, if
any, and "qualified dividend income," if any,
between its common shares and FundPreferred
shares in proportion to the total dividends
paid to each class during or with respect to
such year. See "Federal Income Tax Matters."
9
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund's common shares from the commencement of the
Fund's operations on March 25, 2004 until April 30, 2004. Since the Fund
commenced operations on March 25, 2004, the table covers approximately five
weeks of operations, during which a substantial portion of the Fund's assets
were held in cash pending investment in Senior Loans and other debt instruments
that meet the Fund's investment objective and policies. Accordingly, the
information presented may not provide a meaningful picture of the Fund's
operating performance.
MARCH 25, 2004 --
APRIL 30, 2004
-----------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Common Share Net Asset Value, Beginning of Period......... $ 14.33
--------
Net Investment Income.................................. .01
Net Gains on Securities (Realized and Unrealized)...... --
--------
Total from Investment Operations..................... .01
Offering Costs............................................ (.03)
--------
Common Share Net Asset Value, End of Period............... $ 14.31
========
Per Share Market Value, End of Period..................... $ 14.96
Total Return on Common Share Net Asset Value(a)........... (.14)%
Total Investment Return on Market Value(a)................ (.27)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets Applicable to Common Shares, End of Period (In
Thousands)............................................. $641,287
Ratio of Expenses to Average Net Assets Applicable to
Common Shares Before Reimbursement..................... .96%*
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares Before Reimbursement....... .69%*
Ratio of Expenses to Average Net Assets Applicable to
Common Shares After Reimbursement...................... .64%*
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares After Reimbursement........ 1.01%*
Portfolio Turnover Rate................................... 3%
------------
* Annualized.
(a) Total investment return on market value is the combination of reinvested
dividend income, reinvested capital gains distributions, if any, and changes in
stock price per share. Total return on common share net asset value is the
combination of reinvested dividend income at net asset value, reinvested capital
gains distributions at net asset value, if any, and changes in common share net
asset value per share. Total returns are not annualized.
10
THE FUND
The Fund is a recently organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on January 15, 2004, pursuant to a Declaration
governed by the laws of The Commonwealth of Massachusetts. On March 25, 2004,
the Fund issued an aggregate of 41,800,000 common shares of beneficial interest,
par value $0.01 per share pursuant to the initial public offering thereof. On
April 14, 2004 and May 11, 2004, the Fund issued an additional 3,000,000 and
2,350,000 common shares, respectively, pursuant to partial exercises by the
underwriters of their over-allotment option. The Fund's common shares are listed
on the Exchange under the symbol "JFR." The Fund's principal office is located
at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number is
(800) 257-8787.
The following provides information about the Fund's outstanding shares as
of May 11, 2004:
AMOUNT
HELD BY THE
AMOUNT FUND OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ---------- ----------- -----------
Common............................................. unlimited 0 47,157,000
FundPreferred Shares............................... unlimited 0 0
Series M......................................... 4,000 0 0
Series T......................................... 4,000 0 0
Series W......................................... 4,000 0 0
Series F......................................... 4,000 0 0
USE OF PROCEEDS
The net proceeds of the offering of FundPreferred shares will be
approximately $391,575,000 after payment of the sales load and estimated
offering costs. The Fund will invest the net proceeds of the offering in
accordance with the Fund's investment objective and policies as described under
"The Fund's Investments" as soon as practicable. It is presently anticipated
that the Fund will be able to invest substantially all of the net proceeds in
Senior Loans and other securities that meet the Fund's investment objective and
policies within approximately 1 1/2 to 3 months after the completion of the
offering. Pending such investment, it is anticipated that the proceeds will be
invested in short-term or long-term securities issued by the U.S. government or
its agencies or instrumentalities or in high quality, short-term money market
instruments.
11
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of April
30, 2004, and as adjusted to give effect to the issuance of 2,350,000 additional
common shares on May 11, 2004, as well as the issuance of the shares of
FundPreferred offered hereby.
ACTUAL AS ADJUSTED
------------ --------------
(UNAUDITED) (UNAUDITED)
FUNDPREFERRED SHARES:
FundPreferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no
shares issued and 16,000 shares issued, as adjusted),
respectively*.......................................... $ -- $ 400,000,000
============ ==============
COMMON SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value per share; unlimited shares
authorized, 44,807,000 shares outstanding and
47,157,000 shares outstanding as adjusted,
respectively*.......................................... $ 448,070 $ 471,570
Paid-in surplus**......................................... 640,204,562 665,349,312
Undistributed net investment income....................... 550,706 550,706
Net unrealized appreciation (depreciation) of
investments............................................ 121,366 121,366
Net unrealized appreciation (depreciation) of SAMI........ (37,500) (37,500)
------------ --------------
Net assets applicable to Common Shares.................... $641,287,204 $ 666,455,454
============ ==============
------------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted, paid-in surplus reflects the proceeds of the issuance of the
common shares ($33,663,750) less $.01 par value per common share ($23,500)
and the offering costs of $.03 per common share ($70,500) as well as a
reduction for the sales load and estimated offering costs of the
FundPreferred shares' issuance ($8,425,000).
PORTFOLIO COMPOSITION
As of April 30, 2004, 41.61% of the market value of the Fund's portfolio
was invested in Senior Loans and other debt instruments and 58.39% of the market
value of the Fund's portfolio was invested in short-term investments.
12
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of current
income. There can be no assurance that the Fund's investment objective will be
achieved.
In pursuing its objective of high current income, the Fund will invest in
Senior Loans and other debt instruments that may involve significant credit
risk. As part of its efforts to manage this risk and the potential impact of
such risk on the overall value and returns of the Fund's portfolio, Symphony
will implement its credit management strategy that includes (i) a focus on
Senior Loans that are secured by specific assets, (ii) rigorous and on-going
bottom-up fundamental analysis of issuers, and (iii) overall portfolio
diversification. Symphony will perform its own credit and research analysis of
issuers, taking into consideration, among other things, the entity's financial
resources and operating history, its sensitivity to economic conditions and
trends, the ability of its management, its debt maturity schedules and borrowing
requirements, its anticipated cash flow, interest and asset coverage, and its
earnings prospects. Even with these efforts, because of the greater degree of
credit risk within the portfolio, the Fund's net asset value could decline over
time. In an effort to help preserve the Fund's overall capital, Symphony will
seek to enhance portfolio value by investing in securities it believes to be
undervalued, which, if successful, can mitigate the potential loss of value due
to credit events over time.
NIAC is responsible for determining the Fund's overall investment strategy
and its implementation, including the use of leverage and hedging. Symphony is
the Fund's subadviser responsible for managing the Fund's Managed Assets. See
"Management of the Fund."
Under normal market circumstances, the Fund will invest at least 80% of its
Managed Assets in secured Senior Loans and unsecured Senior Loans, which
unsecured Senior Loans will be, at the time of investment, investment grade
quality. The Fund will invest at least 65% of its Managed Assets in Senior Loans
that are secured by specific collateral. Investment in adjustable rate
instruments such as Senior Loans is expected to minimize changes in the
underlying principal value of such investments, and therefore, the Fund's net
asset value, resulting from changes in market interest rates. The Fund may
invest up to 20% of its Managed Assets in (i) other debt securities such as
investment and non-investment grade debt securities, convertible securities and
structured notes (other than Structured notes that are designed to provide
returns and risks that emulate those of Senior Loans, which may be treated as an
investment in Senior Loans for purposes of the 80% requirement set forth above),
(ii) mortgage-related and other asset-backed securities (including
collateralized loan obligations and collateralized debt obligations), and (iii)
debt securities and other instruments issued by government, government-related
or supranational issuers. No more than 5% of the Fund's Managed Assets may be
invested in each of convertible securities, mortgage-related and other
asset-backed securities, and sovereign debt securities. The debt securities in
which the Fund may invest may have short-term, intermediate-term or long-term
maturities. The Fund also may receive warrants and equity securities issued by a
Borrower or its affiliates in connection with the Fund's other investments in
such entities. The Fund may invest a substantial portion of its Managed Assets
in Senior Loans and other debt instruments that are, at the time of investment,
rated below investment grade or unrated but judged to be of comparable quality.
Investment grade quality securities are those securities that, at the time
of investment, are (i) rated by at least one NRSRO within the four highest
grades (BBB- or Baa3 or better by S&P, Moody's or Fitch), or (ii) unrated but
judged to be of comparable quality. No more than 10% of the Fund's Managed
Assets may be invested in Senior Loans and other debt securities rated CCC+ or
Caa or below by S&P, Moody's or Fitch or that are unrated but judged to be of
comparable quality. Securities of below investment grade quality are regarded as
having predominately speculative characteristics with respect to capacity to pay
interest and repay principal, and are commonly referred to as "junk bonds." See
Appendix B in the Statement of Additional Information for a description of
security ratings.
The Fund's policy under normal circumstances of investing at least 80% of
its Managed Assets in secured Senior Loans and unsecured Senior Loans, which
unsecured Senior Loans will be, at the time of investment, investment grade
quality, is not considered to be fundamental by the Fund and can be changed
without a vote
13
of the shareholders. However, this policy may only be changed by the Fund's
Board following the provision of 60 days prior written notice to shareholders.
Under normal market circumstances, Symphony expects to maintain an average
duration of one year or less for the Fund's portfolio investments in Senior
Loans and other debt instruments. In comparison to maturity (which is the date
on which a debt instrument ceases and the issuer is obligated to repay the
principal amount), duration is a measure of the price volatility of a debt
instrument as a result of changes in market rates of interest, based on the
weighted average timing of the instrument's expected principal and interest
payments. Duration differs from maturity in that it considers a security's
yield, coupon payments, principal payments and call features in addition to the
amount of time until the security finally matures. As the value of a security
changes over time, so will its duration. Prices of securities with shorter
durations (such as the anticipated average duration of one year or less for the
Fund's portfolio investments as described above) tend to be less sensitive to
interest rate changes than securities with longer durations. In general, the
value of a portfolio of securities with a shorter duration can be expected to be
less sensitive to interest rate changes than a portfolio with a longer duration.
The Fund may invest up to 20% of its Managed Assets in securities of
non-U.S. issuers that are U.S. dollar or non-U.S. dollar denominated. Initially,
the Fund does not intend to invest in non-U.S. dollar denominated securities.
The Fund may not invest more than 20% of its Managed Assets in securities from
an industry which (for the purposes of this prospectus) generally refers to the
classification of companies in the same or similar lines of business such as the
automotive, textiles and apparel, hotels, media production and consumer
retailing industries. The Fund may invest more than 20% of its Managed Assets in
sectors which (for the purposes of this prospectus) generally refers to broader
classifications of industries, such as the consumer discretionary sector which
includes the automotive, textiles and apparel, hotels, media production and
consumer retailing industries, provided the Fund's investment in a particular
industry within the sector does not exceed the industry limitation. In addition,
the Fund may invest up to 50% of its Managed Assets in securities and other
instruments that, at the time of investment, are illiquid (i.e., securities that
are not readily marketable).
For a more complete discussion of the Fund's portfolio composition, see
"-- Portfolio Composition and Other Information."
The Fund cannot change its investment objective without the approval of the
holders of a "majority of the outstanding" common shares and FundPreferred
shares voting together as a single class, and of the holders of a "majority of
the outstanding" FundPreferred shares voting as a separate class. When used with
respect to particular shares of the Fund, a "majority of the outstanding" shares
means (i) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy or (ii) more than 50%
of the shares, whichever is less. See "Description of FundPreferred
Shares -- Voting Rights" for additional information with respect to the voting
rights of holders of FundPreferred shares.
OVERALL FUND MANAGEMENT
NIAC is the Fund's investment adviser, responsible for the Fund's overall
investment strategy and its implementation.
NIAC will oversee Symphony in its management of the Fund's portfolio. This
oversight will include ongoing evaluation of Symphony's investment performance,
portfolio allocations, quality of investment process and personnel, compliance
with Fund and regulatory guidelines, trade allocation and execution, and other
factors.
NIAC will also oversee the Fund's use of leverage, and efforts to minimize
the costs and mitigate the risks to Common Shareholders associated with using
financial leverage. See "Use of Leverage" and "Hedging Transactions" below. This
effort may involve making adjustments to investment policies in an attempt to
minimize costs and mitigate risks.
14
SYMPHONY INVESTMENT PHILOSOPHY AND PROCESS
Investment Philosophy. Symphony believes that managing risk, particularly
for volatile assets such as Senior Loans and other forms of high yield debt, is
of paramount importance. Symphony believes that a combination of fundamental
credit analysis and valuation information that is available from the equity
markets provide a means of identifying what it believes to be superior
investment candidates. Additionally, Symphony focuses primarily on liquid
securities to help ensure that exit strategies remain available under different
market conditions.
Investment Process. In identifying Senior Loans and other securities for
potential purchase, Symphony combines quantitative screening and fundamental and
relative value analysis. Symphony screens the identified investment candidates
for liquidity constraints and favorable capital structures. The investment team
then performs rigorous bottom-up fundamental analysis to identify investments
with sound industry fundamentals, cash flow sufficiency and asset quality. The
final portfolio is constructed using risk management and monitoring systems to
ensure proper diversification.
PORTFOLIO COMPOSITION AND OTHER INFORMATION
The Fund's portfolio is composed principally of the following investments.
A more detailed description of the Fund's investment policies and restrictions
and more detailed information about the Fund's portfolio investments are
contained in the SAI.
Senior Loans. The Fund may invest (i) in Senior Loans made by banks or
other financial institutions to Borrowers, (ii) assignments of such interests in
Senior Loans or (iii) participation interests in Senior Loans. Senior Loans hold
the most senior position in the capital structure of a Borrower, are typically
secured with specific collateral and have a claim on the assets and/or stock of
the Borrower that is senior to that held by subordinated debt holders and
stockholders of the Borrower. The capital structure of a Borrower may include
Senior Loans, senior and junior subordinated debt, preferred stock and common
stock issued by the Borrower, typically in descending order of seniority with
respect to claims on the Borrower's assets. The proceeds of Senior Loans
primarily are used by Borrowers to finance leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases, refinancings, internal growth and for
other corporate purposes. A Senior Loan is typically originated, negotiated and
structured by a U.S. or non-U.S. commercial bank, insurance company, finance
company or other financial institution ("Agent") for a lending syndicate of
financial institutions which typically includes the Agent ("Lenders"). The Agent
typically administers and enforces the Senior Loan on behalf of the other
Lenders in the syndicate. In addition, an institution, typically but not always
the Agent, holds any collateral on behalf of the Lenders. The Fund normally will
rely primarily on the Agent to collect principal of and interest on a Senior
Loan. Also, the Fund usually will rely on the Agent to monitor compliance by the
Borrower with the restrictive covenants in a loan agreement.
Senior Loans in which the Fund will invest generally pay interest at rates
that are redetermined periodically at short-term intervals by reference to a
base lending rate, plus a premium. Senior Loans typically have rates of interest
that are redetermined either daily, monthly, quarterly or semi-annually by
reference to a base lending rate plus a premium or credit spread. These base
lending rates are primarily LIBOR, and secondarily the prime rate offered by one
or more major U.S. banks (the "Prime Rate") and the certificate of deposit
("CD") rate or other base lending rates used by commercial lenders. As
adjustable rate loans, the frequency of how often a Senior Loan resets its
interest rate will impact how closely such Senior Loans track current market
interest rates. The Senior Loans held by the Fund will have a dollar-weighted
average period until the next interest rate adjustment of approximately 90 days
or less. As a result, as short-term interest rates increase, interest payable to
the Fund from its investments in Senior Loans should increase, and as short-term
interest rates decrease, interest payable to the Fund from its investments in
Senior Loans should decrease. The Fund may utilize derivative instruments to
shorten the effective interest rate redetermination period of Senior Loans in
its portfolio. Senior Loans typically have a stated term of between one and
eight years. In the experience of Symphony, the average life of Senior Loans in
recent years has been approximately two years because of prepayments.
15
The Fund expects primarily to purchase Senior Loans by assignment from a
participant in the original syndicate of lenders or from subsequent assignees of
such interests. The purchaser of an assignment typically succeeds to all the
rights and obligations under the loan agreement with the same rights and
obligations as the assigning Lender. Assignments may, however, be arranged
through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
assignment may differ from, and be more limited than, those held by the
assigning Lender.
The Fund also may purchase participation interests in the original
syndicate making Senior Loans. Loan participation interests typically represent
direct participations in a loan to a corporate borrower, and generally are
offered by banks or other financial institutions or lending syndicates. The Fund
may participate in such syndications, or can buy part of a Senior Loan, becoming
a part Lender. When purchasing a participation interest, the Fund assumes the
credit risk associated with the corporate Borrower and may assume the credit
risk associated with an interposed bank or other financial intermediary. The
participation interests in which the Fund intends to invest may not be rated by
any NRSRO. See "Risk Factors -- General Risks of the Fund -- Senior Loan Risks
and -- Participation Risk."
The Fund may purchase and retain in its portfolio Senior Loans where the
Borrowers have experienced, or may be perceived to be likely to experience,
credit problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Fund may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan. See
"-- Non-Senior Loan Investments -- Warrants and Equity Securities."
Non-Senior Loan Investments. The Fund may invest in debt instruments and
other securities as described below:
Corporate Bonds. Corporate bonds generally are used by corporations to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and normally must repay the amount borrowed on or before
maturity. Certain bonds are "perpetual" in that they have no maturity date. The
Fund may invest in bonds and other debt securities of any quality.
Structured Notes. The Fund may utilize structured notes and similar
instruments for investment purposes and also for hedging purposes. Structured
notes are privately negotiated debt obligations or economically equivalent
instruments where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate (an "embedded
index"), such as selected securities or loans, an index of securities or loans,
or specified interest rates, or the differential performance of two assets or
markets. The interest and/or principal payments that may be made on a structured
product may vary widely, depending on a variety of factors, including the
volatility of the embedded index and the effect of changes in the embedded index
on principal and/or interest payments. If the Fund invests in structured notes
that are designed to provide returns and risks that emulate those of Senior
Loans, the Fund may treat the value of (or, if applicable, the notional amount
of) such investment as an investment in Senior Loans for purposes of determining
compliance with the requirement set forth above that at least 80% of the Fund's
Managed Assets be invested under normal market circumstances in Senior Loans,
except to the extent that the value (or notional amount) of such investments
exceeds 5% of the Fund's Managed Assets. Any such investment amounts that exceed
5% of the Fund's Managed Assets will be treated as a type of "other debt
instruments" which, in the aggregate, are limited to 20% of the Fund's Managed
Assets.
U.S. Government Securities. U.S. Government securities include (1) U.S.
Treasury obligations, which differ in their interest rates, maturities and times
of issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one year to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years) and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities that are supported by any of
the following: (i) the full faith and credit of the U.S. Treasury, (ii) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury, (iii) discretionary authority of the U.S. Government to
purchase certain obligations of the U.S. Government
16
agency or instrumentality or (iv) the credit of the agency or instrumentality.
The Fund also may invest in any other security or agreement collateralized or
otherwise secured by U.S. Government securities. Agencies and instrumentalities
of the U.S. Government include but are not limited to: Federal Land Banks,
Federal Financing Banks, Banks for Cooperatives, Federal Intermediate Credit
Banks, Farm Credit Banks, Federal Home Loan Banks, FHLMC, FNMA, GNMA, Student
Loan Marketing Association, United States Postal Service, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government. Because the U.S. Government generally is
not obligated to provide support to its instrumentalities, the Fund will invest
in obligations issued by these instrumentalities only if Symphony determines
that the credit risk with respect to such obligations is minimal.
The principal of and/or interest on certain U.S. Government securities
which may be purchased by the Fund could be (i) payable in non-U.S. currencies
rather than U.S. dollars or (b) increased or diminished as a result of changes
in the value of the U.S. dollar relative to the value of non-U.S. currencies.
The value of such portfolio securities may be affected by changes in the
exchange rate between foreign currencies and the U.S. dollar.
Commercial Paper. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by corporations such as banks or bank
holding companies and finance companies. The rate of return on commercial paper
may be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
Warrants and Equity Securities. The Fund may acquire equity securities and
warrants issued by a Borrower or its affiliates as part of a package of
investments in the Borrower or its affiliates issued in connection with a Senior
Loan of the Borrower. The Fund also may convert a warrant so acquired into the
underlying security. Investments in warrants and equity securities entail
certain risks in addition to those associated with investments in Senior Loans.
The value of these securities may be affected more rapidly, and to a greater
extent, by company-specific developments and general market conditions. These
risks may increase fluctuations in the Fund's net asset value. The Fund may
possess material non-public information about a Borrower as a result of its
ownership of a Senior Loan of such Borrower. Because of prohibitions on trading
in securities of issuers while in possession of such information the Fund might
be unable to enter into a transaction in a security of such a Borrower when it
would otherwise be advantageous to do so.
Repurchase Agreements. The Fund may enter into repurchase agreements (the
purchase of a security coupled with an agreement to resell that security at a
higher price) with respect to its permitted investments. 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.
Other Securities. The Fund may invest in convertible securities,
mortgage-related and other asset-backed securities, and sovereign debt
securities, each of which are discussed in more detail in the SAI.
Securities Issued by Non-U.S. Issuers. The Fund may invest up to 20% of
its Managed Assets in securities of non-U.S. issuers that are U.S. dollar or
non-U.S. dollar denominated. Initially, the Fund does not intend to invest in
non-U.S. dollar denominated securities. The Fund's Managed Assets to be invested
in Senior Loans and other debt instruments of non-U.S. issuers may include debt
securities of issuers located, or conducting their business in, emerging markets
countries. Initially, the Fund does not intend to invest in securities of
emerging market issuers. The Fund may invest in any region of the world and
invest in companies operating in developed countries such as Canada, Japan,
Australia, New Zealand and most Western European countries. As used in this
prospectus, an "emerging market" country is any country determined to have an
emerging markets economy, considering, among other things, factors such as
whether the country has a low-to-middle-income economy according to the World
Bank or its related organizations, the country's credit rating, its political
and economic stability and the development of its financial and capital markets.
These countries generally include countries located in Latin America, the
Caribbean, Asia, Africa, the Middle East and Eastern and Central Europe.
17
Zero Coupon Bonds. The Fund's investments in debt securities may be in the
form of a zero coupon bond. A zero coupon bond is a bond that does not pay
interest for the entire life of the obligation. Zero coupon bonds allow an
issuer to avoid or delay the need to generate cash to meet current interest
payments and, as a result, may involve greater credit risk than bonds that pay
interest currently. The Fund would be required to distribute the income on any
of these instruments as it accrues, even though the Fund will not receive any of
the income on a current basis. Thus, the Fund may have to sell other
investments, including when it may not be advisable to do so, to make income
distributions to its common and preferred shareholders.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at time of delivery may be less
(or more) than their cost. A separate account of the Fund will be established
with its custodian consisting of cash equivalents or liquid securities having a
market value at all times at least equal to the amount of any delayed payment
commitment.
No Inverse Floating Rate Securities. The Fund will not invest in inverse
floating rate securities, which are securities that pay interest at rates that
vary inversely with changes in prevailing interest rates and which represent a
leveraged investment in an underlying security.
Hedging Transactions. The Fund may use derivatives or other transactions
for the purpose of hedging the portfolio's exposure to high yield credit risk,
foreign currency exchange rate risk and the risk of increases in interest rates.
The specific derivative instruments to be used, or other transactions to be
entered into, each for hedging purposes may include the purchase or sale of
futures contracts on securities, credit-linked notes, securities indices, other
indices or other financial instruments; options on futures contracts;
exchange-traded and over-the-counter options on securities or indices;
index-linked securities; swaps; and currency exchange transactions. Some, but
not all, of the derivative instruments may be traded and listed on an exchange.
The positions in derivatives will be marked-to-market daily at the closing price
established on the exchange or at a fair value. See "Risk Factors -- General
Risks of the Fund -- Hedging Risk and -- Counterparty Risk" and "Hedging
Transactions" below and "Other Investment Policies and Techniques -- Hedging
Transactions" in the Fund's SAI for further information on hedging transactions.
Illiquid Securities. The Fund may invest up to 50% of its Managed Assets
in securities and other instruments that, at the time of investment, are
illiquid (i.e., securities that are not readily marketable). For this purpose,
illiquid securities may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), that are deemed to be
illiquid, and certain repurchase agreements. The Board of Trustees or its
delegate has the ultimate authority to determine which securities are liquid or
illiquid for purposes of this 50% limitation. The Board of Trustees has
delegated to the Advisers the day-to-day determination of the illiquidity of any
security held by the Fund, although it has retained oversight and ultimate
responsibility for such determinations. No definitive liquidity criteria are
used. The Board of Trustees has directed the Advisers when making liquidity
determinations to look for such factors as (i) the nature of the market for a
security (including the institutional private resale market; the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security; the amount of time normally needed to dispose of the
security; and the method of soliciting offers and the mechanics of transfer),
(ii) the terms of certain securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), and (iii) other relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
18
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Trustees or its delegate. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 50% of the value of its Managed Assets is invested
in illiquid securities, including restricted securities that are not readily
marketable, the Fund will take such steps as are deemed advisable, if any, to
protect liquidity.
Short-Term/Long-Term Debt Securities; Defensive Position; Invest-Up
Period. During temporary defensive periods or in order to keep the Fund's cash
fully invested, including the period during which the net proceeds of the
offering of common shares or FundPreferred shares are being invested, the Fund
may deviate from its investment objective and invest all or any portion of its
assets in investment grade debt securities, including obligations issued or
guaranteed by the U.S. government, its agencies and instrumentalities. In such a
case, the Fund may not pursue or achieve its investment objective. In addition,
upon Symphony's recommendation that a change would be in the best interests of
the Fund and upon concurrence by NIAC, and subject to approval by the Board of
Trustees of the Fund, Symphony may deviate from its investment guidelines
discussed herein.
Other Investment Companies. The Fund may invest up to 10% of its Managed
Assets in securities of other open- or closed-end investment companies that
invest primarily in securities of the types in which the Fund may invest
directly. In addition, the Fund may invest a portion of its Managed Assets in
pooled investment vehicles (other than investment companies) that invest
primarily in securities of the types in which the Fund may invest directly. The
Fund generally expects that it may invest in other investment companies and/or
pooled investment vehicles either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its common shares or FundPreferred shares and/or Borrowings,
or during periods when there is a shortage of attractive securities of the types
in which the Fund may invest in directly available in the market. As an investor
in an investment company, the Fund will bear its ratable share of that
investment company's expenses, and would remain subject to payment of the Fund's
advisory and administrative fees with respect to assets so invested. Common
shareholders would therefore be subject to duplicative expenses to the extent
the Fund invests in other investment companies. Symphony will take expenses into
account when evaluating the investment merits of an investment in the investment
company relative to available securities of the types in which the Fund may
invest directly. In addition, the securities of other investment companies also
may be leveraged and therefore will be subject to the same leverage risks
described herein. The net asset value and market value of leveraged shares will
be more volatile and the yield to shareholders will tend to fluctuate more than
the yield generated by unleveraged shares.
The Fund will treat its investments in such investment companies as
investments in Senior Loans for all purposes, such as for purposes of
determining compliance with the requirement set forth above that at least 80% of
the Fund's Managed Assets be invested under normal market circumstances in
Senior Loans.
Lending of Portfolio Securities. The Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on a current basis
in an amount at least equal to the market value of the securities loaned by the
Fund. The Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned through payments from the
borrower, although such amounts received from the borrower would not be eligible
to be treated as tax-advantaged dividends. The Fund would also receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund may pay reasonable fees to persons unaffiliated with the
Fund for services in arranging these loans. The Fund would have the right to
call the loan and obtain the securities loaned at any time on notice of not more
than five Business Days. The Fund would not have the right to vote the
securities during the existence of the loan but would call the loan to permit
voting of the securities, if, in an Adviser's judgment, a material event
requiring a shareholder vote would otherwise occur before the loan was repaid.
In the event of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or recovering the
loaned securities and losses, including (a) possible decline in the value of the
collateral or in the value of the securities loaned during the
19
period while the Fund seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period, and
(c) expenses of enforcing its rights.
Portfolio Turnover. The Fund may engage in portfolio trading when
considered appropriate, but short-term trading will not be used as the primary
means of achieving the Fund's investment objective. Although the Fund cannot
accurately predict its annual portfolio turnover rate, it is not expected to
exceed 50% under normal circumstances. However, there are no limits on the rate
of portfolio turnover, and investments may be sold without regard to length of
time held when, in the opinion of Symphony, investment considerations warrant
such action. A higher portfolio turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses that are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to shareholders, will be
taxable as ordinary income.
USE OF LEVERAGE
The Fund intends to use leverage through the issuance of FundPreferred
Shares, for investment purposes. The Fund currently anticipates its use of
leverage to represent approximately 38% of the Fund's Managed Assets. In
addition to issuing FundPreferred shares, the Fund may make further use of
financial leverage through borrowing, including the issuance of commercial paper
or notes. The Fund employs financial leverage for the purpose of acquiring
additional investments. The amount of outstanding Borrowings and/or
FundPreferred shares may vary with prevailing market or economic conditions. The
timing and terms of any leverage transactions will be determined by the Fund's
Board of Trustees. Leverage entails special risks. See "Risk Factors -- Risks of
Investing in FundPreferred Shares -- Leverage Risk." The management fee paid to
the Advisers will be calculated on the basis of the Fund's Managed Assets (which
includes the proceeds of any financial leverage), so the fee will be higher when
leverage is used.
Because both Senior Loans and the Fund's FundPreferred shares and
Borrowings, if any, generally pay interest or dividends based on short-term
market interest rates, the Fund's investments in Senior Loans may potentially
offset the leverage risks borne by the Fund relating to the fluctuations on
common share income due to variations in the FundPreferred share dividend rate
and/or the interest rate on Borrowings, if any.
HEDGING TRANSACTIONS
The Fund may use derivatives or other transactions for the purpose of
hedging a portion of its portfolio holdings or in connection with the Fund's
anticipated use of leverage through its sale of FundPreferred shares or
Borrowings.
Portfolio Hedging Transactions. The Fund may use derivatives or other
transactions solely for purposes of hedging the portfolio's exposure to high
yield credit risk, foreign currency exchange rate risk and the risk of increases
in interest rates. The specific derivative instruments to be used, or other
transactions to be entered into, each for hedging purposes, may include the
purchase or sale of futures contracts on securities, credit-linked notes,
securities indices, other indices or other financial instruments; options on
futures contracts; exchange-traded and over-the-counter options on securities or
indices; index-linked securities; swaps; and currency exchange transactions.
Some, but not all, of the derivative instruments may be traded and listed on an
exchange. The positions in derivatives will be marked-to-market daily at the
closing price established on the relevant exchange or at a fair value. For a
complete discussion of these derivative securities, see the SAI.
There may be an imperfect correlation between changes in the value of the
Fund's portfolio holdings and hedging positions entered into by the Fund, which
may prevent the Fund from achieving the intended hedge or expose the Fund to
risk of loss. In addition, the Fund's success in using hedging instruments is
subject to Symphony's ability to predict correctly changes in the relationships
of such hedge instruments to the Fund's portfolio holdings or other factors, and
there can be no assurance that Symphony's judgment in this respect will be
correct. Consequently, the use of hedging transactions might result in a poorer
overall performance for the Fund, whether or not adjusted for risk, than if the
Fund had not hedged its portfolio holdings. In addition,
20
there can be no assurance that the Fund will enter into hedging or other
transactions at times or under circumstances in which it which it would be
advisable to do so. See "Risk Factors -- General Risks of the Fund -- Hedging
Risk."
Futures Contracts and Options on Futures Contracts. The Fund's use of
derivative instruments may include (i) U.S. Treasury security or U.S. Government
Agency security futures contracts and (ii) options on U.S. Treasury security or
U.S. Government Agency security futures contracts. All such instruments must be
traded and listed on an exchange. U.S. Treasury and U.S. Government Agency
futures contracts are standardized contracts for the future delivery of a U.S.
Treasury Bond or U.S. Treasury Note or a U.S. Government Agency security or
their equivalent at a future date at a price set at the time of the contract. An
option on a U.S. Treasury or U.S. Government Agency futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser of
the option the right, in return for the premium paid, to assume a position in a
U.S. Treasury or U.S. Government Agency futures contract at a specified exercise
price at any time on or before the expiration date of the option. Upon exercise
of an option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's future margin account, which represents the amount by
which the market price of the futures contract exceeds the exercise price of the
option on the futures contract.
The Fund may purchase and sell various other kinds of financial futures
contracts and options thereon. Futures contracts may be based on various debt
securities and securities indices (such as the Municipal Bond Index traded on
the Chicago Board of Trade). Such transactions involve a risk of loss or
depreciation due to unanticipated adverse changes in securities prices, which
may exceed the Fund's initial investment in these contracts. The Fund will only
purchase or sell futures contracts or related options in compliance with the
rules of the Commodity Futures Trading Commission. These transactions involve
transaction costs. There can be no assurance that the Fund's use of futures will
be advantageous to the Fund. Guidelines established by one or more NRSROs that
rate any FundPreferred shares issued by the Fund may limit use of these
transactions.
Credit-Linked Notes. The Fund may invest in credit-linked notes ("CLN")
for risk management purposes, including diversification. A CLN is a derivative
instrument that 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
obligation and interest rate risk, the buyer/seller of the CLN is subject to
counterparty risk. See "Risk Factors -- General Risks of the
Fund -- Counterparty Risk."
Swaps. Swap contracts may be purchased or sold to hedge against
fluctuations in securities prices, interest rates or market conditions, to
change the duration of the overall portfolio, or to mitigate default risk. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) to be exchanged or "swapped" between the
parties, which returns are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index.
Credit Default Swaps. The Fund may enter into credit default swap
contracts for risk management purposes, including diversification. When the Fund
is the buyer of a credit default swap contract, the Fund is entitled to receive
the par (or other agreed-upon) value of a referenced debt obligation from the
counterparty to the contract in the event of a default by a third party, such as
a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the Fund
would pay the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Fund would have spent the stream of payments and received no benefit from
the contract. When the Fund is the seller of a credit default swap contract, it
receives the stream of payments, but is obligated to pay upon default of the
referenced debt obligation. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total net assets, the Fund
would be subject to investment exposure on the notional amount of the swap. The
Fund will segregate assets in the form of cash and cash equivalents in an amount
equal to the aggregate market value of the credit default swaps of which it is
the seller, marked to market on a daily basis. These transactions involve
certain risks, including the risk that the seller may be unable to fulfill the
transaction.
21
Interest Rate Swaps. The Fund will enter into interest rate and total
return swaps only 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. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of fixed rate payments for floating rate payments). The Fund will
only enter into interest rate swaps on a net basis. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. The net amount
of the excess, if any, of the Fund's obligations over its entitlements will be
maintained in a segregated account by the Fund's custodian. The Fund will not
enter into any interest rate swap unless the claims-paying ability of the other
party thereto is considered to be investment grade by the Advisers. 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.
These instruments are traded in the over-the-counter market.
The Fund may use interest rate swaps for risk management purposes only and
not as a speculative investment and would typically use interest rate swaps to
shorten the average interest rate reset time of the Fund's holdings. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). The use of interest rate swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If Symphony is incorrect in its forecasts of market values, interest rates and
other applicable factors, the investment performance of the Fund would be
unfavorably affected.
Total Return Swaps. As stated above, the Fund will enter into total return
swaps only on a net basis. Total return swaps are contracts in which one party
agrees to make payments of the total return from the 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).
Currency Exchange Transactions. The Fund may enter into currency exchange
transactions to hedge the Fund's exposure to foreign currency exchange rate risk
in the event the Fund invests in non-U.S. dollar denominated securities of
non-U.S. issuers as described in this prospectus. The Fund's currency
transactions will be limited to portfolio hedging involving portfolio positions.
Portfolio hedging is the use of a forward contract with respect to a portfolio
security position denominated or quoted in a particular currency. A forward
contract is an agreement to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks, foreign
exchange dealers or broker-dealers, are not exchange-traded, and are usually for
less than one year, but may be renewed.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
Other Hedging Transactions. The Fund also may invest in relatively new
instruments without a significant trading history for purposes of hedging the
Fund's portfolio risks. See "Other Investment Policies and Techniques -- Hedging
Transactions" in the Fund's SAI for further information on hedging transactions.
Interest Rate Transactions. The Fund expects that the Fund's portfolio
investments in Senior Loans and other adjustable rate debt instruments will
serve as a hedge against the risk that common share net income and/or returns
may decrease due to rising market dividend or interest rates on FundPreferred
shares or Borrowings.
22
RISK FACTORS
The Fund is a diversified, closed-end management investment company
designed primarily as a long-term investment and not as a trading vehicle. The
Fund is not intended to be a complete investment program and, due to the
uncertainty inherent in all investments, there can be no assurance that the Fund
will achieve its investment objective. Risk is inherent in all investing.
Investing in any investment company security involves risk, including the risk
that you may receive little or no return on your investment or even 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
FundPreferred shares.
RISKS OF INVESTING IN FUNDPREFERRED SHARES
Interest Rate Risk. The Fund issues FundPreferred shares, which pay
dividends based on short-term interest rates. If short-term interest rates rise,
dividend rates on the FundPreferred shares may rise so that the amount of
dividends paid to holders of FundPreferred shares exceeds the income from the
Fund's portfolio securities. While the Fund intends to manage this risk through
its portfolio investments in floating rate senior secured loans, there is no
guarantee these strategies will be implemented or will be successful in reducing
or eliminating this interest rate risk. In addition, rising market interest
rates could negatively impact the value of the Fund's investment portfolio,
reducing the amount of assets serving as asset coverage for the FundPreferred
shares.
Auction Risk. You may not be able to sell your FundPreferred shares at an
auction if the auction fails; that is, if there are more FundPreferred shares
offered for sale than there are buyers for those shares. Also, if you place hold
orders (orders to retain FundPreferred shares) at an auction only at a specified
rate, and that bid rate exceeds the rate set at the auction, you will not retain
your FundPreferred shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. See "Description of
FundPreferred Shares" and "The Auction -- Auction Procedures."
Secondary Market Risk. A secondary market may not exist. To the extent
that a secondary market does exist, and you try to sell your FundPreferred
shares between auctions, you may not be able to sell any or all of your shares,
or you may not be able to sell them for $25,000 per share or $25,000 per share
plus accumulated dividends. If the Fund has designated a special dividend period
(a rate period other than seven (7) days), changes in interest rates could
affect the price you would receive if you sold your shares in the secondary
market. Broker-dealers that maintain a secondary trading market for
FundPreferred shares are not required to maintain this market, and the Fund is
not required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. FundPreferred shares are not
registered on a stock exchange or the Nasdaq stock market. If you sell your
FundPreferred shares to a broker-dealer between auctions, you may receive less
than the price you paid for them, especially when market interest rates have
risen since the last auction.
Ratings and Asset Coverage Risk. While Moody's and S&P assign ratings of
"Aaa" and "AAA," respectively, to FundPreferred shares, the ratings do not
eliminate or necessarily mitigate the risks of investing in FundPreferred
shares. A rating agency could downgrade FundPreferred shares, which may make
your shares less liquid at an auction or in the secondary market, though
probably with higher resulting dividend rates. If a rating agency downgrades the
rating assigned to FundPreferred shares, the Fund will alter its portfolio or
redeem FundPreferred shares. The Fund may voluntarily redeem FundPreferred
shares under certain circumstances. See "Description of FundPreferred
Shares -- Asset Maintenance" for a description of the asset maintenance tests
the Fund must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your
FundPreferred shares investment or the income from that investment will be worth
less in the future. As inflation occurs, the real value of the FundPreferred
shares and distributions declines. In an inflationary period, however, it is
expected that, through the auction process, FundPreferred shares dividend rates
would
23
increase, tending to offset this risk. For additional general risks that
inflation may pose to investors in the Fund see "Risk Factors -- General Risks
of the Fund -- Inflation Risk."
Decline in Net Asset Value Risk. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, please see "-- General
Risks of the Fund" below.
Payment Restrictions. The Fund is prohibited from declaring, paying or
making any dividends or distributions on FundPreferred shares unless it
satisfies certain conditions. See "Description of FundPreferred
Shares -- Restrictions on Dividend, Redemption and Other Payments." The Fund is
also prohibited from declaring, paying or making any dividends or distributions
on common shares unless it satisfies certain conditions. These prohibitions on
the payment of dividends or distributions might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund intends to redeem FundPreferred shares if necessary
to comply with the asset coverage requirements, there can be no assurance that
such redemptions can be effected in time to permit the Fund to distribute its
income as required to maintain its qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Federal Income Tax Matters -- Federal Income Tax Treatment of the Fund."
Leverage Risk. The Fund uses financial leverage in an amount currently
anticipated to represent approximately 38% of its total assets (including the
proceeds from such financial leverage). In addition to issuing FundPreferred
shares, the Fund will make further use of financial leverage through borrowing,
including the issuance of commercial paper or notes. In addition, the Fund may
also borrow funds (a) in connection with a loan made by a bank or other party
that is privately arranged and not intended to be publicly distributed or (b) in
an amount equal to up to 5% of its total assets for temporary purposes only.
If the Fund issues any senior securities representing indebtedness (as
defined in the 1940 Act) under the requirements of the 1940 Act, the value of
the Fund's total assets, less all liabilities and indebtedness of the Fund not
represented by such senior securities, must be at least equal, immediately after
any such senior securities representing indebtedness, to 300% of the aggregate
value of such senior securities. Upon the issuance of FundPreferred shares, the
value of the Fund's total assets, less all liabilities and indebtedness of the
Fund not represented by senior securities must be at least equal, immediately
after the issuance of the FundPreferred shares, to 200% of the aggregate value
of any senior securities and the FundPreferred shares.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do if it issues any such commercial paper or notes),
asset coverage or portfolio composition provisions in addition to and more
stringent than those required by the 1940 Act may be imposed in connection with
the issuance of such a rating. In addition, restrictions may be imposed on
certain investment practices in which the Fund may otherwise engage. Any lender
with respect to borrowings by the Fund may require additional asset coverage and
portfolio composition provisions as well as restrictions on the Fund's
investment practices.
The money borrowed pursuant to any Borrowings may constitute a substantial
lien and burden on the FundPreferred shares by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The Fund may not be permitted to declare dividends or other
distributions, including with respect to FundPreferred shares, or purchase or
redeem shares, including FundPreferred shares, unless (i) at the time thereof
the Fund meets certain asset coverage requirements and (ii) there is no event of
default under any Borrowings, that is continuing. See "Description of
FundPreferred Shares -- Restrictions on Dividend, Redemption and Other
Payments." In the event of a default under any Borrowings, the lenders may have
the right to cause a liquidation of the collateral (i.e., sell portfolio
securities) and if any such default is not cured, the lenders may be able to
control the liquidation as well.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties.
Because the fee paid to the Advisers will be calculated on the basis of
Managed Assets, the fee will be higher when leverage is utilized, giving the
Advisers an incentive to utilize leverage.
24
GENERAL RISKS OF THE FUND
Limited Operating History. The Fund is a recently organized, diversified,
closed-end management investment company with a limited history.
Investment and Market Risk. An investment in the Fund is subject to
investment risk, including the possible loss of the entire principal amount that
you invest. An investment in common shares and FundPreferred shares represents
an indirect investment in the securities owned by the Fund, most of which are
not traded on a national securities exchange, Nasdaq or in the over-the-counter
markets. The value of these securities, like other market investments, may move
up or down, sometimes rapidly and unpredictably.
Below Investment Grade Risk. The Fund may purchase Senior Loans and other
debt instruments that are rated below investment grade or that are unrated but
judged to be of comparable quality by Symphony. No more than 10% of the Fund's
Managed Assets may be invested in securities rated CCC+ or Caa or below by S&P,
Moody's or Fitch or that are unrated but judged to be of comparable quality.
Securities of below investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal, and are commonly referred to as "junk bonds."
Issuers of lower grade securities may be highly leveraged and may not have
available to them more traditional methods of financing. The prices of these
lower grade securities are typically more sensitive to negative developments,
such as a decline in the issuer's revenues or a general economic downturn, than
are the prices of higher grade securities. The secondary market for lower grade
securities, including some Senior Loans, 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. There are
fewer dealers in the market for lower grade securities than for investment grade
obligations. The prices quoted by different dealers for lower grade securities
may vary significantly and the spread between the bid and ask price for such
securities is generally much larger than for higher quality instruments. Under
adverse market or economic conditions, the secondary market for lower grade
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.
Non-U.S. Issuer Risk. The Fund may invest up to 20% of its Managed Assets
in Senior Loans and other debt instruments of non-U.S. issuers that are U.S.
dollar or non-U.S. dollar denominated. Initially, the Fund does not intend to
invest in non-U.S. dollar denominated securities. The Fund's Managed Assets to
be invested in debt securities of non-U.S. issuers may include debt securities
of issuers located, or conducting their business in, emerging markets countries.
Initially, the Fund does not intend to invest in securities of emerging markets
issuers. Investments in securities of non-U.S. issuers involve special risks not
presented by investments in securities of U.S. issuers, including the following:
(i) less publicly available information about non-U.S. issuers or markets due to
less rigorous disclosure or accounting standards or regulatory practices; (ii)
many non-U.S. markets are smaller, less liquid and more volatile, meaning that,
in a changing market, Symphony may not be able to sell the Fund's portfolio
securities at times, in amounts or at prices it considers reasonable; (iii)
potential adverse effects of fluctuations in currency exchange rates or controls
on the value of the Fund's investments; (iv) the economies of non-U.S. countries
may grow at slower rates than expected or may experience a downturn or
recession; (v) the impact of economic, political, social or diplomatic events;
(vi) possible seizure, expropriation or nationalization of the company or its
assets; (vii) certain non-U.S. countries may impose restrictions on the ability
of non-U.S. issuers to make payments of principal and/or interest to investors
located outside the U.S., due to blockage of foreign currency exchanges or
otherwise; and (viii) withholding and other non-U.S. taxes may decrease the
Fund's return. These risks are more pronounced to the extent that the Fund
invests a significant amount of its assets in companies located in one region
and to the extent that the Fund invests in securities of issuers in emerging
markets. Although the Fund may hedge its exposure to certain of these risks,
including the foreign currency exchange rate risk, there
25
can be no assurance that the Fund will enter into hedging transactions at any
time or at times or under circumstances in which it might be advisable to do so.
Economies and social and political climates in individual countries may
differ unfavorably from the United States. 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 positions. Many countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Unanticipated economic,
political and 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. The Fund may invest up to 20% of its Managed Assets in
securities of non-U.S. issuers that are non-U.S. dollar denominated. However,
initially the Fund does not intend to invest in such securities. Investments by
the Fund in non-U.S.-dollar denominated securities will be subject to currency
risk. Currency risk is the risk that fluctuations in the exchange rates between
the U.S. dollar and non-U.S. currencies may negatively affect an investment. The
value of securities denominated in non-U.S. currencies may fluctuate based on
changes in the value of those currencies relative to the U.S. dollar, and a
decline in applicable foreign exchange rates could reduce the value of such
securities held by the Fund. The values of non-U.S. investments and the
investment income derived from them also may be affected unfavorably by changes
in currency exchange control regulations. In addition, although a portion of the
Fund's investment income may be received or realized in non-U.S. currencies, the
Fund will be required to compute and distribute its income in U.S. dollars. This
means that if the exchange rate for any such non-U.S. currency declines after
the Fund's income has been earned and translated into U.S. dollars but before
the Fund receives payment, the Fund could be required to liquidate portfolio
securities to make such distributions.
Illiquid Securities Risk. The Fund may invest up to 50% of its Managed
Assets in securities and other instruments that, at the time of investment, are
illiquid. Illiquid securities are securities that are not readily marketable and
may include some restricted securities, which are securities that may not be
resold to the public without an effective registration statement under the
Securities Act or, if they are unregistered, may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration. Illiquid
securities involve the risk that the securities will not be able to be sold at
the time desired by the Fund or at prices approximating the value at which the
Fund is carrying the securities on its books.
Interest Rate Risk. Interest rate risk is the risk that fixed-income
securities will decline in value because of changes in market interest rates.
When market interest rates rise, the market value of such securities generally
will fall. The Fund's investment in such securities means that the net asset
value and market price of Common Shares will tend to decline if market interest
rates rise. Market interest rates in the U.S. and certain other countries in
which the Fund may invest currently are near historically low levels. Because
the Fund will invest at least 80% of its Managed Assets in Senior Loans and will
maintain an average portfolio duration of one year or less, the Fund is intended
to have a relatively low level of interest rate risk. However, because interest
rates on most Senior Loans and other adjustable rate instruments typically only
reset periodically (e.g., monthly or quarterly), changes in prevailing interest
rates (and particularly sudden and significant changes) can be expected to cause
some fluctuation in the market value of these securities, including declines in
market value as interest rates rise.
Regulatory Risk. 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.
Hedging Risk. The Fund may use derivatives or other transactions for
purposes of hedging the portfolio's exposure to high yield credit risk, foreign
currency exchange rate risk and the risk of increases in interest rates that
could result in poorer overall performance for the Fund. There may be an
imperfect correlation between the Fund's portfolio holdings and such
derivatives, which may prevent the Fund from achieving the intended consequences
of the applicable transaction or expose the Fund to risk of loss. Further, the
Fund's use of derivatives or other transactions to reduce risk involves costs
and will be subject to
26
Symphony's ability to predict correctly changes in the relationships of such
hedging instruments to the Fund's portfolio holdings or other factors. No
assurance can be given that Symphony's judgment in this respect will be correct.
Consequently, the use of hedging transactions might result in a poorer overall
performance for the Fund, whether or not adjusted for risk, than if the Fund had
not hedged its portfolio holdings. In addition, no assurance can be given that
the Fund will enter into hedging transactions at times or under circumstances in
which it would be advisable to do so.
There are several risks associated with the use of futures contracts and
options on futures contracts. A purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract. 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 speculative 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 Symphony's
ability to predict correctly changes in interest rate relationships or other
factors. See "Hedging Transactions" and "Other Investment Policies and
Techniques -- Hedging Transactions" in the Fund's SAI. The Fund will use
derivatives or other transactions described above for purposes of hedging the
Fund's portfolio risks.
Counterparty Risk. The Fund may be subject to credit risk with respect to
the counterparties to certain derivative agreements entered into by the Fund. If
a counterparty becomes bankrupt or otherwise fails to perform its obligations
under a derivative contract due to financial difficulties, the Fund may
experience significant delays in obtaining any recovery under the derivative
contract in a bankruptcy or other reorganization proceeding. The Fund may obtain
only a limited recovery or may obtain no recovery in such circumstances.
Repurchase Agreement Risk. With respect to repurchase agreements, if the
party agreeing to repurchase specific securities should default, the Fund may
seek to sell the securities which it holds. This could involve transaction costs
or delays in addition to a loss on the securities if their value should fall
below their repurchase price. Repurchase agreements maturing in more than seven
days are considered to be illiquid securities.
Market Disruption Risk. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks (including the terrorist attacks
in the U.S. on September 11, 2001), war and other geopolitical events. The Fund
cannot predict the effects of similar events in the future on the U.S. economy.
Lower rated securities tend to be more volatile than higher rated securities so
that these events and any actions resulting from them may have a greater impact
on the prices and volatility of lower rated securities than on higher rated
securities.
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 of the common shares
and distributions can decline. In addition, during any periods of rising
inflation, FundPreferred share dividend rates and interest rates on Borrowings
would likely increase, which, without a corresponding increase in the interest
rates on investments in the Fund's portfolio, would reduce returns to common
shareholders. Inflation risk is mitigated to a certain degree by the Fund's
investments in Senior Loans and other adjustable rate debt instruments because
increases in inflation have historically been accompanied by increases in the
adjustable rates of interest of such securities.
Deflation Risk. Deflation risk is the risk that prices throughout the
economy decline over time, which may have an adverse effect on the market
valuation of companies, their assets and revenues, and the valuation of real
estate. In addition, deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer default more likely, which may
result in a decline in the value of the Fund's portfolio.
27
Certain Affiliations. Certain broker-dealers may be considered to be
affiliated persons of the Fund, NIAC, Symphony and/or Nuveen. Absent an
exemption from the Securities and Exchange Commission or other regulatory
relief, the Fund is generally precluded from effecting certain principal
transactions with affiliated brokers, and its ability to purchase securities
being underwritten by an affiliated broker or a syndicate including an
affiliated broker, or to utilize affiliated brokers for agency transactions, is
subject to restrictions. This could limit the Fund's ability to engage in
securities transactions, purchase certain Senior Loans and take advantage of
market opportunities. In addition, unless and until the underwriting syndicate
is broken in connection with the initial public offering of the common shares,
the Fund will be precluded from effecting principal transactions with brokers
who are members of the syndicate. See also "Management of the Fund -- Investment
Adviser and Subadviser."
Senior Loan Risks. Borrower Credit Risk. Senior Loans and other
adjustable rate debt instruments 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. Although under normal circumstances
at least 65% of the Fund's Managed Assets will be invested in Senior Loans that
are secured by specific collateral, there can be no assurance that the
liquidation of any collateral securing a Senior Loan would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of 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. The collateral securing a Senior Loan 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 such 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 would negatively affect the Fund's performance.
In evaluating the creditworthiness of Borrowers, Symphony may consider, and
may rely in part, on analyses performed by others. Borrowers may have
outstanding debt obligations that are rated below investment grade by a NRSRO.
Many of the Senior Loans in the Fund will have been assigned ratings below
investment grade quality. Because of the protective features of Senior Loans,
Symphony believes that Senior Loans tend to have more favorable loss recovery
rates as compared to more junior types of below investment grade debt
obligations. Symphony does not view ratings as the determinative factor in its
investment decisions and relies more upon its credit analysis abilities than
upon ratings.
The Fund is subject to the same inherent risks described above with respect
to issuers of other debt instruments in which the Fund may invest, although it
is not expected that these debt instruments will be secured by collateral.
Senior Loan Interest Rate Risk. When interest rates decline, the value of
a fund invested in fixed rate obligations can be expected to rise. Conversely,
when interest rates rise, the value of a fund invested in fixed rate obligations
can be expected to decline. Although changes in prevailing interest rates can be
expected to cause some fluctuations in the value of Senior Loans (due to the
fact that adjustable rates on Senior Loans only reset periodically), the value
of Senior Loans and other adjustable rate debt instruments is substantially less
sensitive to changes in market interest rates than fixed rate instruments. As a
result, the Advisers expect the Fund's policy of investing at least 80% of its
Managed Assets in Senior Loans will make the Fund less volatile and its net
asset value less sensitive to changes in market interest rates than if the Fund
invested exclusively in fixed rate obligations. Similarly, because interest
rates on most Senior Loans and other adjustable rate instruments typically only
reset periodically (e.g., monthly or quarterly), a sudden and significant
increase in market interest rates may cause a decline in the value of these
investments and in the Fund's net asset value. Other factors (including, but not
limited to, rating downgrades, credit deterioration, a large downward movement
in stock prices, a disparity in supply and demand of certain Senior Loans and
other securities or market conditions that reduce liquidity) can reduce the
value of Senior Loans and other debt obligations, impairing the Fund's net asset
value.
28
Risks in Senior Loan Valuation. The Fund uses an independent pricing
service to value most Senior Loans and other debt securities at their market
value or at a fair value determined by the independent pricing service. The Fund
will use the fair value method to value loans or other securities if the
independent pricing service is unable to provide a market or fair value for them
or if the market or fair value provided by the independent pricing service is
deemed unreliable, or if events occurring after the close of a securities market
and before the Fund values its Managed Assets would materially affect net asset
value. A security 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. Because non-U.S. securities may trade on days
when common shares are not priced, net asset value can change at times when
common shares cannot be sold.
Agent Risk. A financial institution's employment as an Agent under a
Senior Loan might be terminated in the event that it fails to observe a
requisite standard of care or becomes insolvent. A successor Agent would
generally be appointed to replace the terminated Agent, and assets held by the
Agent under the loan agreement would likely remain available to holders of such
indebtedness. However, if assets held by the terminated 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 loan participation and could suffer a loss of principal and/or
interest. In situations involving other interposed financial institutions (e.g.,
an insurance company or government agency) similar risks may arise.
Participation Risk. The Fund also may purchase a participation interest in
a Senior Loan and by doing so acquire some or all of the interest of a bank or
other lending institution in a Senior Loan to a Borrower. A participation
typically will result in the Fund having a contractual relationship only with
the Lender, not the Borrower. As a result, the Fund assumes the credit risk of
the Lender selling the participation in addition to the credit risk of the
Borrower. By purchasing a participation, the Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the participation and only upon receipt by the Lender of the
payments from the Borrower. In the event of insolvency or bankruptcy of the
Lender selling the participation, the Fund may be treated as a general creditor
of the Lender and may not have a senior claim to the Lender's interest in the
Senior Loan. If the Fund only acquires a participation in the loan made by a
third party, the Fund may not be able to control the exercise of any remedies
that the Lender would have under the Senior Loan. Such third party participation
arrangements are designed to give Senior Loan investors preferential treatment
over high yield investors in the event of a deterioration in the credit quality
of the issuer. Even when these arrangements exist, however, there can be no
assurance that the principal and interest owed on the Senior Loan will be repaid
in full.
Prepayment Risk. During periods of declining interest rates or for other
purposes, Borrowers may exercise their option to prepay principal earlier than
scheduled, forcing the Fund to reinvest in lower yielding securities. This is
known as call or prepayment risk. In addition, below investment grade securities
frequently have call features that allow an issuer to redeem a security at dates
prior to its stated maturity at a specified price (typically greater than par)
only if certain prescribed conditions are met (commonly referred to as call
protection). An issuer may redeem a lower grade security if, for example, the
issuer can refinance the debt at a lower cost due to declining interest rates or
an improvement in the credit standing of the issuer. Senior Loans typically have
no such call protection. For premium bonds (bonds acquired at prices that exceed
their par or principal value) purchased by the Fund, prepayment risk may be
increased.
Other Risks Associated with Senior Loans. Many Senior Loans in which the
Fund will invest may not be rated by a NRSRO, 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. In addition, the amount of
public information available with respect to Senior Loans generally may be less
extensive than that available for registered or exchange listed securities.
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. No active trading market may
exist for some Senior Loans and some Senior Loans may be subject to restrictions
on resale. A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods, which may impair the
ability to realize full value and thus cause a
29
material decline in the Fund's net asset value. During periods of limited supply
and liquidity of Senior Loans, the Fund's yield may be lower.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Advisers. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
INVESTMENT ADVISER AND SUBADVISER
NIAC is responsible for the Fund's overall investment strategy and its
implementation, including portfolio allocations, and the use of leverage and
hedging. NIAC also is responsible for the ongoing monitoring of Symphony,
managing the Fund's business affairs and providing certain clerical, bookkeeping
and other administrative services.
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, a registered
investment adviser, is a wholly owned subsidiary of Nuveen Investments, Inc.
Founded in 1898, Nuveen Investments, Inc. and its affiliates had approximately
$100.9 billion of assets under management as of March 31, 2004. Nuveen
Investments, Inc. is a publicly-traded company and a majority-owned subsidiary
of The St. Paul Travelers Companies, Inc. ("St. Paul Travelers"), a
publicly-traded company that is principally engaged in providing
property-liability insurance through subsidiaries.
Symphony, 555 California Street, Suite 2975, San Francisco, CA 94104, is
the Fund's subadviser responsible for managing the Fund's Managed Assets.
Symphony specializes in the management of market neutral equity and debt
strategies and Senior Loan and other debt portfolios. Symphony, a registered
investment adviser, commenced operations in 1994 and had approximately $3.8
billion in assets under management as of March 31, 2004. Symphony is an indirect
wholly owned subsidiary of Nuveen.
Gunther Stein and Lenny Mason are the portfolio managers at Symphony
responsible for investing the Fund's Managed Assets. Mr. Stein is the Director
of Fixed Income Strategies of Symphony and has been lead portfolio manager for
high yield strategies at Symphony since 1999. He also is a Vice President of
NIAC. Prior to joining Symphony in 1999, Mr. Stein was a high yield portfolio
manager at Wells Fargo. Mr. Mason is a fixed income portfolio manager at
Symphony. He also is a Vice President of NIAC. Prior to joining Symphony in
2001, Mr. Mason was a Managing Director of FleetBoston's Technology and
Communications Group. Mr. Stein and Mr. Mason also are co-portfolio managers of
other closed-end funds sponsored by Nuveen.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between NIAC and the Fund,
the Fund has agreed to pay an annual management fee for the services and
facilities provided by NIAC, payable on a monthly basis, according to the
following schedule:
MANAGEMENT
AVERAGE DAILY MANAGED ASSETS FEE
---------------------------- ----------
Up to $500 million.......................................... .8500%
$500 million to $1.0 billion................................ .8250%
$1.0 billion to $1.5 billion................................ .8000%
$1.5 billion to $2.0 billion................................ .7750%
$2.0 billion and over....................................... .7500%
30
Pursuant to an investment subadvisory agreement between NIAC and Symphony,
Symphony will receive from NIAC a management fee equal to the portion specified
below of the management fee payable by the Fund to NIAC (net of the
reimbursements described below), payable on a monthly basis:
PERCENTAGE OF NET
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
---------------------------- -----------------
Up to $125 million.......................................... 50.0%
$125 million to $150 million................................ 47.5%
$150 million to $175 million................................ 45.0%
$175 million to $200 million................................ 42.5%
$200 million and over....................................... 40.0%
In addition to the fee of NIAC, the Fund pays all other costs and expenses
of its operations, including compensation of its trustees (other than those
affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of issuing any FundPreferred shares, expenses associated with
any Borrowings, expenses of preparing, printing and distributing shareholder
reports, notices, proxy statements and reports to governmental agencies, and
taxes, if any. All fees and expenses are accrued daily and deducted before
payment of dividends to investors.
For the first eight full years of the Fund's operation, the Advisers have
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
PERCENTAGE REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF
MARCH 31, MANAGED ASSETS)
----------- ---------------------
2004(1)..................................................... .32%
2005........................................................ .32%
2006........................................................ .32%
2007........................................................ .32%
2008........................................................ .32%
2009........................................................ .32%
2010........................................................ .24%
2011........................................................ .16%
2012........................................................ .08%
------------
(1) From the commencement of operations.
The Advisers have not agreed to reimburse the Fund for any portion of its
fees and expenses beyond March 31, 2012.
DESCRIPTION OF FUNDPREFERRED SHARES
The following is a brief description of the terms of FundPreferred shares.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the more detailed description of FundPreferred
shares in the Fund's Statement Establishing and Fixing the Rights and
Preferences of FundPreferred Shares (the "Statement") a form of which is
attached as Appendix A to the SAI. Capitalized terms not otherwise defined in
the prospectus shall have the same meaning as defined in the Statement.
GENERAL
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares, par value $0.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees without the approval
of common shareholders. The Statement currently authorizes the issuance of
31
FundPreferred shares as follows: 4,000, 4,000, 4,000 and 4,000 FundPreferred
Shares Series M, Series T, Series W and Series F, respectively. The
FundPreferred shares have a liquidation preference of $25,000 per share, plus
all accumulated but unpaid dividends (whether or not earned or declared) to the
date of final distribution. The FundPreferred shares when issued and sold
through this Offering (i) will be fully paid and, subject to matters discussed
in "Certain Provisions in the Declaration of Trust," non-assessable, (ii) will
not be convertible into common shares or other capital stock of the Fund, (iii)
will have no preemptive rights, and (iv) will not be subject to any sinking
fund. The FundPreferred shares will be subject to optional and mandatory
redemption as described below under "-- Redemption."
Holders of FundPreferred shares will not receive certificates representing
their ownership interest in such shares. DTC will initially act as Securities
Depository for the Agent Members with respect to the FundPreferred shares.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent will act as the transfer agent,
registrar, and paying agent for the FundPreferred shares. Furthermore, the
Auction Agent will send notices to holders of FundPreferred shares of any
meeting at which holders of FundPreferred shares have the right to vote. See
"-- Voting Rights" below. However, the Auction Agent generally will serve merely
as the agent of the Fund, acting in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any share of FundPreferred
shares, so long as the Fund is current in the payment of dividends on the
FundPreferred shares and on any other capital shares of the Fund ranking on a
parity with the FundPreferred shares with respect to the payment of dividends or
upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
General. Holders of FundPreferred shares will be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends on their shares, at the Applicable
Rate determined as set forth below under "-- Determination of Dividend Rate,"
payable on the respective dates set forth below. Dividends so declared and
payable shall be paid to the extent permitted under the Code, and to the extent
available and in preference to and priority over any dividend declared and
payable on the common shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
dividends. The Fund does not intend to establish any reserves for the payment of
dividends.
All moneys paid to the Paying Agent for the payment of dividends shall be
held in trust for the payment of such dividends to the Holders. Each dividend
will be paid by the Paying Agent to the Holders as their names appear on the
share ledger or share records of the Fund, which Holder is expected to be the
nominee of the Securities Depository. The Securities Depository will credit the
accounts of the Agent Members of the beneficial owners in accordance with the
Securities Depository's normal procedures. The Securities Depository's current
procedures provide for it to distribute dividends in same-day funds to Agent
Members who are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. The Agent Member of a beneficial owner will be
responsible for holding or disbursing such payments on the applicable Dividend
Payment Date to such beneficial owner in accordance with the instructions of
such beneficial owner.
Dividends in arrears for any past Dividend Period may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
Holders as their names appear on the share ledger or share records of the Fund
on such date, not exceeding 15 days preceding the payment date thereof, as may
be fixed by the Board of Trustees. Any dividend payment shall first be credited
against the earliest accumulated but unpaid dividends. No interest will be
payable in respect of any dividend payment or payments which may be in arrears.
See "-- Default Period" below.
The amount of dividends per share payable (if declared) on each Dividend
Payment Date of each Dividend Period of less than one year (or in respect of
dividends on another date in connection with a redemption during such Dividend
Period) shall be computed by multiplying the Applicable Rate (or the
32
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Dividend Period of one year or more,
the amount of dividends per share payable on any Dividend Payment Date (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of twelve
30-day months.
Subject to the foregoing, and any requirements of Massachusetts law, to the
extent that the Fund's investment company taxable income for any taxable year
exceeds any current or accumulated dividends on the FundPreferred shares, the
Fund intends to distribute such excess investment company taxable income to the
holders of the common shares. The term "investment company taxable income," as
it is defined in the Code, includes interest, dividends, net short-term capital
gains and other income received or accrued less the advisory fee, bank custodian
charges, taxes (except capital gains taxes) and other expenses properly
chargeable against income, but generally does not include net capital gain
(defined as the excess of net long-term capital gains over net short-term
capital losses and capital loss carryovers from prior periods), dividends paid
in shares of stock, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. The Fund also intends to
distribute any realized net capital gain annually to the holders of the common
shares (subject to the prior rights of the holders of the FundPreferred shares)
subject to the foregoing and any requirements of Massachusetts law. The Fund
will designate distributions made with respect to FundPreferred shares as
capital gain distributions in proportion to the FundPreferred shares' share of
total dividends paid by the Fund during the year. See "Federal Income Tax
Matters -- Federal Income Tax Treatment of Holders of FundPreferred Shares."
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e., the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date are set forth
on the inside cover page of the prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction.
The initial Dividend Period for the FundPreferred shares shall be , ,
and days for FundPreferred Shares Series M, Series T, Series W, and Series
F, respectively. Dividend Periods after the initial Dividend Period shall either
be Standard Dividend Periods or, subject to certain conditions and with notice
to Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient Clearing
Bids exist at the Auction in respect of such Special Dividend Period (that is,
in general, the number of shares subject to Buy Orders by Potential Holders is
at least equal to the number of shares subject to Sell Orders by Existing
Holders).
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of less than 30 days, Dividend Payment Dates shall occur on the
first Business Day following such Dividend Period and, if greater than 30 days,
then on a monthly basis on the first Business Day of each month within such
Dividend Period and on the Business Day following the last day of such Dividend
Period. Dividends will be paid through the Securities Depository on each
Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Rate. The Maximum
Rate will be the higher of the Applicable Percentage of the Reference Rate, or
the Applicable Spread plus the Reference Rate. The Reference Rate will be the
applicable LIBOR Rate (as defined below) (for a Dividend Period of fewer than
365 days) or the Treasury Index Rate (as defined below) (for a Dividend Period
of 365 days or more). The Applicable Percentage and Applicable Spread for any
Standard Dividend Period will generally be determined based on the credit
ratings assigned to the FundPreferred shares by Moody's and S&P on the auction
date for such period . If Moody's
33
and/or S&P shall not make such rating available, the rate shall be determined by
reference to equivalent ratings issued by any Other Rating Agency.
APPLICABLE APPLICABLE
MOODY'S CREDIT RATING S&P CREDIT RATING PERCENTAGE SPREAD
--------------------- ----------------- ---------- ----------
Aaa AAA 125% 125 bps
The "LIBOR Rate" is the applicable London Inter-Bank Offered Rate for
deposits in U.S. dollars for the period most closely approximating the
applicable dividend period for a series of FundPreferred shares.
The "Treasury Index Rate" is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for a series of FundPreferred shares.
Assuming the Fund maintains an Aaa/AAA rating on the FundPreferred shares,
the practical effect of the different methods used to calculate the Maximum 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 Board of Trustees may amend the Maximum 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 Rate shown
without the consent of the holders of FundPreferred shares, including each
series, or any shareholder of the Fund, but only with confirmation from each
Rating Agency then rating the FundPreferred shares that such action will not
impair such agency's then-current rating of the FundPreferred shares, and after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund could meet the FundPreferred Shares Basic Maintenance
Amount test discussed below under "-- Asset Maintenance."
The Maximum Rate for the FundPreferred shares will apply automatically
following an Auction for such shares in which Sufficient Clearing Bids have not
been made (other than because all shares of FundPreferred shares were subject to
Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for circumstances in which
the Dividend Rate is the Default Rate, as described below).
The All Hold Rate will apply automatically following an Auction in which
all of the outstanding shares are subject to (or are deemed to be subject to)
Submitted Hold Orders. The All Hold Rate is 80% of the applicable Reference
Rate.
Prior to each Auction, Broker-Dealers will notify Holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of the FundPreferred shares; provided, however, that no such
designation is necessary for a Standard Dividend Period and that any designation
of a Special Dividend Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in the timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, the FundPreferred shares shall have been cured as set forth under
"-- Default Period," (iii) Sufficient Clearing Bids shall have existed in an
Auction held on the Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Fund
34
shall have mailed a notice of redemption with respect to any shares, as
described under "-- Redemption" below, the Redemption Price with respect to such
shares shall have been deposited with the Paying Agent, and (v) in the case of
the designation of a Special Dividend Period, the Fund has confirmed that, as of
the Auction Date next preceding the first day of such Special Dividend Period,
it satisfies the FundPreferred Shares Basic Maintenance Amount (as defined
below) and has consulted with the Broker-Dealers and has provided notice and
otherwise complied with any Rating Agency Guidelines.
If the Fund proposes to designate any Special Dividend Period, not fewer
than seven (7) (or two (2) Business Days in the event the duration of the
Dividend Period prior to such Special Dividend Period is fewer than eight (8)
days) nor more than 30 days prior to the first day of such Special Dividend
Period, notice shall be (i) made by press release and (ii) communicated by the
Fund by telephonic or other means to the Auction Agent and confirmed in writing
promptly thereafter. Each such notice shall state (A) that the Fund proposes to
exercise its option to designate a succeeding Special Dividend Period,
specifying the first and last days thereof and (B) that the Fund will, by 3:00
p.m. New York City time, on the second Business Day next preceding the first day
of such Special Dividend Period, notify the Auction Agent, who will promptly
notify the Broker-Dealers, of either (x) its determination, subject to certain
conditions, to proceed with such Special Dividend Period, subject to the terms
of any Specific Redemption Provisions, or (y) its determination not to proceed
with such Special Dividend Period in which latter event the succeeding Dividend
Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as a Special Dividend Period, specifying
the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the required confirmation described above by 3:00 p.m., New York City time,
on the second Business Day next preceding the first day of such proposed Special
Dividend Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Dividend Period.
Default Period. Subject to cure provisions, a "Default Period" with
respect to a particular series will commence on any date the Fund fails to
deposit irrevocably in trust in same-day funds, with the Paying Agent by 12:00
noon, New York City time, (A) the full amount of any declared dividend on that
series payable on the Dividend Payment Date (a "Dividend Default") or (B) the
full amount of any redemption price (the "Redemption Price") payable on the date
fixed for redemption (the "Redemption Date") (a "Redemption Default") and
together with a Dividend Default, hereinafter referred to as "Default"). Subject
to cure provisions, a Default Period with respect to a Dividend Default or a
Redemption Default shall end on the Business Day on which, by 12:00 noon, New
York City time, all unpaid dividends and any unpaid Redemption Price shall have
been deposited irrevocably in trust in same-day funds with the Paying Agent. In
the case of a Dividend Default, the Applicable Rate for each Dividend Period
commencing during a Default Period will be equal to the Default Rate, and each
subsequent Dividend Period commencing after the beginning of a Default Period
shall be a Standard Dividend Period; provided, however, that the commencement of
a Default Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period with respect to a
Dividend Default applicable to that series of FundPreferred shares. No Default
Period with respect to a Dividend Default or Redemption Default shall be deemed
to commence if the amount of any dividend or any Redemption Price due (if such
default is not solely due to the willful failure of the Fund) is deposited
irrevocably in trust, in same-day funds with the Paying Agent by 12:00 noon, New
York City time within three Business Days after the applicable Dividend Payment
Date or Redemption
35
Date, together with an amount equal to the Default Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365 for each series. The Default Rate shall be equal to the Reference
Rate multiplied by three (3).
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect
to the FundPreferred shares if, at the time of such declaration (and after
giving effect thereto), asset coverage with respect to any Borrowings of the
Fund that are senior securities representing indebtedness (as defined in the
1940 Act), would be less than 200% (or such other percentage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities representing indebtedness of a closed-end investment company
as a condition of declaring dividends on its preferred shares) or (ii) declare
any other distribution on the FundPreferred shares or purchase or redeem
FundPreferred shares if at the time of the declaration (and after giving effect
thereto), asset coverage with respect to such Borrowings that are senior
securities representing indebtedness would be less than 300% (or such higher
percentage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring distributions,
purchases or redemptions of its shares of beneficial interest). "Senior
securities representing indebtedness" generally means any bond, debenture, note
or similar obligation or instrument constituting a security (other than shares
of beneficial interest) and evidencing indebtedness and could include the Fund's
obligations under any Borrowings. For purposes of determining asset coverage for
senior securities representing indebtedness in connection with the payment of
dividends or other distributions on or purchases or redemptions of stock, the
term "senior security" does not include any promissory note or other evidence of
indebtedness issued in consideration of any loan, extension or renewal thereof,
made by a bank or other person and privately arranged, and not intended to be
publicly distributed. The term "senior security" also does not include any such
promissory note or other evidence of indebtedness in any case where such a loan
is for temporary purposes only and in an amount not exceeding 5% of the value of
the total assets of the Fund at the time when the loan is made; a loan is
presumed under the 1940 Act to be for temporary purposes if it is repaid within
60 days and is not extended or renewed; otherwise it is presumed not to be for
temporary purposes. For purposes of determining whether the 200% and 300% asset
coverage requirements described above apply in connection with dividends or
distributions on or purchases or redemptions of FundPreferred shares, such asset
coverages may be calculated on the basis of values calculated as of a time
within 48 hours (not including Sundays or holidays) next preceding the time of
the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of FundPreferred shares may be prohibited (i) at any time
that an event of default under any Borrowings has occurred and is continuing; or
(ii) after giving effect to such declaration, the Fund would not have eligible
portfolio holdings with an aggregated Discounted Value at least equal to any
asset coverage requirements associated with such Borrowings; or (iii) the Fund
has not redeemed the full amount of Borrowings, if any, required to be redeemed
by any provision for mandatory redemption.
Upon failure to pay dividends for two years or more, the holders of
FundPreferred shares will acquire certain additional voting rights. See
"-- Voting Rights" below. Such rights shall be the exclusive remedy of the
holders of FundPreferred shares upon any failure to pay dividends on the
FundPreferred shares.
For so long as any FundPreferred shares are outstanding, except in
connection with the liquidation of the Fund, or a refinancing of the
FundPreferred shares as provided in the Statement, the Fund will not declare,
pay or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or options, warrants or rights to
subscribe for or purchase, common shares or other shares of beneficial interest,
if any, ranking junior to the FundPreferred shares as to dividends or upon
liquidation) in respect to common shares or any other shares of the Fund ranking
junior to or on a parity with the FundPreferred shares as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the
FundPreferred shares as to dividends and upon liquidation) or any such parity
shares (except by conversion into or exchange for shares of the Fund ranking
36
junior to or on a parity with the FundPreferred shares as to dividends and upon
liquidation), unless (i) there is no event of default under any Borrowings that
is continuing; (ii) immediately after such transaction, the Fund would satisfy
the FundPreferred Shares Basic Maintenance Amount (as defined below) and the
Fund would maintain the 1940 Act FundPreferred Shares Asset Coverage (as defined
below) (see "-- Asset Maintenance"); (iii) immediately after such transaction,
the Fund satisfies the asset coverage requirements, if any, under any
Borrowings; (iv) full cumulative dividends on the FundPreferred shares due on or
prior to the date of the transaction have been declared and paid; (v) the Fund
has redeemed the full number of FundPreferred shares required to be redeemed by
any provision for mandatory redemption contained in the Statement (see
"-- Redemption"); and (vi) the Fund has redeemed the full amount of any
Borrowings required to be redeemed by any provision for mandatory redemption.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem FundPreferred shares having
a Dividend Period of one year or less, in whole or in part, out of funds legally
available therefor, on the Dividend Payment Date upon not less than 15 days and
not more than 40 days prior notice. The optional redemption price per share
shall be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for
redemption. FundPreferred shares having a Dividend Period of more than one year
are redeemable at the option of the Fund, in whole or in part, out of funds
legally available therefor, prior to the end of the relevant Dividend Period,
subject to any Specific Redemption Provisions, which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Fund shall not effect any optional redemption unless
after giving effect thereto (i) the Fund has available certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of FundPreferred shares by
reason of the redemption of FundPreferred shares on such date fixed for the
redemption and (ii) the Fund would satisfy the FundPreferred Shares Basic
Maintenance Amount.
The Fund also reserves the right to repurchase FundPreferred shares in
market or other transactions from time to time in accordance with applicable law
and at a price that may be more or less than the liquidation preference of the
FundPreferred shares, but is under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal to the
FundPreferred Shares Basic Maintenance Amount or, as of the last Business Day of
any month, the 1940 Act FundPreferred Shares Asset Coverage, and such failure is
not cured within ten Business Days following such Valuation Date in the case of
a failure to maintain the FundPreferred Shares Basic Maintenance Amount or on
the last Business Day of the following month in the case of a failure to
maintain the 1940 Act FundPreferred Shares Asset Coverage as of such last
Business Day (each an "Asset Coverage Cure Date"), the FundPreferred shares will
be subject to mandatory redemption out of funds legally available therefor. See
"-- Asset Maintenance." The number of FundPreferred shares to be redeemed in
such circumstances will be equal to the lesser of (i) the minimum number of
FundPreferred shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset Coverage Cure
Date, would result in the Fund satisfying the FundPreferred Shares Basic
Maintenance Amount or 1940 Act FundPreferred Shares Asset Coverage, as the case
may be, in either case as of the relevant Asset Coverage Cure Date (provided
that, if there is no such minimum number of shares the redemption of which would
have such result, all FundPreferred shares then outstanding will be redeemed),
and (ii) the maximum number of FundPreferred shares that can be redeemed out of
funds expected to be available therefor on the Mandatory Redemption Date (as
defined below) at the Mandatory Redemption Price (as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the FundPreferred Shares Basic Maintenance Amount or the 1940 Act
FundPreferred Shares Asset Coverage, as the case may be, pro rata among the
Holders of FundPreferred shares in proportion to the number of shares they hold,
by lot or by such other method as the Fund shall deem fair and equitable,
subject to mandatory redemption provisions, if any.
37
The Fund is required to effect such a mandatory redemption not later than
40 days after the Asset Coverage Cure Date, as the case may be (the "Mandatory
Redemption Date"), except that if the Fund does not have funds legally available
for the redemption of, or is not otherwise legally permitted to redeem, all of
the required number of FundPreferred shares which are subject to mandatory
redemption, or the Fund otherwise is unable to effect such redemption on or
prior to such Mandatory Redemption Date, the Fund will redeem those
FundPreferred shares on the earliest practicable date on which the Fund will
have such funds available, upon notice to record owners of shares of
FundPreferred shares and the Paying Agent. The Fund's ability to make a
mandatory redemption may be limited by the provisions of the 1940 Act or
Massachusetts law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) redemption
premium, if any, determined by the Board of Trustees, in its discretion, after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the Fund
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Fund shall deliver a notice of redemption to the
Auction Agent containing the information described below one Business Day prior
to the giving of notice to Holders in the case of optional redemptions as
described above and on or prior to the 30th day preceding the Mandatory
Redemption Date in the case of a mandatory redemption as described above. The
Auction Agent will use its reasonable efforts to provide notice to each holder
of FundPreferred shares called for redemption by electronic means not later than
the close of business on the Business Day immediately following the Business Day
on which the Auction Agent determines the shares to be redeemed (or, during a
Default Period with respect to such shares, not later than the close of business
on the Business Day immediately following the day on which the Auction Agent
receives notice of redemption from the Fund). Such notice will be confirmed
promptly in writing not later than the close of business on the third Business
Day preceding the redemption date by providing the notice to each holder of
record of FundPreferred shares called for redemption, the Paying Agent (if
different from the Auction Agent) and the Securities Depository ("Notice of
Redemption"). Notice of Redemption will be addressed to the registered owners of
the FundPreferred shares at their addresses appearing on the share records of
the Fund. Such notice will set forth (i) the redemption date, (ii) the number
and identity of FundPreferred shares to be redeemed, (iii) the redemption price
(specifying the amount of accumulated dividends to be included therein), (iv)
that dividends on the shares to be redeemed will cease to accumulate on such
redemption date, and (v) the provision under which redemption shall be made. No
defect in the Notice of Redemption or in the transmittal or mailing thereof will
affect the validity of the redemption proceedings, except as required by
applicable law.
If fewer than all of the shares of a series of FundPreferred shares are
redeemed on any date, the shares to be redeemed on such date will be selected by
the Fund on a pro rata basis in proportion to the number of shares held by such
holders, by lot or by such other method as is determined by the Fund to be fair
and equitable, subject to the terms of any Specific Redemption Provisions.
FundPreferred shares may be subject to mandatory redemption as described herein
notwithstanding the terms of any Specific Redemption Provisions. The Auction
Agent will give notice to the Securities Depository, whose nominee will be the
record holder of all of the FundPreferred shares, and the Securities Depository
will determine the number of shares to be redeemed from the account of the Agent
Member of each beneficial owner. Each Agent Member will determine the number of
shares to be redeemed from the account of each beneficial owner for which it
acts as agent. An Agent Member may select for redemption shares from the
accounts of some beneficial owners without selecting for redemption any shares
from the accounts of other beneficial owners. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is the record holder of all of
the shares, the particular shares to be redeemed shall be selected by the Fund
by lot, on a pro rata basis between each series or by such other method as the
Fund shall deem fair and equitable, as contemplated above.
38
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, dividends on such shares should cease to
accumulate and such shares should be no longer deemed to be outstanding for any
purpose and all rights of the owners of the shares so called for redemption will
cease and terminate, except the right of the owners of such shares to receive
the redemption price, but without any interest or additional amount. The Fund
shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of (i)
the aggregate redemption price of the FundPreferred shares called for redemption
on such date and (ii) such other amounts, if any, to which holders of
FundPreferred shares called for redemption may be entitled. The Fund will be
entitled to receive, from time to time, from the Paying Agent the interest, if
any, earned on such funds deposited with the Paying Agent and the owners of
shares so redeemed will have no claim to any such interest. Any funds so
deposited which are unclaimed two years after such redemption date will be paid,
to the extent permitted by law, by the Paying Agent to the Fund upon its
request. Thereupon, Holders of FundPreferred shares called for redemption may
look only to the Fund for payment.
So long as any FundPreferred shares are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
FundPreferred shares may be redeemed unless all dividends in arrears on the
outstanding FundPreferred shares, and all shares of beneficial interest of the
Fund ranking on a parity with the FundPreferred shares with respect to the
payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment, except in connection with the
liquidation of the Fund in which case all FundPreferred shares and all shares
ranking in a parity with the FundPreferred shares must receive proportionate
amounts and that the foregoing shall not prevent the purchase or acquisition of
all the outstanding FundPreferred shares pursuant to the successful completion
of an otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding FundPreferred shares.
Except for the provisions described above, nothing contained in the
Statement limits any legal right of the Fund to purchase or otherwise acquire
any shares of FundPreferred shares outside of an Auction at any price, whether
higher or lower than the price that would be paid in connection with an optional
or mandatory redemption, so long as, at the time of any such purchase, there is
no arrearage in the payment of dividends on or the mandatory or optional
redemption price with respect to, any shares of FundPreferred shares for which
Notice of Redemption has been given and the Fund is in compliance with the 1940
Act FundPreferred Shares Asset Coverage and satisfies the FundPreferred Shares
Basic Maintenance Amount after giving effect to such purchase or acquisition on
the date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the outstanding
shares of FundPreferred shares are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Trustees.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements
in respect of the FundPreferred shares: (i) the Fund must maintain assets in its
portfolio that have a value, discounted in accordance with guidelines set forth
by a Rating Agency, at least equal to the aggregate liquidation preference of
the FundPreferred shares plus specified liabilities, payment obligations and
other amounts; and (ii) the Fund must maintain asset coverage for FundPreferred
shares of at least 200%.
FundPreferred Shares Basic Maintenance Amount. The Fund must maintain, as
of each Valuation Date on which any share of FundPreferred shares is
outstanding, Eligible Assets having an aggregate Discounted Value at least equal
to the FundPreferred Shares Basic Maintenance Amount, which is calculated
separately for each Rating Agency which is then rating the FundPreferred shares
and so requires. If the Fund fails to maintain Eligible Assets having an
aggregated Discounted Value at least equal to the FundPreferred Shares
39
Basic Maintenance Amount as of any Valuation Date and such failure is not cured
on or before the related Asset Coverage Cure Date, the Fund will be required in
certain circumstances to redeem certain of the shares of FundPreferred shares.
See "-- Redemption -- Mandatory Redemption."
The "FundPreferred Shares Basic Maintenance Amount" as of any Valuation
Date is currently defined as:
Eligible Assets having an aggregate Discounted Value equal to or
greater than the dollar amount equal to the sum of the sum of (A) the
product of the number of FundPreferred outstanding on such date multiplied
by $25,000 (plus the product of the number of shares of any other series of
preferred shares outstanding on such date multiplied by the Liquidation
Preference of such shares), plus any redemption premium applicable to the
FundPreferred (or other preferred shares) then subject to redemption; (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 FundPreferred
outstanding that follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding preferred shares to, but not including, the
first respective dividend payment dates for such other shares that follow
such Valuation Date); (C) the aggregate amount of dividends that would
accumulate on shares of each series of FundPreferred outstanding from such
first respective Dividend Payment Date therefor through the 45th day after
such Valuation Date, at the Maximum Rate (calculated as if such Valuation
Date were the Auction Date for the Dividend Period commencing on such
Dividend Payment Date) for a Standard Dividend Period of shares of such
series to commence on such Dividend Payment Date, assuming, solely for
purposes of the foregoing, that if on such Valuation Date the Fund shall
have delivered a notice of Special Dividend Period to the Auction Agent
pursuant to Section 4(b) of Part I of the Statement with respect to shares
of such series, such Maximum Rate shall be the Maximum Rate for the Special
Dividend Period of shares of such series to commence on such Dividend
Payment Date (except that (1) if such Valuation Date occurs at a time when
a Failure to Deposit (or, in the case of preferred shares other than
FundPreferred, a failure similar to a Failure to Deposit) has occurred that
has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in
respect of which such failure has occurred and (2) for those days during
the period described in this subparagraph (C) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date
will remain in effect (or, in the case of preferred shares other than
FundPreferred, in respect of which the dividend rate or rates in effect
immediately prior to such respective dividend payment dates will remain in
effect), the dividend for purposes of calculation would accumulate at such
Applicable Rate (or other rate or rates, as the case may be in respect of
those days); (D) the amount of anticipated expenses of the Fund for the 90
days subsequent to such Valuation Date; (E) the amount of any indebtedness
or obligations of the Fund senior in right of payments to the
FundPreferred; and (F) any current liabilities as of such Valuation Date to
the extent not reflected in any of (A) through (E) (including, without
limitation, any payables for portfolio securities purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions); less the value (i.e., the face value of cash,
short-term municipal obligations and short-term securities that are the
direct obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of (A) though (F)
became payable, otherwise the Discounted Value) of any of the Fund's assets
irrevocably deposited by the Fund for the payment of any of (A) through
(F).
For S&P, if the average Discount Factor of the Fund's aggregate S&P
Eligible Assets is less than 200%, the FundPreferred Shares Basic Maintenance
amount means the asset coverage, as determined in accordance with Section 18(h)
of the 1940 Act, with respect to all outstanding senior securities of the Fund
which are stock, including all Outstanding FundPreferred (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common shares).
See "-- 1940 Act FundPreferred Shares Asset Coverage" below.
Each Rating Agency may amend the definition of "FundPreferred Shares Basic
Maintenance Amount".
40
The Market Value of the Fund's portfolio securities (used in calculating
the Discounted Value of Eligible Assets) is calculated in the same manner as the
Fund calculates its net asset value. See "Net Asset Value" in the SAI.
Each Rating Agency's Discount Factors, the criteria used to determine
whether the assets held in the Fund's portfolio are Eligible Assets, and the
guidelines for determining the Discounted Value of the Fund's portfolio holdings
for purposes of determining compliance with the FundPreferred Shares Basic
Maintenance Amount are based on Rating Agency Guidelines established by each
Rating Agency in connection with its rating of the FundPreferred shares. The
Discount Factor relating to any asset of the Fund, the FundPreferred Shares
Basic Maintenance Amount, the assets eligible for inclusion in the calculation
of the Discounted Value of the Fund's portfolio and certain definitions and
methods of calculation relating thereto may be changed from time to time by the
applicable Rating Agency, without the approval of the Fund, the Board of
Trustees or the shareholders.
A Rating Agency's guidelines will apply to FundPreferred shares only so
long as such Rating Agency is rating such shares. The Fund will pay certain fees
to Moody's, S&P and any Other Rating Agency which may provide a rating for the
FundPreferred shares for rating FundPreferred shares. The ratings assigned to
FundPreferred shares are not recommendations to buy, sell or hold FundPreferred
shares. Such ratings may be subject to revision or withdrawal by the assigning
rating agent at any time. Any rating of FundPreferred shares should be evaluated
independently of any other rating.
1940 Act FundPreferred Shares Asset Coverage. The Fund is also required to
maintain, with respect to FundPreferred shares, as of the last Business Day on
any month in which any FundPreferred shares is outstanding, asset coverage of at
least 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing shares of a closed-end investment company as a condition of
declaring dividends on its common shares) ("1940 Act FundPreferred Shares Asset
Coverage"). If the Fund fails to maintain the 1940 Act FundPreferred Shares
Asset Coverage as of the last Business Day of any month and such failure is not
cured as of the related Asset Coverage Cure Date, the Fund will be required to
redeem certain shares of FundPreferred shares. See "-- Redemption -- Mandatory
Redemption."
The Fund estimates that based on the composition of its portfolio as of
April 30, 2004, assuming the issuance of 2,350,000 Common Shares as of May 11,
2004, less the offering costs related thereto, and the issuance of all
FundPreferred shares offered hereby and giving effect to the deduction of sales
load and estimated offering costs related thereto estimated at $8,425,000, the
1940 Act FundPreferred Shares Asset Coverage would be:
Value of Fund assets less liabilities
not representing senior securities $1,066,455,454
------------------------------------------------------------ = --------------- = 267%
Senior securities representing indebtedness plus $ 400,000,000
aggregate liquidation preference of FundPreferred Shares
Notices. Under the current Rating Agency Guidelines, after the Date of
Original Issue and in certain other circumstances, the Fund is required to
deliver to any Rating Agency which is then rating the FundPreferred shares (i) a
certificate with respect to the calculation of the FundPreferred Shares Basic
Maintenance Amount; (ii) a certificate with respect to the calculation of the
1940 Act FundPreferred Shares Asset Coverage and the value of the portfolio
holdings of the Fund; and (iii) a letter proposed by the Fund's independent
accountants regarding the accuracy of such calculations.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the holders of each series of
FundPreferred shares then outstanding and any other shares ranking on a parity
with the FundPreferred shares then outstanding, in preference to the holders of
common shares, will be entitled to payment out of the assets of the Fund, or the
proceeds thereof, available for distribution to shareholders after satisfaction
of claims of creditors of the Fund (including, without limitation, those
resulting from Borrowings), of a liquidation preference in the amount equal to
$25,000 per share of the FundPreferred
41
shares, plus an amount equal to accumulated dividends (whether or not earned or
declared but without interest) to the date of payment of such preference is made
in full or a sum sufficient for the payment thereof is set apart with the Paying
Agent. However, holders of FundPreferred shares will not be entitled to a
premium, if any, to which such holder would be entitled to receive upon
redemption of such FundPreferred shares. After payment of the full amount of
such liquidation distribution, the owners of the FundPreferred shares will not
be entitled to any further participation in any distribution of assets of the
Fund.
If, upon any such liquidation, dissolution or winding up of the affairs of
the Fund, whether voluntary or involuntary, the assets of the Fund available for
distribution among the holders of all outstanding Preferred Shares, including
the FundPreferred shares, shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then such available
assets shall be distributed among the holders of all outstanding Preferred
Shares, including the FundPreferred shares, ratably in any such distribution of
assets according to the respective amounts which would be payable on all such
hares if all amounts thereon were paid in full. Upon the dissolution,
liquidation or winding up of the affairs of the Fund, whether voluntary or
involuntary, until payment in full is made to the holders of FundPreferred
shares of the liquidation distribution to which they are entitled, no dividend
or other distribution shall be made to the holders of shares of common shares or
any other class of shares of beneficial interest of the Fund ranking junior to
FundPreferred shares upon dissolution, liquidation or winding up and no
purchase, redemption or other acquisition for any consideration by the Fund
shall be made in respect of the shares of common shares or any other class of
shares of beneficial interest of the Fund ranking junior to FundPreferred shares
upon dissolution, liquidation or winding up.
A consolidation, reorganization or merger of the Fund with or into any
other trust or company, or a sale, lease or exchange of all or substantially all
of the assets of the Fund in consideration for the issuance of equity securities
of another trust or company, shall not be deemed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in the Declaration, Statement or as otherwise
required by applicable law, holders of FundPreferred shares have one vote per
share and vote together with holders of shares of common shares as a single
class. Under applicable rules of the Exchange, the Fund is currently required to
hold annual meetings of shareholders.
In connection with the election of the Board of Trustees, the holders of
outstanding Preferred Shares, including each series of the FundPreferred shares,
represented in person or by proxy at said meeting, shall be entitled, as a
class, to the exclusion of the holders of all other securities and classes of
beneficial interest of the Fund, to elect two Trustees of the Fund. The holders
of outstanding common shares and Preferred Shares, including each series of the
FundPreferred shares, voting together as a single class, shall elect the balance
of the Trustees. Notwithstanding the foregoing, if (a) at the close of business
on any Dividend Payment Date accumulated dividends (whether or not earned or
declared) on the Preferred Shares, including FundPreferred shares, equal to at
least two full years' dividends shall be due and unpaid; or (b) any time holders
of any Preferred Shares are entitled under the 1940 Act to elect a majority of
the Trustees of the Fund, then the number of members constituting the Board
shall automatically be increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of Preferred Shares, including
the FundPreferred shares, as described above, would constitute a majority of the
Board as so increased by such smallest number; and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Trustees are to be elected, the holders of
Preferred Shares, including the FundPreferred shares, voting as a separate
class, will be entitled to elect the smallest number of additional Trustees
that, together with the two Trustees which such holders will be in any event
entitled to elect, constitutes a majority of the total number of Trustees of the
Fund as so increased. The terms of office of the persons who are Trustees at the
time of that election will continue. If the Fund thereafter shall pay, or
declare and set apart for payment, in full all dividends payable on all
outstanding Preferred Shares, including the FundPreferred shares, for all past
Dividend Periods, or the Voting Period is otherwise terminated, the voting
rights stated in the above sentence shall cease, and the terms of office of all
of the additional Trustees elected
42
by the holders of Preferred Shares, including the FundPreferred shares (but not
of the Trustees with respect to whose election the holders of common shares were
entitled to vote or the two Trustees the holders of Preferred Shares, including
the FundPreferred shares, have the right to elect in any event), will terminate
automatically. Any shares of FundPreferred shares issued after the date hereof
shall vote with the FundPreferred shares as a single class on the matters
described above, and the issuance of any other FundPreferred shares by the Fund
may reduce the voting power of the FundPreferred shares.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including each series of the FundPreferred shares, determined
with reference to a "majority of outstanding voting securities" as the term is
defined in Section 2(a)(42) of the 1940 Act, voting as a separate class, is
required to (i) amend, alter or repeal any of the preferences, rights or powers
of such class so as to affect materially and adversely such preferences, rights
or powers; (ii) increase the authorized number of shares of Preferred Shares;
(iii) create, authorize or issue shares of any class of shares ranking senior to
or on a parity with the Preferred Shares with respect to the payment of
dividends or the distribution of assets, or any securities convertible into, or
warrants, options or similar rights to purchase, acquire or receive, such shares
of beneficial interest ranking senior to or on parity with the Preferred Shares
or reclassify any authorized shares of beneficial interest of the Fund into any
shares ranking senior to or on parity with the Preferred Shares (except that the
Board of Trustees, without the vote or consent of the holders of Preferred
Shares, may from time to time authorize, create and classify, and the Fund may
from time to time issue shares or series of Preferred Shares, including other
series of FundPreferred shares, ranking on a parity with the FundPreferred
shares with respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up to the affairs of the Fund, and may
authorize, reclassify and/or issue any additional shares of each series of
FundPreferred shares, including shares previously purchased or redeemed by the
Fund, subject to continuing compliance by the Fund with 1940 Act FundPreferred
Shares Asset Coverage and FundPreferred Shares Basic Maintenance Amount
requirements); (iv) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, Trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (v) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Fund's assets as a whole, except (A) liens the validity
of which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the FundPreferred shares, or arising in connection with any futures
contracts or options thereon, interest rate swap or cap transactions, forward
rate transactions, put or call options, or other similar transactions, (D)
liens, pledges, charges, security interests, security agreements or other
encumbrances arising in connection with any indebtedness permitted under clause
(vi) below and (E) liens to secure payment for services rendered including,
without limitation, services rendered by the Fund's custodian and the Auction
Agent; or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund satisfies the FundPreferred Shares Basic Maintenance Amount as of the
immediately preceding Valuation Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares, including any series of FundPreferred shares,
voting separately from any other series, determined with reference to a
"majority of outstanding voting securities" as that term is defined in Section
2(a)(42) of the 1940 Act, shall be required with respect to any matter that
materially and adversely affects the rights,
43
preferences, or powers of such series in a manner different from that of other
series of classes of the Fund's shares of beneficial interest. For purposes of
the foregoing, no matter shall be deemed to adversely affect any right,
preference or power unless such matter (i) alters or abolishes any preferential
right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series.
The foregoing voting provisions will not apply with respect to the
FundPreferred shares if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption, and sufficient
funds shall have been deposited in trust to effect such redemption.
The Board of Trustees, without the vote or consent of any holder of
Preferred Shares, including FundPreferred shares, or any other shareholder of
the Fund, may from time to time adopt, amend, alter or repeal any or all of any
definitions set forth in the Statement or add covenants and other obligations of
the Fund or confirm the applicability of covenants and other obligations set
forth in the Statement in connection with obtaining or maintaining the rating of
any Rating Agency which is then rating the FundPreferred shares and any such
adoption, amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of FundPreferred shares or the holders thereof,
provided the Board of Trustees receives written confirmation from such Rating
Agency (such confirmation in no event being required to be obtained from a
particular Rating Agency with respect to definitions or other provisions
relevant only to another Rating Agency's rating) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
Rating Agency.
Notwithstanding anything herein to the contrary, the Rating Agency
Guidelines, as they may be amended from time to time by the respective Rating
Agency will be reflected in a written document and may be amended by the
respective Rating Agency without the vote, consent or approval of the Fund, the
Board of Trustees and any holder of shares of Preferred Shares, including any
series of FundPreferred shares, or any other shareholder of the Fund.
A copy of the current Rating Agency Guidelines will be provided to any
holder of FundPreferred shares promptly upon request therefor made by such
holder to the Fund by writing the Fund at 333 W. Wacker Dr., Chicago, IL 60606.
Also, subject to compliance with applicable law, the Board of Trustees may
amend the definition of Maximum Rate to increase the percentage amount by which
the Reference Rate is multiplied to determine the Maximum Rate shown therein
without the vote or consent of the holders of the Preferred Shares, including
FundPreferred shares, or any other shareholder of the Fund, and without
receiving any confirmation from any rating agency after consultation with the
Broker-Dealers, provided that immediately following any such increase the Fund
would be in compliance with the FundPreferred Shares Basic Maintenance Amount.
Unless otherwise required by law, holders of FundPreferred shares shall not
have any relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of FundPreferred shares
shall have no rights to cumulative voting. In the event that the Fund fails to
pay any dividends on the FundPreferred shares, the exclusive remedy of the
holders shall be the right to vote for Trustees as discussed above.
THE AUCTION
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York) which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for each series of FundPreferred shares so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to
44
enter into an agreement with a successor Auction Agent containing substantially
the same terms and conditions as the Auction Agency Agreement. The Fund may
remove the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for FundPreferred shares.
The Auction Agent after each Auction for FundPreferred shares will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Dividend Period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealers in the case of any Auction immediately preceding a Dividend
Period of one year or longer, of the purchase price of FundPreferred shares
placed by such Broker-Dealer at such Auction. For the purposes of the preceding
sentence, FundPreferred shares will be placed by a Broker-Dealer if such shares
were (a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for series of
FundPreferred shares, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of such series (a "Beneficial Owner") may submit orders ("Orders")
with respect to shares of such series to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next
Dividend Period thereof.
- Bid -- indicating its desire 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 thereof is less than the rate specified in such Bid (also
known as a hold-at-a-rate order).
- 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 thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of FundPreferred shares then
held by such Beneficial Owner. A Beneficial Owner of shares of such series that
submits a Bid with respect to shares of such series to its Broker-Dealer having
a rate higher than the Maximum Rate for shares of such series on the Auction
Date therefore will be treated as having submitted a Sell Order with respect to
such shares to its Broker-Dealer. A Beneficial Owner of shares of such series
that fails to submit an Order with respect to such shares to its Broker-Dealer
will be deemed to have submitted a Hold Order with respect to such shares of
such series to its Broker-Dealer; provided, however, that if a Beneficial Owner
of shares of such series fails to submit an Order with respect to shares of such
series to its Broker-Dealer for an Auction relating to a Dividend Period of more
than 28 Dividend Period Days, such Beneficial Owner will be deemed to have
submitted a Sell Order with respect to such shares to its Broker-Dealer. A Sell
Order shall constitute an irrevocable offer to sell the FundPreferred shares
subject thereto. A Beneficial Owner that offers to become the Beneficial Owner
of additional FundPreferred shares is, for purposes of such offer, a Potential
Beneficial Owner as discussed below.
45
A customer of a Broker-Dealer that is not a Beneficial Owner of a series of
FundPreferred shares 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 (in each case, 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 thereof is not less than the rate specified
in such Bid. A Bid placed by a Potential Beneficial Owner of shares of such
series specifying a rate higher than the Maximum Rate for shares of such series
on the Auction Date therefore will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of FundPreferred shares held by it or customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of FundPreferred shares 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 Sufficient Clearing Bids for a series of FundPreferred shares exist
(that is, the number of shares of such series subject to Bids submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Potential Holders with rates equal to or lower than the Maximum Rate for shares
of such series is at least equal to the number of shares of such series subject
to Sell Orders submitted or deemed submitted to the Auction Agent by
Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of 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 Sufficient Clearing Bids for a series of FundPreferred shares do not exist,
the Applicable Rate for shares of such series for the next succeeding Dividend
Period thereof will be the Maximum Rate for shares of such series on the Auction
Date therefor. In such event, Beneficial Owners of shares of such series that
have submitted or are deemed to have submitted Sell Orders may not be able to
sell in such Auction all shares of such series subject to such Sell Orders. If
Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold
Orders with respect to all Existing Holders of a series of FundPreferred shares,
the Applicable Rate for shares of such series for the next succeeding Dividend
Period thereof will be the All Hold Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of
FundPreferred shares that is fewer 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.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
46
SECONDARY MARKET TRADING AND TRANSFER OF FUNDPREFERRED SHARES
The Broker-Dealers may maintain a secondary trading market of FundPreferred
shares outside of Auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that such secondary trading
market of FundPreferred shares will be established, or, if established, will
provide owners with liquidity of investment. FundPreferred shares are not
registered on any stock exchange or on the Nasdaq Stock Market. Investors who
purchase shares in an Auction for a Special Dividend Period should note that
because the dividend rate on such shares will be fixed for the length of such
Dividend Period, the value of the shares may fluctuate in response to changes in
interest rates, and may be more or less than their original cost if sold on the
open market in advance of the next Auction therefor, depending upon market
conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of FundPreferred shares only in whole shares and only (1) pursuant to a
Bid or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of FundPreferred shares from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.
DESCRIPTION OF BORROWINGS
The Declaration of Trust authorizes the Fund, without prior approval of
holders of common and Preferred Shares, including FundPreferred shares, to
borrow money. In this connection, the Fund may issue notes or other evidence of
indebtedness (including bank borrowings or commercial paper) and may secure any
such borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate. Any Borrowings will rank senior
to the FundPreferred shares.
Limitations. Under the requirements of the 1940 Act, the Fund, immediately
after issuing any Borrowings that are senior securities representing
indebtedness (as defined in the 1940 Act), must have an asset coverage of at
least 300%. With respect to any such Borrowings, asset coverage means the ratio
which the value of the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of any such Borrowings that are senior securities representing indebtedness,
issued by the Fund. Certain types of Borrowings may also result in the Fund
being subject to covenants in credit agreements relating to asset coverages or
portfolio composition or otherwise. In addition, the Fund may be subject to
certain restrictions imposed by guidelines of one or more rating agencies which
may issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the FundPreferred shares shareholders, and the terms of any such
Borrowings may contain provisions which limit certain activities of the Fund,
including the payment of dividends to holders of FundPreferred shares in certain
circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company under the Code,
the Fund, subject to its ability to liquidate its portfolio, intends to repay
the Borrowings. Any Borrowing will likely be ranked senior or equal to all other
existing and future borrowings of the Fund.
47
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, the terms may be the same as, or
different from, the terms described above, subject to applicable law and the
Fund's Declaration.
DESCRIPTION OF COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
common shares, par value $0.01 per share. All common shares have equal rights to
the payment of dividends and the distribution of assets upon liquidation. Common
shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will have
no pre-emptive or conversion rights or rights to cumulative voting. At any time
when FundPreferred shares are outstanding, common shareholders will not be
entitled to receive any cash distributions from the Fund unless all accrued
dividends on FundPreferred shares have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to FundPreferred shares would be at least
200% after giving effect to the distributions.
The common shares are listed on the Exchange. The Fund intends to hold
annual meetings of shareholders so long as the common shares are listed on a
national securities exchange and such meetings are required as a condition to
such listing.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the common shares and FundPreferred shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization of the
Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or
substantially all of the Fund's assets (other than in the regular course of the
Fund's investment activities), (4) in certain circumstances, a termination of
the Fund, or a series or class of the Fund, or (5) a removal of trustees by
shareholders, and then only for cause, unless, with respect to (1) through (4),
such transaction has already been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders of
at least a majority of the Fund's common shares and FundPreferred shares
outstanding at the time, voting together as a single class, is required;
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), only the required vote by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
FundPreferred shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the FundPreferred shares
outstanding at the time, voting as a separate class, or, if such action has been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, the affirmative vote of
the holders of at least a majority of the FundPreferred shares outstanding at
the time, voting as a separate
48
class. None of the foregoing provisions may be amended except by the vote of at
least two-thirds of the common shares and FundPreferred shares, voting together
as a single class. The votes required to approve the conversion of the Fund from
a closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
FundPreferred shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders. See the
SAI under "Certain Provisions in the Declaration of Trust."
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
common shares trade in the open market at a price that is a function of several
factors, including dividend levels (which are in turn affected by expenses), net
asset value, call protection, dividend stability, portfolio credit quality,
relative demand for and supply of such shares in the market, general market and
economic conditions and other factors. Because shares of closed-end investment
companies may frequently trade at prices lower than net asset value, the Fund's
Board of Trustees has currently determined that, at least annually, it will
consider action that might be taken to reduce or eliminate any material discount
from net asset value in respect of common shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Fund cannot assure you that
its Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers will actually reduce market discount.
If the Fund converted to an open-end investment company, it would be
required to redeem all FundPreferred shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the common shares
would no longer be listed on the New York Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by the 1940 Act or the rules thereunder) at their
net asset value, less any redemption charge that is in effect at the time of
redemption. See the SAI under "Repurchase of Fund Shares; Conversion to Open-End
Fund" for a discussion of the voting requirements applicable to the conversion
of the Fund to an open-end investment company.
Before deciding whether to take any action if the common shares trade below
net asset value, the Board of Trustees would consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
shareholders, and market considerations. Based on these considerations, even if
the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken. See the SAI under "Repurchase of Fund Shares; Conversion to
Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.
FEDERAL INCOME TAX MATTERS
The following is intended to be a general summary of certain U.S. federal
income tax consequences of investing in FundPreferred shares. It is not intended
to be a complete discussion of all such federal income tax consequences, nor
does it purport to deal with all categories of investors. This discussion
reflects applicable tax laws of the United States as of the date of this
prospectus, which tax laws may change or be subject to new interpretation by the
courts or the IRS either retroactively or prospectively. INVESTORS ARE THEREFORE
ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS BEFORE MAKING AN INVESTMENT IN
THE FUND.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify for, and to elect to be treated as, a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code") and intends to qualify under
49
those provisions each year. As a regulated investment company, the Fund
generally will not be subject to federal income tax on its investment company
taxable income (as that term is defined in the Code, without regard to the
deduction for dividends paid) and net capital gain (i.e. net long-term capital
gains in excess of the sum of net short-term capital losses and capital loss
carryovers from prior years), if any, that it distributes to shareholders.
However, the Fund would be subject to corporate income tax (currently imposed at
a maximum effective rate of 35%) on any undistributed income. The Fund intends
to distribute to its shareholders, at least annually, all or substantially all
of its investment company taxable income and net capital gains.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax. To prevent imposition of this tax, the Fund must distribute, or be
deemed to have distributed, during each calendar year an amount at least equal
to the sum of (1) 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the
twelve-month period ending on October 31 of the calendar year, and (3) all such
ordinary income and capital gains for previous years that were not distributed
during such years. To prevent application of this excise tax, the Fund intends
to make distributions to satisfy the calendar year distribution requirement.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In such event, the
Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits, would generally constitute dividends, which
would generally be eligible for the dividends received deduction available to
corporate shareholders. Furthermore, individual and other noncorporate
shareholders generally would be able to treat such distributions as "qualified
dividend income" eligible for reduced rates of federal income taxation in
taxable years beginning on or before December 31, 2008.
The Fund's transactions, if any, in forward contracts, options, futures
contracts and hedged investments will be subject to special provisions of the
Code that, among other things, may affect the character of gain and loss
realized by the Fund (i.e., may affect whether gain or loss is ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses, and
affect whether capital gain and loss is characterized as long-term or
short-term. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also may require the Fund to
mark-to-market certain types of positions in its portfolio (i.e., treat them as
if they were closed out), which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions, make the appropriate tax elections, and make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract, or hedged investment in order to mitigate
the effect of these rules, prevent disqualification of the Fund as a regulated
investment company, and minimize the imposition of income and excise taxes.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF FUNDPREFERRED SHARES
Under present law, the Fund is of the opinion that FundPreferred shares
will constitute equity of the Fund, and thus distributions with respect to
FundPreferred shares (other than distributions in redemption of FundPreferred
shares subject to Section 302(b) of the Code) will generally constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits, as calculated for federal income tax purposes. Except in the case of
capital gain dividends, such dividends generally will be taxable as ordinary
income to holders. Dividends derived from net capital gain and designated by the
Fund as capital gain dividends will be treated as long-term capital gains in the
hands of holders regardless of the length of time such holders have held their
shares. Distributions in excess of the Fund's earnings and profits, if any, will
first reduce a shareholder's adjusted tax basis in his or her shares and, after
the adjusted tax basis is reduced to zero, will constitute capital gains to a
holder who holds such shares as a capital asset. The IRS currently requires that
a regulated investment company that has two or more classes of stock allocate to
each such class proportionate amounts of each type of its income (such as
ordinary income and capital gains). Accordingly, the Fund
50
intends to designate dividends made with respect to the common shares and the
FundPreferred shares as consisting of particular types of income (e.g., net
capital gain, ordinary income, dividends qualifying for the dividends received
deduction, if any, and qualified dividend income, if any) in accordance with
each class's proportionate share of the total dividends paid by the Fund during
the year. Dividends paid by the Fund are generally not expected to be eligible
for the dividends received deduction available to corporate shareholders or
constitute qualified dividend income that is subject to reduced rates of federal
income tax when received by individual and other noncorporate shareholders.
A distribution will be treated as having been paid on December 31 if it is
declared by the Fund in October, November or December with a record date in such
months and is paid by the Fund in January of the following year. Accordingly,
such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared.
SALE OF SHARES
The sale of FundPreferred shares by holders will generally be a taxable
transaction for federal income tax purposes. Holders of FundPreferred shares who
sell such shares will generally recognize gain or loss in an amount equal to the
difference between the net proceeds of the sale and their adjusted tax basis in
the shares sold. If such FundPreferred shares are held as a capital asset at the
time of the sale, the gain or loss will generally be a capital gain or loss.
Similarly, a redemption by the Fund (including a redemption resulting from
liquidation of the Fund), if any, of all the FundPreferred shares actually and
constructively held by a shareholder generally will give rise to capital gain or
loss under Section 302(b) of the Code if the shareholder does not own (and is
not regarded under certain tax law rules of constructive ownership as owning)
any common shares in the Fund, and provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may also give rise to
capital gain or loss, but certain conditions imposed by Section 302(b) of the
Code must be satisfied to achieve such treatment. Any loss realized upon a
taxable disposition of FundPreferred shares held for six months or less will be
treated as a long-term capital loss to the extent of any distributions of net
capital gain received (or deemed received) with respect to such shares. Any loss
realized on a sale or exchange will be disallowed to the extent that
substantially identical shares are reacquired within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of such
shares. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income tax purposes,
a portion of all taxable distributions (including redemption proceeds) payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number, who fail to make required certifications or who have been
notified by the IRS that they are subject to backup withholding (or if the Fund
has been so notified). Certain corporate and other shareholders specified in the
Code and the regulations thereunder are exempt from backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability provided the
appropriate information is furnished to the IRS.
OTHER TAXATION
Non-U.S. shareholders, including shareholders who, with respect to the
United States, are nonresident alien individuals, may be subject to U.S.
withholding tax on certain distributions at a rate of 30% or such lower rates as
may be prescribed by any applicable treaty.
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general federal
income taxation rules and with respect to other federal, state, local or foreign
tax consequences to them before making an investment in FundPreferred shares.
51
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT, DIVIDEND DISBURSING AGENT
AND REDEMPTION AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The custodian performs
custodial, fund accounting and portfolio accounting services. The Fund's
transfer, shareholder services and dividend paying agent is also State Street
Bank and Trust Company, One Federal Street, Boston, Massachusetts 02110. The
Bank of New York is the Auction Agent with respect to the FundPreferred shares
and acts as transfer agent, registrar, dividend disbursing agent and redemption
agent with respect to the FundPreferred shares.
52
UNDERWRITING
Citigroup Global Markets Inc. is acting as representative of the
underwriters named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date hereof, each underwriter named below has
severally agreed to purchase, and the Fund has agreed to sell to such
underwriter, the number of FundPreferred shares set forth opposite the name of
such underwriter.
UNDERWRITERS SERIES M SERIES T SERIES W SERIES F
------------ -------- -------- -------- --------
Citigroup Global Markets Inc. .............
Nuveen Investments, LLC....................
A.G. Edwards & Sons, Inc. .................
Wachovia Capital Markets, LLC..............
Total....................................
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the FundPreferred shares if they
purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The sales load the Fund will pay of
$ per share is equal to % of the initial offering price. One half of the
sales load from this offering will be paid to certain underwriters based on
their participation in the offering of the Fund's common shares. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the
FundPreferred shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
Investors must pay for any FundPreferred shares purchased on or before
, 2004.
The Fund and the Advisers have each agreed that, for a period of 180 days
from the date of this prospectus, they will not, without the prior written
consent of Citigroup Global Markets Inc. on behalf of the underwriters, sell,
contract to sell, or otherwise dispose of any senior securities (as defined in
the 1940 Act) of the Fund, or any securities convertible into or exchangeable
for senior securities or grant any options or warrants to purchase senior
securities of the Fund other than FundPreferred shares. Citigroup Global Markets
Inc. on behalf of the underwriters in its sole discretion may release any of the
securities subject to those lock-up agreements at any time without notice.
The underwriting agreement provides that it may be terminated in the
absolute discretion of Citigroup Global Markets Inc. without liability on the
part of the underwriters to the Fund or the Advisers if, prior to the delivery
of and payment for the FundPreferred shares, (i) trading in the Fund's common
shares shall have been suspended by the Securities and Exchange Commission or
the New York Stock Exchange or trading in securities generally on the New York
Stock Exchange shall have been suspended or limited or minimum prices for
trading in securities generally shall have been established on the New York
Stock Exchange, (ii) a commercial banking moratorium shall have been declared by
either federal or New York state authorities or (iii) there shall have occurred
any outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war, or other calamity or crisis the effect of which on
financial markets in the United States is such as to make it, in the sole
judgment of Citigroup Global Markets Inc., impracticable or inadvisable to
proceed with the offering or delivery of the FundPreferred shares as
contemplated by the prospectus (exclusive of any supplement thereto).
The Fund anticipates that from time to time certain of the underwriters may
act as brokers or dealers in connection with the execution of the Fund's
portfolio transactions after they have ceased to be underwriters and, subject to
certain restrictions, may act as brokers while they are underwriters.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the SAI under "Additional
Information Concerning Auctions for FundPreferred".
53
Nuveen, 333 West Wacker Drive, Chicago, Illinois, 60606, one of the
underwriters, is an affiliate of NIAC.
The Fund and NIAC have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, or
to contribute to payments the underwriters may be required to make because of
any of those liabilities. Insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Fund of expenses incurred or paid by a director, officer or
controlling person of the Fund in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, New York 10013.
LEGAL OPINIONS
Certain legal matters in connection with the FundPreferred shares offered
hereby will be passed upon for the Fund by Vedder, Price, Kaufman & Kammholz,
P.C., Chicago, Illinois, and for the Underwriters by Simpson Thacher & Bartlett
LLP, New York, New York. Vedder, Price, Kaufman & Kammholz, P.C. and Simpson
Thacher & Bartlett LLP may rely as to certain matters of Massachusetts law on
the opinion of Bingham McCutchen LLP, Boston, Massachusetts.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Reports, proxy statements, and other information about
the Fund can be inspected at the offices of the Exchange.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and FundPreferred shares can be found
in the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains each Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the SEC, including proxy statements and reports filed under
the Securities Exchange Act of 1934. Additional information may be found on the
Internet at http://www.nuveen.com.
54
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Investment Objective........................................ S-3
Investment Restrictions..................................... S-3
Investment Policies and Techniques.......................... S-6
Overall Fund Management..................................... S-7
Symphony Investment Philosophy and Process.................. S-8
Portfolio Composition....................................... S-8
Other Investment Policies and Techniques.................... S-16
Management of the Fund...................................... S-32
Investment Advisers......................................... S-41
Portfolio Transactions and Brokerage........................ S-45
Net Asset Value............................................. S-46
Additional Information Concerning Auctions For FundPreferred
Shares.................................................... S-47
Certain Provisions in the Declaration of Trust.............. S-49
Repurchase of Fund Shares; Conversion to Open-End Fund...... S-50
Federal Income Tax Matters.................................. S-52
Experts..................................................... S-58
Custodian, Transfer Agent, Auction Agent, Dividend
Disbursing Agent and Redemption Agent..................... S-58
Additional Information...................................... S-58
Report of Independent Auditors.............................. F-1
Financial Statements........................................ F-2
Appendix A Statement of Preferences......................... A-1
Appendix B Ratings of Investments........................... B-1
55
$400,000,000
NUVEEN FLOATING RATE INCOME FUND
FUNDPREFERRED(TM) SHARES
4,000 SHARES, SERIES M
4,000 SHARES, SERIES T
4,000 SHARES, SERIES W
4,000 SHARES, SERIES F
---------------
PROSPECTUS
, 2004
---------------
CITIGROUP
NUVEEN INVESTMENTS, LLC
A.G. EDWARDS
WACHOVIA SECURITIES
SUBJECT TO COMPLETION, DATED May 13, 2004
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
NUVEEN FLOATING RATE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Floating Rate Income Fund (the "Fund") is a recently organized,
diversified, closed-end management investment company.
This Statement of Additional Information relating to FundPreferred(TM)
shares of the Fund ("FundPreferred shares") does not constitute a prospectus,
but should be read in conjunction with the Fund's prospectus relating thereto
dated ___________, 2004 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing FundPreferred shares. Investors should obtain and
read the Fund's Prospectus prior to purchasing such shares. A copy of the Fund's
Prospectus may be obtained without charge by calling (800) 257-8787. You may
also obtain a copy of the Fund's Prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus.
This Statement of Additional Information is dated ___________,2004.
S-1
TABLE OF CONTENTS
PAGE
Investment Objective................................................................. S-3
Investment Restrictions.............................................................. S-3
Investment Policies and Techniques................................................... S-6
Overall Fund Management.............................................................. S-7
Symphony Investment Philosophy and Process........................................... S-8
Portfolio Composition................................................................ S-8
Other Investment Policies and Techniques............................................. S-16
Management of the Fund............................................................... S-32
Investment Advisers.................................................................. S-41
Portfolio Transactions and Brokerage................................................. S-45
Net Asset Value...................................................................... S-46
Additional Information Concerning Auctions For FundPreferred Shares.................. S-47
Certain Provisions in the Declaration of Trust....................................... S-49
Repurchase of Fund Shares; Conversion to Open-End Fund............................... S-50
Federal Income Tax Matters........................................................... S-52
Experts.............................................................................. S-58
Custodian, Transfer Agent, Auction Agent, Dividend Disbursing Agent and
Redemption Agent................................................................... S-58
Additional Information............................................................... S-58
Report of Independent Auditors....................................................... F-1
Financial Statements................................................................. F-2
Appendix A Statement of Preferences.................................................. A-1
Appendix B Ratings of Investments.................................................... B-1
S-2
INVESTMENT OBJECTIVE
The Fund's investment objective is to achieve a high level of current
income.
In pursuing its objective of high current income, the Fund will invest
in Senior Loans and other debt instruments that may involve significant credit
risk. As part of its efforts to manage this risk and the potential impact of
such risk on the overall value and returns of the Fund's portfolio, Symphony
will implement its credit management strategy that includes (i) a focus on
Senior Loans that are secured by specific assets, (ii) rigorous and on-going
bottom-up fundamental analysis of issuers, and (iii) overall portfolio
diversification. Symphony will perform its own credit and research analysis of
issuers, taking into consideration, among other things, the entity's financial
resources and operating history, its sensitivity to economic conditions and
trends, the ability of its management, its debt maturity schedules and borrowing
requirements, its anticipated cash flow, interest and asset coverage, and its
earnings prospects. Even with these efforts, because of the greater degree of
credit risk within the portfolio, the Fund's net asset value could decline over
time. In an effort to help preserve the Fund's overall capital, Symphony will
seek to enhance portfolio value by investing in securities it believes to be
undervalued, which, if successful, can mitigate the potential loss of value due
to credit events over time.
The Fund cannot change its investment objective without the approval of
the holders of a "majority of the outstanding" common shares ("Common Shares")
and FundPreferred shares voting together as a single class, and of the
holders of a "majority of the outstanding" FundPreferred shares voting as a
separate class. When used with respect to particular shares of the Fund, a
"majority of the outstanding" shares means (i) 67% or more of the shares present
at a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
See "Description of FundPreferred Shares -- Voting Rights" in the Fund's
Prospectus for additional information with respect to the voting rights of
holders of FundPreferred shares.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, FundPreferred shares voting together as a single class,
and of the holders of a majority of the outstanding FundPreferred shares voting
as a separate class:
(1) Issue senior securities, as defined in the Investment
Company Act of 1940, other than (i) preferred shares which immediately
after issuance will have asset coverage of at least 200%, (ii)
indebtedness which immediately after issuance will have asset coverage
of at least 300%, or (iii) the borrowings permitted by investment
restriction (2) set forth below;
(2) Borrow money, except as permitted by the Investment
Company Act of 1940 and exemptive orders granted under the Investment
Company Act of 1940;
(3) Act as underwriter of another issuer's securities,
except to the extent that the Fund may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities or acting as an agent or one
of a group of co-agents in originating Senior Loans;
(4) Invest more than 25% of its total assets in
securities of issuers in any one industry provided, however, that such
limitation shall not apply to obligations issued or
S-3
guaranteed by the United States Government or by its agencies or
instrumentalities, and provided further that for purposes of this
limitation, the term "issuer" shall not include a lender selling a
participation to the Fund together with any other person
interpositioned between such lender and the Fund with respect to a
participation;
(5) Purchase or sell real estate, except pursuant to the
exercise by the Fund of its rights under loan agreements and except to
the extent that interests in Senior Loans the Fund may invest in are
considered to be interests in real estate, and this shall not prevent
the Fund from investing in securities of companies that deal in real
estate or are engaged in the real estate business, including real
estate investment trusts, and securities secured by real estate or
interests therein, and the Fund may hold and sell real estate or
mortgages on real estate acquired through default, liquidation, or
other distributions of an interest in real estate as a result of the
Fund's ownership of such securities;
(6) Purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments except
pursuant to the exercise by the Fund of its rights under loan
agreements and except to the extent that interests in Senior Loans the
Fund may invest in are considered to be interests in commodities and
this shall not prevent the Fund from purchasing or selling options,
futures contracts, derivative instruments or from investing in
securities or other instruments backed by physical commodities;
(7) Make loans except as permitted by the Investment
Company Act of 1940 and exemptive orders granted under the Investment
Company Act of 1940; and
(8) With respect to 75% of the value of the Fund's total
assets, purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, and provided further that for purposes
of this restriction, the term "issuer" includes both the borrower under
a loan agreement and the lender selling a participation to the Fund
together with any other persons interpositioned between such lender and
the Fund with respect to a participation.
For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund, means (i) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.
For the purpose of applying the limitation set forth in subparagraph
(8) above, a governmental issuer shall be deemed the single issuer of a security
when its assets and revenues are separate from other governmental entities and
its securities are backed only by its assets and revenues. Similarly, in the
case of a non-governmental issuer, if the security is backed only by the assets
and revenues of the non-governmental issuer, then such non-governmental issuer
would be deemed to be the single issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above.
S-4
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed 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. As a
stockholder in any investment company, the Fund will bear its ratable share of
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees 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. 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.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, except that the Fund may make
short sales of securities if, at all times when a short position is
open, the Fund owns at least an equal amount of such securities or
securities convertible into or exchangeable for, without payment of any
further consideration, securities of the same issuer as, and equal in
amount to, the securities sold short, and provided that transactions in
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short.
(2) Purchase securities of open-end or closed-end
investment companies except in compliance with the Investment Company
Act of 1940 or any exemptive relief obtained thereunder. The Fund will
rely on representations of borrowers in loan agreements in determining
whether such borrowers are investment companies.
(3) Purchase securities of companies for the purpose of
exercising control, except to the extent that exercise by the Fund of
its rights under loan agreements would be deemed to constitute
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund may be subject to certain restrictions imposed by either
guidelines of one or more NRSROs that may issue ratings for FundPreferred
shares, commercial paper or notes, or, if the Fund borrows from a lender, by the
lender. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed on the Fund by the 1940
Act. It is not anticipated that these covenants or guidelines will impede
Symphony from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies. In addition to other considerations, to the
extent that the Fund believes that the covenants and guidelines required by the
NRSROs or lenders would impede its ability to meet its investment objective, or
if the Fund is unable to obtain the rating on FundPreferred shares (expected to
be at least AA/Aa), the Fund will not issue FundPreferred shares.
S-5
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies, and techniques that are described in the Fund's
Prospectus.
The Fund's investment objective is to achieve a high level of current
income.
In pursuing its objective of high current income, the Fund will invest
in Senior Loans and other debt instruments that may involve significant credit
risk. As part of its efforts to manage this risk and the potential impact of
such risk on the overall value and returns of the Fund's portfolio, Symphony
will implement its credit management strategy that includes (i) a focus on
Senior Loans that are secured by specific assets, (ii) rigorous and ongoing
bottom-up fundamental analysis of issuers, and (iii) overall portfolio
diversification. Symphony will perform its own credit and research analysis of
issuers, taking into consideration, among other things, the entity's financial
resources and operating history, its sensitivity to economic conditions and
trends, the ability of its management, its debt maturity schedules and borrowing
requirements, its anticipated cash flow, interest and asset coverage, and its
earnings prospects. Even with these efforts, because of the greater degree of
credit risk within the portfolio, the Fund's net asset value could decline over
time. In an effort to help preserve the Fund's overall capital, Symphony will
seek to enhance portfolio value by investing in securities it believes to be
undervalued, which, if successful, can mitigate the potential loss of value due
to credit events over time.
Under normal market circumstances, the Fund will invest at least 80% of
its Managed Assets in adjustable rate secured Senior Loans and adjustable rate
unsecured Senior Loans (collectively referred to as "Senior Loans"), which
unsecured Senior Loans will be, at the time of investment, investment grade
quality. The Fund will invest at least 65% of its Managed Assets in Senior Loans
that are secured by specific collateral. Senior Loans pay interest at rates that
are redetermined periodically at short-term intervals by reference to a base
lending rate, primarily the London-Interbank offered rate ("LIBOR"), plus a
premium. The Fund may invest a substantial portion of its Managed Assets in
Senior Loans and other debt instruments that are, at the time of investment,
rated below investment grade or unrated but judged to be of comparable quality.
Senior Loans are made to U.S. or non-U.S. corporations, partnerships and other
business entities ("Borrowers") that operate in various industries and
geographical regions. It is anticipated that the proceeds of the Senior Loans in
which the Fund will invest will be used by Borrowers to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases,
refinancings, internal growth and for other corporate purposes.
The Fund may invest up to 20% of its Managed Assets in (i) other debt
securities such as investment and non-investment grade debt securities,
convertible securities and structured notes (other than structured notes that
are designed to provide returns and risks that emulate those of Senior Loans,
which may be treated as an investment in Senior Loans for purposes of the 80%
test set forth above) (ii) mortgage-related and other asset-backed securities
(including collateralized loan obligations and collateralized debt obligations)
and (iii) debt securities and other instruments issued by government,
government-related or supranational issuers (commonly referred to as sovereign
debt securities). No more than 5% of the Fund's Managed Assets may be invested
in each of convertible securities, mortgage-related and other asset-backed
securities and sovereign debt securities. The debt securities in which the Fund
may invest may have short-term, intermediate-term or long-term maturities. The
Fund also may receive acquire warrants and equity securities issued by a
Borrower or its affiliates in connection with the Fund's other investments in
such entities.
Investment grade quality securities are those securities that, at the
time of investment, are (i) rated within the four highest grades (BBB- or Baa3
or better by Standard & Poor's Corporation, a division of The McGraw-Hill
Companies ("S&P"), Moody's Investors Service, Inc.("Moody's") or Fitch Ratings
("Fitch")), or (ii) unrated but judged to be of comparable quality. The Fund may
purchase Senior Loans
S-6
and other debt securities that are rated below investment grade or that are
unrated but judged to be of comparable quality. No more than 10% of the Fund's
Managed Assets may be invested in Senior Loans and other debt securities that
are, at the time of investment, rated CCC+ or Caa or below by S&P, Moody's or
Fitch or that are unrated but judged to be of comparable quality.
Under normal circumstances:
- The Fund expects to maintain an average duration of one year
or less for its portfolio investments in Senior Loans and
other debt instruments. See "The Fund's Investments --
Investment Objectives and Policies" in the Fund's Prospectus
for a description of duration.
- The Fund will not invest in inverse floating rate securities.
- The Fund may invest up to 20% of its Managed Assets in
securities of non-U.S. issuers (which term for purposes of
this Statement of Additional Information includes Borrowers)
that are U.S. dollar or non-U.S. dollar denominated.
Initially, the Fund does not intend to invest in non-U.S.
dollar denominated securities. The Fund's Managed Assets to be
invested in Senior Loans and other debt instruments of
non-U.S. issuers may include debt securities of issuers
located, or conducting their business in, emerging markets
countries. Initially, the Fund does not intend to invest in
securities of emerging markets issuers.
- The Fund may not invest more than 20% of its Managed Assets in
securities from an industry which (for the purposes of this
Statement of Additional Information) generally refers to the
classification of companies in the same or similar lines of
business such as the automotive, textiles and apparel, hotels,
media production and consumer retailing industries.
- The Fund may invest more than 20% of its Managed Assets in
sectors which (for the purposes of this Statement of
Additional Information) generally refers to broader
classifications of industries, such as the consumer
discretionary sector which includes the automotive, textiles
and apparel, hotels, media production and consumer retailing
industries, provided the Fund's investment in a particular
industry within the sector does not exceed the industry
limitation.
- The Fund may invest up to 50% of its Managed Assets in
securities and other instruments that, at the time of
investment, are illiquid (i.e., securities that are not
readily marketable).
OVERALL FUND MANAGEMENT
NIAC is responsible for the Fund's overall investment strategy and its
implementation, including the use of leverage and hedging.
NIAC oversees Symphony in its management of the Fund's portfolio. This
oversight will include ongoing evaluation of Symphony's investment performance,
quality of investment process and personnel, compliance with Fund and regulatory
guidelines, trade allocation and execution, and other factors.
NIAC also oversees the Fund's use of leverage, and efforts to minimize
the costs and mitigate the risks to Common Shareholders associated with using
financial leverage. See "Use of Leverage" and "Hedging Transactions" in the
Fund's Prospectus. This effort may involve making adjustments to investment
policies in an attempt to minimize costs and mitigate risks.
S-7
SYMPHONY INVESTMENT PHILOSOPHY AND PROCESS
Investment Philosophy. Symphony believes that managing risk,
particularly for volatile assets such as Senior Loans and other forms of high
yield debt, is of paramount importance. Symphony believes that a combination of
fundamental credit analysis and valuation information that is available from the
equity markets provide a means of identifying what it believes to be superior
investment candidates. Additionally, Symphony focuses primarily on liquid
securities to ensure that exit strategies remain available under different
market conditions.
Investment Process. In identifying Senior Loans and other securities
for potential purchase, Symphony combines quantitative screening and fundamental
and relative value analysis. Symphony screens the identified investment
candidates for liquidity constraints and favorable capital structures. The
investment team then performs rigorous bottom-up fundamental analysis to
identify investments with sound industry fundamentals, cash flow sufficiency and
asset quality. The final portfolio is constructed using risk management and
monitoring systems to ensure proper diversification.
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the investments
described below.
Senior Loans. Senior loans, as with the other types of securities in
which the Fund may invest, are counted for purposes of various other limitations
described in this Statement of Additional Information, including the limitation
on investing no more than 50% of the Fund's Managed Assets in illiquid
securities, to the extent such Senior Loans are deemed to be illiquid.
Senior loans, like most other debt obligations, are subject to the risk
of default. Default in the payment of interest or principal on a senior loan
results in a reduction in income to the Fund, a reduction in the value of the
senior loan and a decrease in the Fund's net asset value. This decrease in the
Fund's net asset value would be magnified by the Fund's use of leverage. The
risk of default increases in the event of an economic downturn or a substantial
increase in interest rates. An increased risk of default could result in a
decline in the value of Senior Loans and in the Fund's net asset value.
Many Senior Loans in which the Fund may invest may not be rated by an
NRSRO, generally will not be registered with the Securities and Exchange
Commission and generally will not be listed on a securities exchange. In
addition, the amount of public information available with respect to senior
loans generally may be less extensive than that available for registered and
exchange-listed securities. 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. Senior loans may not be rated at the time that the Fund purchases
them. If a senior loan is rated at the time of purchase, Symphony may consider
the rating when evaluating the senior loan but may not view ratings as a
determinative factor in investment decisions. As a result, the Fund is more
dependent on Symphony's credit analysis abilities. Because of the protective
terms of most Senior Loans, it is possible that the Fund is more likely to
recover more of its investment in a defaulted senior loan than would be the case
for most other types of defaulted debt securities.
In the case of collateralized Senior Loans, there is no assurance that
sale of the collateral would raise enough cash to satisfy the borrower's payment
obligation or that the collateral can or will be liquidated. In the event of
bankruptcy, liquidation may not occur and the court may not give lenders the
full benefit of their senior positions. If the terms of a senior loan do not
require the borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Fund will be
S-8
exposed to the risk that the value of the collateral will not at all times equal
or exceed the amount of the borrower's obligations under the senior loan. To the
extent that a senior loan is collateralized by stock in the borrower or its
subsidiaries, such stock may lose all of its value in the event of bankruptcy of
the borrower. Uncollateralized Senior Loans involve a greater risk of loss. Some
Senior Loans in which the Fund may invest are subject to the risk that a court,
pursuant to fraudulent conveyance or other similar laws, could subordinate such
Senior Loans to presently existing or future indebtedness of the borrower or
take other action detrimental to the holders of Senior Loans, such as the Fund,
including, under certain circumstances, invalidating such Senior Loans. Lenders
commonly have certain obligations pursuant to the loan agreement, which may
include the obligation to make additional loans or release collateral in certain
circumstances.
The amount of public information with respect to Senior Loans generally
may be less extensive than that available for more widely rated, registered and
exchange-listed securities. 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 addition, there is no minimum rating or other independent
evaluation of a borrower or its securities limiting the Fund's investments.
Symphony may rely exclusively or primarily on its own evaluation of
borrower credit quality in selecting Senior Loans for purchase. As a result, the
Fund is particularly dependent on the analytical abilities of Symphony.
No active trading market currently exists for some of the Senior Loans
in which the Fund may invest and, thus, those loans may be illiquid. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner at a
price approximately equal to its value on the Fund's books. The illiquidity of
some Senior Loans 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.
Because of the lack of an active trading market, illiquid securities are also
difficult to value and prices provided by external pricing services may not
reflect the true fair value of the securities. The risks of illiquidity are
particularly important when the Fund's operations require cash, and may in
certain circumstances require that the Fund sell other investments or borrow to
meet short-term cash requirements. To the extent that a secondary market does
exist for certain Senior Loans, the market may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods. The market
for Senior Loans could be disrupted in the event of an economic downturn or a
substantial increase or decrease in interest rates. This could result in
increased volatility in the market and in the Fund's net asset value and market
price per share.
If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
Senior Loans for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions could reduce or eliminate sources of financing
for certain borrowers. This would increase the risk of default. If legislation
or federal or state regulators require financial institutions to dispose of
Senior Loans that are considered highly leveraged transactions or subject such
Senior Loans to increased regulatory scrutiny, financial institutions may
determine to sell such Senior Loans. Such sales could result in prices that, in
the opinion of Symphony, do not represent fair value. If the Fund attempts to
sell a senior loan at a time when a financial institution is engaging in such a
sale, the price the Fund could get for the senior loan may be adversely
affected.
Any lender, which could include the Fund, is subject to the risk that a
court could find the lender liable for damages in a claim by a borrower arising
under the common laws of tort or contracts or anti-fraud provisions of certain
securities laws for actions taken or omitted to be taken by the lenders under
the
S-9
relevant terms of a loan agreement or in connection with actions with respect to
the collateral underlying in the senior loan.
The Fund may purchase participations in Senior Loans. By purchasing a
participation interest in a loan, the Fund acquires some or all of the interest
of a bank or other financial institution in a loan to a corporate borrower.
Under a participation, the Fund generally will have rights that are more limited
than the rights of lenders or of persons who acquire a senior loan by
assignment. In a participation, the Fund typically has a contractual
relationship with the lender selling the participation, but not with the
borrower. As a result, the Fund assumes the credit risk of the lender selling
the participation in addition to the credit risk of the borrower. In the event
of insolvency of the lender selling the participation, the Fund may be treated
as a general creditor of the lender and may not have a senior claim to the
lenders' interest in the senior loan. A lender selling a participation and other
persons interpositioned between the lender and the Fund with respect to
participations will likely conduct their principal business activities in the
banking, finance and financial services industries.
The Fund may purchase and retain in its portfolio Senior Loans where
the Borrowers have experienced, or may be perceived to be likely to experience,
credit problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Fund may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan.
Non-Senior Loan Investments. The Fund may invest in debt instruments
and other securities as described below:
Corporate Bonds. Corporate bonds generally are used by corporations to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest and normally must repay the amount borrowed on or before
maturity. Certain bonds are "perpetual" in that they have no maturity date. The
Fund may invest in bonds and other debt securities of any quality.
Structured Notes. The Fund may use structured notes, which are
privately negotiated debt obligations or economically equivalent instruments
where the principal and/or interest is determined by reference to the
performance of a benchmark asset, market or interest rate (an "embedded index"),
such as selected securities or loans, an index of securities or loans, or
specified interest rates, or the differential performance of two assets or
markets. Structured notes may be issued by corporations, including banks, as
well as by governmental agencies. Structured notes frequently are assembled in
the form of medium-term notes, but a variety of forms are available and may be
used in particular circumstances. The terms of such structured notes normally
provide that their principal and/or interest payments are to be adjusted upwards
or index while the structured notes are outstanding. As a result, the interest
and/or principal payments that may be made on a structured product may vary
widely, depending on a variety factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or
interest payments. If the Fund invests in structured notes that are designed to
provide returns and risks that emulate those of senior loans, the Fund may treat
the value of (or, if applicable, the notional amount of) such investment as an
investment in Senior Loans for purposes of determining compliance with the
requirement set forth above that at least 80% of the Fund's Managed Assets be
invested under normal market circumstances in Senior Loans, except to the extent
that the value (or notional amount) of such investments exceeds 5% of the Fund's
Managed Assets. Any such investment amounts that exceed 5% of Managed Assets
will be treated as a type of "other debt instruments" which, in the aggregate,
are limited to 20% of Managed Assets. The rate of return on structured notes may
be determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of the
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.
Symphony may utilize structured notes for investment purposes and also
for risk management purposes, such as to reduce the duration and interest rate
sensitivity of the Fund's portfolio. While structured notes may offer the
potential for a favorable rate of return from time to time, they also entail
certain risks. Structured notes may be less liquid than other debt securities,
and the price of structured notes may be more volatile. In some cases, depending
on the terms of the embedded index, a structured note may provide that the
principal and/or interest payments may be adjusted below zero. Structured notes
also may involve significant credit risk and risk of default by the
counterparty. Although structured notes are not necessarily illiquid, NIAC
believes that currently most structured notes are illiquid. Like other
sophisticated strategies, the Fund's use of structured notes may not work as
intended. If the value of
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the embedded index changes in a manner other than that expected by Symphony,
principal and/or interest payments received on the structured notes may be
substantially less than expected. Also, if Symphony uses structured notes to
reduce the duration of the Fund's portfolio, this may limit the Fund's return
when having a longer duration of the Fund's portfolio, this may limit the Fund's
return when having a longer duration would be beneficial (for instance, when
interest rates decline).
Below Investment Grade Securities. Investments in below investment
grade 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. Issuers of below
investment grade securities may be highly leveraged and may not have available
to them more traditional methods of financing. 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 below investment grade securities may be more
complex than for issuers of higher quality securities.
Below investment grade 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 lower-grade security
prices because the advent of a recession could lessen the ability of an issuer
to make principal and interest payments on its debt obligations. If an issuer of
below investment grade 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 below investment grade securities
structured as zero coupon 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 which pay interest currently
and in cash. Symphony seeks to reduce these risks through diversification,
credit analysis and attention to current developments and trends in both the
economy and financial markets.
The secondary market for below investment grade 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. There are fewer dealers in the market for below investment
grade securities than for investment grade obligations. The prices quoted by
different dealers may vary significantly and the spread between the bid and ask
price is generally much larger than for higher quality instruments. Under
adverse market or economic conditions, the secondary market for below investment
grade 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.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of below investment
grade securities, especially in a thinly traded market. When secondary markets
for below investment grade 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 less 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 its portfolio securities. The Fund will be
more dependent on Symphony's research and analysis when investing in below
investment grade securities. Symphony seeks to minimize the risks of investing
in all securities through in-depth credit analysis and attention to current
developments in interest rates and market conditions.
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A general description of the ratings of securities by Moody's, S&P and
Fitch is set forth in Appendix B to this Statement of Additional Information.
The ratings of Moody's, S&P and Fitch represent their 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, in the case of
debt obligations, certain debt obligations with the same maturity, coupon and
rating may have different yields while debt obligations with the same maturity
and coupon with different ratings may have the same yield. For these reasons,
the use of credit ratings as the sole method of evaluating lower-grade
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of
lower-grade securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
The Subadviser does not rely solely on credit ratings when selecting
securities for the Fund, and develops its own independent analysis of issuer
credit quality.
The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency or Symphony downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, Symphony may consider such factors as its 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 below
investment grade securities may be more complex than for issuers of higher
quality debt securities.
Convertible Securities. Convertible securities are bonds, debentures,
notes, preferred securities or other securities that may be converted or
exchanged (by the holder or the issuer) into shares of the underlying common
stock (or cash or securities of equivalent value) at a stated exchange ratio or
predetermined price (the "conversion price"). Convertible securities have
general characteristics similar to both debt securities and common stocks. The
interest paid on convertible securities may be fixed or floating rate. Floating
rate convertible securities may specify an interest rate or rates that are
conditioned upon changes to the market price of the underlying common stock.
Convertible securities also may be issued in zero coupon form with an
original issue discount. See "Other Investment Policies and Techniques -- Zero
Coupon and Payment-In-Kind Securities." Although to a lesser extent than with
debt securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, will also react to variations in
the general market for common stocks. Depending upon the relationship of the
conversion price to the market value of the underlying common stock, a
convertible security may trade more like a common stock than a debt instrument.
A convertible security generally entitles the holder to receive
interest paid or accrued until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a debt obligation. Before conversion,
convertible securities have characteristics similar to non-convertible debt
obligations and can provide for a stable stream of income with generally higher
yields than common stocks. However, convertible securities fall below debt
obligations of the same issuer in order of preference or priority in the event
of a liquidation, and are typically unrated or rated lower than such debt
obligations. In addition, contingent payment convertible securities allow the
issuer to claim federal income tax deductions based on its nonconvertible cost
of debt which generally will result in deductions in excess of the actual cash
payments made on the
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securities (and accordingly, holders will recognize income in amounts in excess
of the cash payments received). There can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. The convertible securities in which the Fund may invest may be
below investment grade quality. See " -- Below Investment Grade Securities"
above.
Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar credit quality because of the
potential for capital appreciation. A convertible security, in addition to
providing current income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from any increases
in the market price of the underlying common stock. The common stock underlying
convertible securities may be issued by a different entity than the issuer of
the convertible securities.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate based on the credit quality of the
issuer and will fluctuate inversely with changes in prevailing interest rates.
However, at the same time, the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock, and
will therefore be subject to risks relating to the activities of the issuer
and/or general market and economic conditions. Depending upon the relationship
of the conversion price to the market value of the underlying security, a
convertible security may trade more like an equity security than a debt
instrument.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed-income
security.
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the conversion
price at maturity (or redemption) is based solely upon the market price of the
underlying common stock, which may be significantly less than par or the price
(above or below par) paid. Mandatory convertible securities may be called for
conversion by the issuer after a particular date and under certain circumstances
(including at a specified price) established upon its issuance. For these
reasons, the risks associated with the investing in mandatory convertible
securities most closely resemble the risks inherent in common stocks. Mandatory
convertible securities customarily pay a higher coupon yield to compensate for
the potential risk of additional price volatility and loss upon redemption.
Since the correlation of common stock risk increases as the security approaches
its redemption date, there can be no assurance that the higher coupon will
compensate for the potential loss. If a mandatory convertible security is called
for conversion, the Fund will be required to either convert it into the
underlying common stock or sell it to a third party, which may have an adverse
effect on the Fund's ability to achieve its investment objective.
Convertible securities generally offer lower interest or dividend
yields than non-convertible fixed-income securities of similar credit quality
because of the potential for capital appreciation. The market values of
convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, a convertible
security's market value also tends to reflect the
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market price of the common stock of the issuing company, particularly when the
stock price is greater than the convertible security's conversion price. The
conversion price is defined as the predetermined price or exchange ratio at
which the convertible security can be converted or exchanged for the underlying
common stock. As the market price of the underlying common stock declines below
the conversion price, the price of the convertible security tends to be
increasingly influenced more by the yield of the convertible security than by
the market price of the underlying common stock.
U.S. Government Securities. U.S. Government securities include (1) U.S.
Treasury obligations, which differ in their interest rates, maturities and times
of issuance: U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one year to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years) and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities that are supported by any of
the following: (i) the full faith and credit of the U.S. Treasury, (ii) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury, (iii) discretionary authority of the U.S. Government to
purchase certain obligations of the U.S. Government agency or instrumentality or
(iv) the credit of the agency or instrumentality. The Fund also may invest in
any other security or agreement collateralized or otherwise secured by U.S.
Government securities. Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, FHLMC, FNMA, GNMA, Student Loan Marketing Association,
United States Postal Service, Small Business Administration, Tennessee Valley
Authority and any other enterprise established or sponsored by the U.S.
Government. Because the U.S. Government generally is not obligated to provide
support to its instrumentalities, the Fund will invest in obligations issued by
these instrumentalities only if Symphony determines that the credit risk with
respect to such obligations is minimal.
The principal of and/or interest on certain U.S. Government securities
which may be purchased by the Fund could be (a) payable in non-U.S. currencies
rather than U.S. dollars or (b) increased or diminished as a result of changes
in the value of the U.S. dollar relative to the value of non-U.S. currencies.
The value of such portfolio securities may be affected favorably by
changes in the exchange rate between foreign currencies and the U.S. dollar.
Mortgage-Related and Asset-Backed Securities. Mortgage-related
securities are debt instruments that provide periodic payments consisting of
interest and/or principal that are derived from or related to payments of
interest and/or principal on underlying mortgages. Additional payments on
mortgage-related securities may be made out of unscheduled prepayments of
principal resulting from the sale of the underlying property, or from
refinancing or foreclosure, net of fees or costs that may be incurred. The
mortgage-related securities in which the Fund invests will typically pay
variable rates of interest, although the Fund may invest in fixed-rate
obligations as well.
The Fund may invest in certain asset-backed securities as discussed
below.
Asset-backed securities are payment claims that are securitized in the
form of negotiable paper that is issued by a financing company (generally called
a Special Purpose Vehicle or "SPV"). These securitized payment claims 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 risk arising out of this
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.
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A collateralized loan obligation ("CLO") is a structured credit
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 CLO holders, thereby
creating a series of obligations with varying rates and maturities appealing to
a wide range of investors. CLOs generally are secured by an assignment to a
trustee under an indenture pursuant to which the bonds are issued of collateral
consisting of a pool of debt instruments, usually, non-investment grade bank
loans. Payments with respect to the underlying debt securities generally are
made to the trustee under the indenture. CLOs are designed to be retired as the
underlying debt instruments are repaid. In the event of sufficient early
prepayments on such debt instruments, the class or series of CLO first to mature
generally will be retired prior to maturity. Therefore, although in most cases
the issuer of CLOs will not supply additional collateral in the event of such
prepayments, there will be sufficient collateral to secure their priority with
respect to other CLO tranches that remain outstanding. The credit quality of
these securities depends primarily upon the quality of the underlying assets,
their priority with respect to other CLO tranches and the level of credit
support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average maturity and may lower their return. If
the credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution or fund providing the
credit support or enhancement.
The Fund also may invest in collateralized debt obligations ("CDOs"). A
CDO is a structured credit security issued by an SPV that was created to
reapportion the risk and return characteristics of a pool of assets. The assets,
typically non-investment grade bonds, leveraged loans, and other asset-backed
obligations, are used as collateral supporting the various debt and equity
tranches issued by the SPV. CDOs operate similarly to CLOs and are subject to
the same inherent risks.
Generally, rising interest rates tend to extend the duration of
fixed-rate mortgage-related securities, making them more sensitive to changes in
interest rates. As a result, in a period of rising interest rates,
mortgage-related securities held by the Fund may exhibit additional volatility.
This is known as extension risk. Symphony expects that the Fund will focus its
mortgage-related investments principally in adjustable rate mortgage-related and
other asset-backed securities, which should minimize the Fund's overall
sensitivity to interest rate volatility and extension risk. However, because
interest rates on most adjustable rate mortgage-related and other asset-backed
securities typically only reset periodically (e.g., monthly or quarterly),
changes in prevailing interest rates (and particularly sudden and significant
changes) can be expected to cause some fluctuation in the market value of these
securities, including declines in market value as interest rates rise. In
addition, adjustable and fixed rate mortgage-related securities are subject to
prepayment risk. This can reduce the Fund's returns because the Fund may have to
reinvest that money at lower prevailing interest rates. Below investment grade
securities frequently have call features that allow an issuer to redeem a
security at dates prior to its stated maturity at a specified price (typically
greater than par) only if certain prescribed conditions are met (commonly
referred to as call protection). An issuer may redeem a lower grade security if,
for example, the issuer can refinance the debt at a lower cost due to declining
interest rates or an improvement in the credit standing of the issuer. Senior
Loans typically have no such call protection. For premium bonds (bonds acquired
at prices that exceed their par or principal value) purchased by the Fund,
prepayment risk may be increased. The Fund's investments in other asset-backed
securities are subject to risks similar to those associated with
mortgage-related securities, as well as additional risks associated with the
nature of the assets and the servicing of those assets.
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Debtor-In-Possession Financings. 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.
Commercial Paper. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by corporations such as banks or bank
holding companies and finance companies. The rate of return on commercial paper
may be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
Warrants and Equity Securities. The Fund may acquire equity securities
and warrants issued by a Borrower or its affiliates as part of a package of
investments in the Borrower or its affiliates issued in connection with a Senior
Loan of the Borrower. The Fund also may convert a warrant so acquired into the
underlying security. Investments in warrants and equity securities entail
certain risks in addition to those associated with investments in Senior Loans.
The value of these securities may be affected more rapidly, and to a greater
extent, by company-specific developments and general market conditions. These
risks may increase fluctuations in the Fund's net asset value. The Fund may
possess material non-public information about a Borrower as a result of its
ownership of a Senior Loan of such Borrower. Because of prohibitions on trading
in securities of issuers while in possession of such information the Fund might
be unable to enter into a transaction in a security of such a Borrower when it
would otherwise be advantageous to do so.
OTHER INVESTMENT POLICIES AND TECHNIQUES
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. Government securities or municipal bonds) agrees to repurchase
the same security at a specified price on a future date agreed upon by the
parties. The agreed-upon repurchase price determines the yield during the Fund's
holding period. Repurchase agreements are considered to be loans collateralized
by the underlying security that is the subject of the repurchase contract. The
Fund will only enter into repurchase agreements with registered securities
dealers or domestic banks that, in the opinion of Symphony, present minimal
credit risk. The risk to the Fund is limited to the ability of the issuer to pay
the agreed-upon repurchase price on the delivery date; however, although the
value of the underlying collateral at the time the transaction is entered into
always equals or exceeds the agreed-upon repurchase price, if the value of the
collateral declines there is a risk of loss of both principal and interest. In
the event of default, the collateral may be sold but the Fund might incur a loss
if the value of the collateral declines, and might incur disposition costs or
experience delays in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Symphony
will monitor the value of the collateral at the time the transaction is entered
into and at all times subsequent during the term of the repurchase agreement in
an effort to determine that such value always equals or exceeds the agreed-upon
repurchase price. In the event the value of the collateral declines below the
repurchase price, Symphony will demand additional collateral from the issuer to
increase Symphony of the collateral to at least that of the repurchase price,
including interest.
S-16
SOVEREIGN DEBT SECURITIES
The Fund may invest in debt securities and other instruments that are
issued by, or that are related to, government, government-related and
supranational issuers, including those located, or conducting their business, in
emerging markets countries.
The ability of a non-U.S. sovereign issuer, especially in an emerging
market country, to make timely and ultimate payments on its debt obligations
will be strongly influenced by the sovereign issuer's balance of payments,
including export performance, its access to international credits and
investments, fluctuations of interest rate and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its export in currencies other than dollars, its
ability to make debt payments denominated in dollars could be adversely
affected. If a sovereign issuer cannot generate sufficient earnings from foreign
trade to service its external debt, it may need to depend on continuing loans
and aid from foreign governments, commercial banks and multinational
organizations. There may be no bankruptcy proceedings similar to those in U.S.
by which defaulted interest may be collected.
Additional factors that may influence the ability or willingness to
service debt include, but are not limited to, a country's cash flow situation,
the availability or sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, and its
government's policy towards the International Monetary Fund, the International
Bank for Reconstruction and Development and other international agencies to
which a government debtor may be subject.
The Fund may invest in debt securities issued by issuers located, or
conducting their business in, emerging markets countries, and investments in
such debt securities are particularly speculative. Heightened risks of investing
in emerging markets sovereign debt include:
- Risk of default by a governmental issuer or guarantor. In the
event of a default, the Fund may have limited legal recourse
against the issuer and/or guarantor.
- Risk of restructuring certain debt obligations. This may
include reducing and rescheduling interest and principal
payments or requiring lenders to extend additional credit,
which may adversely affect the value of these investments.
In addition, risks of investing in emerging markets securities include:
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity, significant price volatility, restrictions on foreign
investment, and possible repatriation of investment income and capital. in
addition, foreign investors may be required to register the proceeds of sales,
future economic or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and devaluation may
occur subsequent to investments in these currencies by the Fund. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
markets countries.
SECURITIES ISSUED BY NON-U.S. ISSUERS
The Fund may invest up to 20% of its Managed Assets in securities of
non-U.S. issuers that are U.S. dollar or non-U.S. dollar denominated. Initially,
the Fund does not intend to invest in non-U.S. dollar denominated securities.
The Fund may invest in any region of the world and invest in companies operating
in developed countries such as Canada, Japan, Australia, New Zealand and most
Western
S-17
European countries. Initially, the Fund does not intend to invest in securities
of emerging market issuers. As used in this Statement of Additional Information,
an "emerging market" country is any country determined to have an emerging
markets economy, considering, among other things, factors such as whether the
country has a low-to-middle income economy according to the World Bank or its
related organizations, the country's credit rating, its political and economic
stability and the development of its financial and capital markets. These
countries generally include countries located in Latin America, the Caribbean,
Asia, Africa, the Middle East and Eastern and Central Europe.
Securities of non-U.S. issuers include ADRs, Global Depositary Receipts
(GDRs) or other securities representing underlying shares of non-U.S. issuers.
Positions in those securities are not necessarily denominated in the
same currency as the common stocks into which they may be converted. ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying securities. GDRs are U.S. dollar-denominated
receipts evidencing ownership of non-U.S. securities. Generally, ADRs, in
registered form, are designed for the U.S. securities markets and GDRs, in
bearer form, are designed for use in non-U.S. securities markets. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the
Fund is likely to bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored ADR. Investors should understand and consider
carefully the risks involved in investing in securities of non-U.S. issuers.
Investing in securities of non-U.S. issuers involves certain considerations
comprising both risks and opportunities not typically associated with investing
in securities of U.S. issuers. These considerations include: (i) less publicly
available information about non-U.S. issuers or markets due to less rigorous
disclosure or accounting standards or regulatory practices; (ii) many non-U.S.
markets are smaller, less liquid and more volatile, meaning that, in a changing
market, Symphony may not be able to sell the Fund's portfolio securities at
times, in amounts or at prices it considers reasonable; (iii) potential adverse
effects of fluctuations in currency exchange rates or controls on the value of
the Fund's investments; (iv) the economies of non-U.S. countries may grow at
slower rates than expected or may experience a downturn or recession; (v) the
impact of economic, political, social or diplomatic developments may adversely
affect the securities markets; (vi) withholding and other non-U.S. taxes may
decrease the Fund's return; (vii) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal
and/or interest to investors located outside the U.S. due to blockage of foreign
currency exchanges or otherwise; and (viii) possible seizure, expropriation or
nationalization of the company or its assets. These risks are more pronounced to
the extent that the Fund invests a significant amount of its investments in
issuers located in one region and to the extent that the Fund invests in
securities of issuers in emerging markets. Although the Fund may hedge its
exposure to certain of these risks, including the foreign currency exchange rate
risk, there can be no assurance that the Fund will enter into hedging
transactions at any time or at times or under circumstances in which it might be
advisable to do so.
Debt Obligations of Non-U.S. Governments. 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.
S-18
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 non-U.S. currency reserves, the availability
of sufficient non-U.S. currency, 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.
Eurodollar Instruments and Yankee Bonds. The Fund may invest in
Eurodollar instruments and Yankee bonds. Yankee bonds are U.S. dollar
denominated bonds typically issued in the U.S. by non-U.S. governments and their
agencies and non-U.S. banks and corporations. These investments involve risks
that are different from investments in securities issued by U.S. issuers,
including potential unfavorable political and economic developments, non-U.S.
withholding or other taxes, seizure of non-U.S. deposits, currency controls,
interest limitations or other governmental restrictions which might affect
payment of principal or interest.
ZERO COUPON AND PAYMENT-IN-KIND SECURITIES
The Fund's investments in debt securities may be in the form of a zero
coupon bond. Zero coupon bonds are debt obligations that do not entitle the
holder to any periodic payments of interest for the entire life of the
obligation. When held to its maturity, its return comes from the difference
between the purchase price and its maturity value. Payment-in-kind securities
("PIKs") pay dividends or interest in the form of additional securities of the
issuer, rather than in cash. 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
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 to be taxed 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 investment company
taxable income, including the original issue discount accrued on zero coupon
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 order to avoid unfavorable tax
consequences. In some circumstances, such sales might be necessary in order to
satisfy cash distribution requirements to its shareholders even though
investment considerations might otherwise make it undesirable for the Fund to
sell securities at such time. See "Federal Income Tax Matters." Under many
market conditions, investments in zero coupon bonds and PIKs may be illiquid,
making it difficult for the Fund to dispose of them or determine their current
value.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. On such transactions the payment
obligation and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Commission to maintain in a
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separate account liquid assets, consisting of cash, cash equivalents or liquid
securities having a market value at all times of at least equal to the amount of
any delayed payment commitment. Income generated by any such assets which
provide taxable income for federal income tax purposes is includable in the
taxable income of the Fund. The Fund may enter into contracts to purchase
securities on a forward basis (i.e., where settlement will occur more than 60
days from the date of the transaction) only to the extent that the Fund
specifically collateralizes such obligations with a security that is expected to
be called or mature within sixty days before or after the settlement date of the
forward transaction. The commitment to purchase securities on a when-issued,
delayed delivery or forward basis may involve an element of risk because no
interest accrues on the bonds prior to settlement and at the time of delivery
the market value may be less than their cost.
NO INVERSE FLOATING RATE SECURITIES
The Fund will not invest in inverse floating rate securities, which are
securities that pay interest at rates that vary inversely with changes in
prevailing interest rates and which represent a leveraged investment in an
underlying security.
HEDGING TRANSACTIONS
As a non-fundamental policy that can be changed by the Board of
Trustees, the use of derivatives and other transactions for purposes of hedging
the portfolio will be restricted to reducing the portfolio's exposure to lower
grade credit risk, foreign currency exchange rate risk and the risk of increases
in interest rates. The specific derivative instruments to be used, or other
transactions to be entered into, for hedging purposes may include the purchase
or sale of futures contracts on securities, credit-linked notes, securities
indices, other indices or other financial instruments; options on futures
contracts; exchange-traded and over-the-counter options on securities or
indices; index-linked securities; swaps; and currency exchange transactions.
Some, but not all, of the derivative instruments may be traded and listed on an
exchange. The positions in derivatives will be marked-to-market daily at the
closing price established on the relevant exchange or at a fair value.
There may be an imperfect correlation between changes in the value of
the Fund's portfolio holdings and hedging positions entered into by the Fund,
which may prevent the Fund from achieving the intended hedge or expose the Fund
to risk of loss. In addition, the Fund's success in using hedging instruments is
subject to Symphony's ability to predict correctly changes in the relationships
of such hedge instruments to the Fund's portfolio holdings or other factors, and
there can be no assurance that Symphony's judgment in this respect will be
correct. Consequently, the use of hedging transactions might result in a poorer
overall performance for the Fund, whether or not adjusted for risk, than if the
Fund had not hedged its portfolio holdings. In addition, there can be no
assurance that the Fund will enter into hedging or other transactions at times
or under circumstances in which it would be advisable to do so. See "Risk
Factors--Hedging Risks" in the Fund's Prospectus.
Short Sales. The Fund may make short sales of securities if, at all
times when a short position is open, the Fund owns at least an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issuer as, and
equal in amount to, the securities sold short. This technique is called selling
short "against the box."
In a short sale, the Fund will not deliver from its portfolio the
securities sold and will not receive immediately the proceeds from the sale.
Instead, the Fund will borrow the securities sold short from a broker-dealer
through which the short sale is executed and the broker-dealer will deliver such
securities, on behalf of the Fund, to the purchaser of such securities. Such
broker-dealer will be entitled to retain the proceeds from the short sale until
the Fund delivers to such broker-dealer the securities sold short. In addition,
the Fund will be required to pay the broker-dealer the amount of any dividends
paid on shares
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sold short. Finally, to secure its obligation to deliver to such broker-dealer
the securities sold short, the Fund must deposit and continuously maintain in a
separate account with its custodian an equivalent amount of the securities sold
short or securities convertible into or exchangeable for such securities without
the payment of additional consideration. The Fund is said to have a short
position in the securities sold until it delivers to the broker-dealer the
securities sold, at which time the Fund will receive the proceeds of the sale.
Because the Fund ordinarily will want to continue to hold securities in its
portfolio that are sold short, the Fund will normally close out a short position
by purchasing on the open market and delivering to the broker-dealer an equal
amount of the securities sold short, rather than delivering portfolio
securities. Short sales may protect the Fund against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gain in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the conversion premium. The Fund will incur
transaction costs in connection with short sales. In addition to enabling the
Fund to hedge against market risk, short sales may afford the Fund an
opportunity to earn additional current income to the extent the Fund is able to
enter into arrangements with broker-dealers through which the short sales are
executed to receive income with respect to the proceeds of the short sales
during the period the Fund's short positions remain open.
The Code imposes constructive sale treatment for federal income tax
purposes on certain hedging strategies with respect to appreciated financial
positions. Under these rules, taxpayers will recognize gain, but not loss, with
respect to securities if they enter into short sales or "offsetting notional
principal contracts" (as defined by the Code) with respect to, or futures or
forward contracts to deliver, the same or substantially identical property, or
if they enter into such transactions and then acquire the same or substantially
identical property. The Secretary of Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that have
substantially the same effect as these transactions. See "Federal Income Tax
Matters."
Options on Securities. In order to hedge against adverse market shifts,
the Fund may purchase put and call options on stock, bonds or other securities.
In addition, the Fund may seek to hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security or its equivalent at a
specified price at any time during the option period. In contrast, a call option
gives the purchaser the right to buy the underlying security covered by the
option or its equivalent from the writer of the option at the stated exercise
price at any time during the option period.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time during the option period prior to the
option's expiration date. The Fund may choose to exercise the options it holds,
permit them to expire or terminate them prior to their expiration by entering
into closing sale or purchase transactions. In entering into a closing sale or
purchase transaction, the Fund would sell an option of the same series as the
one it has purchased. The ability of the Fund to enter into a closing sale
transaction with respect to options purchased and to enter into a closing
purchase transaction with respect to options sold depends on the existence of a
liquid secondary market. There can be no assurance that a closing purchase or
sale transaction can be effected when the Fund so desires. The Fund's ability to
terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange-traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to the Fund.
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In purchasing a put option, the Fund will seek to benefit from a
decline in the market price of the underlying security, while in purchasing a
call option, the Fund will seek to benefit from an increase in the market price
of the underlying security. If an option purchased is not sold or exercised when
it has remaining value, or if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
remains equal to or below the exercise price, in the case of a call, during the
life of the option, the option will expire worthless. For the purchase of an
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the instruments underlying the options,
buying options can result in additional amounts of leverage to the Fund. The
leverage caused by trading in options could cause the Fund's net asset value to
be subject to more frequent and wider fluctuation than would be the case if the
Fund did not invest in options.
The Fund will receive a premium when it writes put and call options,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call, the
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security above the exercise price of the option for as long as
the Fund's obligation as the writer of the option continues. Upon the exercise
of a put option written by the Fund, the Fund may suffer an economic loss equal
to the difference between the price at which the Fund is required to purchase
the underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option written by the Fund, the Fund may suffer an economic loss equal to an
amount not less than the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
sum of the premium received for writing the option and the difference, if any,
between the call price paid to the Fund and the Fund's acquisition cost of the
security. Thus, in some periods the Fund might receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities unhedged.
Options on Stock and Bond Indexes. The Fund may purchase put and call
options on stock and bond indexes to hedge against risks of market-wide price
movements affecting its assets. In addition, the Fund may write covered put and
call options on stock and bond indexes. A stock or bond index measures the
movement of a certain group of stocks or bonds by assigning relative values to
the stocks or bonds included in the index. Options on a stock or bond index are
similar to options on securities. Because no underlying security can be
delivered, however, the option represents the holder's right to obtain from the
writer, in cash, a fixed multiple of the amount by which the exercise price
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the exercise date. The advisability of
using stock or bond index options to hedge against the risk of market-wide
movements will depend on the extent of diversification of the Fund's investments
and the sensitivity of its investments to factors influencing the underlying
index. The effectiveness of purchasing or writing stock or bond index options as
a hedging technique will depend upon the extent to which price movements in the
Fund's investments correlate with price movements in the stock or bond index
selected. In addition, successful use by the Fund of options on stock or bond
indexes will be subject to the ability of Symphony to predict correctly changes
in the relationship of the underlying index to the Fund's portfolio holdings. No
assurance can be given that Symphony's judgment in this respect will be correct.
When the Fund writes an option on a stock or bond index, it will
establish a segregated account with its custodian in which the Fund will deposit
liquid securities in an amount equal to the market value of the option, and will
maintain the account while the option is open.
S-22
Stock and Bond Index Futures Contracts. The Fund may purchase and sell
stock index futures as a hedge against movements in the equity markets. Stock
and bond index futures contracts are agreements in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock or bond index at the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
For example, if Symphony expects general stock or bond market prices to
decline, it might sell a futures contract on a particular stock or bond index.
If that index does in fact decline, the value of some or all of the securities
in the fund's portfolio may also be expected to decline, but that decrease would
be offset in part by the increase in the value of the Fund's position in such
futures contract. If, on the other hand, Symphony expects general stock or bond
market prices to rise, it might purchase a stock or bond index futures contract
as a hedge against an increase in prices of particular securities it wants
ultimately to buy. If in fact the stock or bond index does rise, the price of
the particular securities intended to be purchased may also increase, but that
increase would be offset in part by the increase in the value of the Fund's
futures contract resulting from the increase in the index. The Fund may purchase
futures contracts on a stock or bond index to enable Symphony to gain immediate
exposure to the underlying securities market pending the investment in
individual securities of the Fund's portfolio.
Under regulations of the Commodity Futures Trading Commission ("CFTC")
currently in effect, which may change from time to time, with respect to futures
contracts purchased by the Fund, the Fund will set aside in a segregated account
liquid securities with a value at least equal to the value of instruments
underlying such futures contracts less the amount of initial margin on deposit
for such contracts. The current view of the staff of the Securities and Exchange
Commission is that the Fund's long and short positions in futures contracts must
be collateralized with cash or certain liquid assets held in a segregated
account or "covered" in order to counter the impact of any potential leveraging.
Parties to a futures contract must make "initial margin" deposits to
secure performance of the contract. There are also requirements to make
"variation margin" deposits from time to time as the value of the futures
contract fluctuates. The Fund and NIAC have claimed, respectively, an exclusion
from registration as a commodity pool and as a commodity trading advisor under
the Commodity Exchange Act (CEA) and, therefore, neither the Fund nor NIAC, or
their officers and directors, are subject to the registration requirements of
the CEA.
The Fund reserves the right to engage in transactions involving futures
and options thereon to the extent allowed by CFTC regulations in effect from
time to time and in accordance with the Fund's policies. In addition, certain
provisions of the Code may limit the extent to which the Fund may enter into
futures contracts or engage in options transactions. See "Federal Income Tax
Matters."
The potential loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option (plus transaction costs).
With respect to options purchased by the Fund, there are no daily cash
payments made by the Fund to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
Other Futures Contracts and Options on Futures Contracts. The Fund's
use of derivative instruments also may include (i) U.S. Treasury security or
U.S. Government Agency security futures contracts and (ii) options on U.S.
Treasury security or U.S. Government Agency security futures contracts. All such
instruments must be traded and listed on an exchange. U.S. Treasury and U.S.
Government Agency futures contracts are standardized contracts for the future
delivery of a U.S. Treasury Bond or U.S. Treasury Note or a U.S. Government
Agency security or their equivalent at a future date at a price set at the time
of the contract. An option on a U.S. Treasury or U.S. Government Agency futures
S-23
contract, as contrasted with the direct investment in such a contract, gives the
purchaser of the option the right, in return for the premium paid, to assume a
position in a U.S. Treasury or U.S. Government Agency futures contract at a
specified exercise price at any time on or before the expiration date of the
option. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's future margin account, which
represents the amount by which the market price of the futures contract exceeds
the exercise price of the option on the futures contract.
Risks Associated with Futures Contracts and Options on Futures
Contracts. Futures prices are affected by many factors, such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument and the time remaining until expiration of the contract. 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. If, for example, the Fund had insufficient cash, it might have to
sell a portion of its underlying portfolio of securities in order to meet daily
variation margin requirements on its futures contracts or options on futures
contracts at a time when it might be disadvantageous to do so. 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 speculative 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. Futures
prices are affected by many factors, such as current and anticipated short-term
interest rates, changes in volatility of the underlying instrument and the time
remaining until the expiration of the contract. Further, the Fund's use of
futures contracts and options on futures contracts to reduce risk involves costs
and will be subject to Symphony's ability to predict correctly changes in
interest rate relationships or other factors. A decision as to whether, when and
how to use futures contracts involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some degree because of
market behavior or unexpected stock price or interest rate trends. No assurance
can be given that Symphony's judgment in this respect will be correct.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit.
The daily limit governs only price movements during a particular
trading day and therefore does not limit potential losses because the limit may
work to prevent the liquidation of unfavorable positions. For example, futures
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to substantial
losses. Stock index futures contracts are not normally subject to such daily
price change limitations.
The Fund may invest in other options. An option is an instrument that
gives the holder of the instrument the right, but not the obligation, to buy or
sell a predetermined number of specific securities (i.e. preferred stocks,
common stocks or bonds) at a stated price within the expiration period of the
instrument, which is generally less than 12 months from its issuance. If the
right is not exercised after a specified period but prior to the expiration, the
option expires. Both put and call options may be used by the Fund.
S-24
Structured Notes. The Fund may use structured notes and similar
instruments for hedging purposes. Structured notes are privately negotiated debt
obligations or economically equivalent instruments where the principal and/or
interest is determined by reference to the performance of a benchmark asset,
market or interest rate (an "embedded index"), such as selected securities or
loans, an index of securities or loans or specified interest rates or the
differential performance of two assets or markets. The terms of such structured
instruments normally provide that their principal and/or interest payments are
to be adjusted upwards or downwards (but not ordinarily below zero) to reflect
changes in the embedded index while the structured instruments are outstanding.
As a result, the interest and/or principal payments that may be made on a
structured product may vary widely, depending on a variety of factors, including
the volatility of the embedded index and the effect of changes in the embedded
index on principal and/or interest payments. The rate of return on structured
notes may be determined by applying a multiplier to the performance or
differential performance of the referenced index(es) or other asset(s).
Application of a multiplier involves leverage that will serve to
magnify the potential for gain and the risk of loss.
The Fund may purchase and sell various other kinds of financial futures
contracts and options thereon. Futures contracts may be based on various debt
securities and securities indices (such as the Municipal Bond Index traded on
the Chicago Board of Trade). Such transactions involve a risk of loss or
depreciation due to unanticipated adverse changes in securities prices, which
may exceed the Fund's initial investment in these contracts. The Fund will only
purchase or sell futures contracts or related options in compliance with the
rules of the Commodity Futures Trading Commission. These transactions involve
transaction costs. There can be no assurance that the Fund's use of futures will
be advantageous to the Fund. Guidelines established by one or more NRSROs that
rate any FundPreferred shares issued by the Fund may limit use of these
transactions.
Credit-Linked Notes. The Fund may invest in credit-linked notes ("CLN")
for risk management purposes, including diversification. A CLN is a derivative
instrument that 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
obligation and interest rate risk, the buyer/seller of the CLN is subject to
counterparty risk. See "Risk Factors -- Counterparty Risk" in the Fund's
Prospectus.
Swaps. Swap contracts may be purchased or sold to hedge against
fluctuations in securities prices, interest rates or market conditions, to
change the duration of the overall portfolio, or to mitigate default risk. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) to be exchanged or "swapped" between the
parties, which returns are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index.
Credit Default Swaps. The Fund may enter into credit default swap
contracts for risk management purposes, including diversification. When the Fund
is the buyer of a credit default swap contract, the Fund is entitled to receive
the par (or other agreed-upon) value of a referenced debt obligation from the
counterparty to the contract in the event of a default by a third party, such as
a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the Fund
would pay the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Fund would have spent the stream of payments and received no benefit from
the contract. When the Fund is the seller of a credit default swap contract, it
receives the stream of payments, but is obligated to pay upon default of the
referenced debt obligation. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total net assets, the Fund
would be subject to investment exposure on the notional amount of the swap. The
Fund will segregate assets in the
S-25
form of cash and cash equivalents in an amount equal to the aggregate market
value of the credit default swaps of which it is the seller, marked to market on
a daily basis. These transactions involve certain risks, including the risk that
the seller may be unable to fulfill the transaction.
Interest Rate Swaps. The Fund will enter into interest rate and total
return swaps only 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. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of fixed rate payments for floating rate payments). The Fund will
only enter into interest rate swaps on a net basis. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. The net amount
of the excess, if any, of the Fund's obligations over its entitlements will be
maintained in a segregated account by the Fund's custodian. The Fund will not
enter into any interest rate swap unless the claims-paying ability of the other
party thereto is considered to be investment grade by the Advisers. 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.
These instruments are traded in the over-the-counter market.
The Fund may use interest rate swaps for risk management purposes only
and not as a speculative investment and would typically use interest rate swaps
to shorten the average interest rate reset time of the Fund's holdings. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). The use of interest rate swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If Symphony is incorrect in its forecasts of market values, interest rates and
other applicable factors, the investment performance of the Fund would be
unfavorably affected.
Total Return Swaps. As stated above, the Fund will enter into total
return swaps only on a net basis. Total return swaps are contracts in which one
party agrees to make payments of the total return from the 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).
Currency Exchange Transactions. The Fund may enter into currency
exchange transactions to hedge the Fund's exposure to foreign currency exchange
rate risk in the event the Fund invests in non-U.S. dollar denominated
securities of non-U.S. issuers as described in this Statement of Additional
Information. The Fund's currency transactions will be limited to portfolio
hedging involving portfolio positions. Portfolio hedging is the use of a forward
contract with respect to a portfolio security position denominated or quoted in
a particular currency. A forward contract is an agreement to purchase or sell a
specified currency at a specified future date (or within a specified time
period) and price set at the time of the contract. Forward contracts are usually
entered into with banks, foreign exchange dealers or broker-dealers, are not
exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency,
the Fund may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual obligation to
deliver the currency by purchasing an offsetting contract with the same currency
trader obligating it to purchase on the same maturity date the same amount of
the currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the
S-26
security and make delivery of the currency. Conversely, it may be necessary to
sell on the spot market some of the currency received upon the sale of the
portfolio security if its market value exceeds the amount of currency the Fund
is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
Other Hedging Transactions. The Fund may invest in relatively new
instruments without a significant trading history for purposes of hedging the
Fund's portfolio risks. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.
ILLIQUID SECURITIES
The Fund may invest up to 50% of its Managed Assets in securities and
other instruments that, at the time of investment, are illiquid (i.e.,
securities that are not readily marketable). For this purpose, illiquid
securities may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), that are deemed to be
illiquid, and certain repurchase agreements. The Board of Trustees or its
delegate has the ultimate authority to determine which securities are liquid or
illiquid for purposes of this 50% limitation. The Board of Trustees has
delegated to Symphony the day-to-day determination of the illiquidity of any
security held by the Fund, although it has retained oversight and ultimate
responsibility for such determinations. No definitive liquidity criteria are
used. The Board of Trustees has directed Symphony when making liquidity
determinations to look for such factors as (i) the nature of the market for a
security (including the institutional private resale market; the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security; the amount of time normally needed to dispose of the
security; and the method of soliciting offers and the mechanics of transfer),
(ii) the terms of certain securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), and (iii) other relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
S-27
were to develop, the Fund might obtain a less favorable price than that which
prevailed when it decided to sell. Illiquid securities will be priced at fair
value as determined in good faith by the Board of Trustees or its delegate. If,
through the appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 50% of the value of
its Managed Assets is invested in illiquid securities, including restricted
securities that are not readily marketable, the Fund will take such steps as are
deemed advisable, if any, to protect liquidity.
Short-Term/Long-Term Debt Securities; Defensive Position; Invest-Up
Period. During temporary defensive purposes or in order to keep the Fund's cash
on hand fully invested, including the period during which the net proceeds of
the offering are being invested, the Fund may invest up to 100% of its Managed
Assets in cash equivalents and investment grade debt securities, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. In addition, upon Symphony's recommendation that a change
would be in the best interests of the Fund and upon concurrence by NIAC, and
subject to approval of the Board of Trustees of the Fund, Symphony may deviate
from its investment guidelines discussed herein. In such a case, the Fund may
not pursue or achieve its investment objective. These investments are defined to
include, without limitation, the following:
(1) U.S. government securities, including bills, notes
and bonds differing as to maturity and rates of interest that are
either issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds
deposited in a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a specified rate
of return, and are normally negotiable. The issuer of a certificate of
deposit agrees to pay the amount deposited plus interest to the bearer
of the certificate on the date specified thereon. Under current FDIC
regulations, the maximum insurance payable as to any one certificate of
deposit is $100,000; therefore, certificates of deposit purchased by
the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of
debt securities. At the time the Fund purchases securities pursuant to
a repurchase agreement, it simultaneously agrees to resell and
redeliver such securities to the seller, who also simultaneously agrees
to buy back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. The Fund may enter into
repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of deposit;
or bankers' acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to
S-28
the seller, collateralized by the underlying securities. The risk to
the Fund is limited to the ability of the seller to pay the agreed-upon
sum on the repurchase date; in the event of default, the repurchase
agreement provides that the Fund is entitled to sell the underlying
collateral. If the seller defaults under a repurchase agreement when
the value of the underlying collateral is less than the repurchase
price, the Fund could incur a loss of both principal and interest. The
Adviser monitors the value of the collateral at the time the action is
entered into and at all times during the term of the repurchase
agreement. The Adviser does so in an effort to determine that the value
of the collateral always equals or exceeds the agreed-upon repurchase
price to be paid to the Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the Fund to liquidate the
collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws.
(4) Commercial paper, which consists of short-term
unsecured promissory notes, including variable rate master demand notes
issued by corporations to finance their current operations. Master
demand notes are direct lending arrangements between the Fund and a
corporation. There is no secondary market for such notes. However, they
are redeemable by the Fund at any time. Symphony will consider the
financial condition of the corporation (e.g., earning power, cash flow,
and other liquidity measures) and will continuously monitor the
corporation's ability to meet all of its financial obligations, because
the Fund's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the highest
categories by a NRSRO and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its Managed Assets in securities of
other open- or closed-end investment companies that invest primarily in
securities of the types in which the Fund may invest directly. In addition, the
Fund may invest a portion of its Managed Assets in pooled investment vehicles
(other than investment companies) that invest primarily in securities of the
types in which the Fund may invest directly. The Fund generally expects that it
may invest in other investment companies and/or other pooled investment vehicles
either during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
Common Shares, FundPreferred shares and/or Borrowings, or during periods when
there is a shortage of attractive securities of the types in which the Fund may
invest in directly available in the market. As an investor in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's advisory and
administrative fees with respect to assets so invested. Common Shareholders
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. Symphony will take expenses into account
when evaluating the investment merits of an investment in the investment company
relative to available securities of the types in which the Fund may invest
directly. In addition, the securities of other investment companies also may be
leveraged and therefore will be subject to the same leverage risks described
herein. The net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares. The Fund will treat its investments in
such investment companies as investments in Senior Loans for all purposes, such
as for purposes of determining compliance with the requirement set forth above
that at least 80% of the Fund's Managed Assets be invested under normal market
circumstances in Senior Loans.
S-29
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers and banks.
Any such loan must be continuously secured by collateral in cash or cash
equivalents maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned through payments from the borrower. The Fund would also
receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging these loans. The Fund would
have the right to call the loan and obtain the securities loaned at any time on
notice of not more than five business days. The Fund would not have the right to
vote the securities during the existence of the loan but would call the loan to
permit voting of the securities, if, in Symphony's judgment, a material event
requiring a shareholder vote would otherwise occur before the loan was repaid.
In the event of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or recovering the
loaned securities and losses, including (a) possible decline in the value of the
collateral or in the value of the securities loaned during the period while the
Fund seeks to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c) expenses of
enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment
objective of the Fund in relation to actual and anticipated movements in
interest rates. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what
Symphony believes to be a temporary price disparity between the two securities.
Temporary price disparities between two comparable securities may result from
supply and demand imbalances where, for example, a temporary oversupply of
certain securities may cause a temporarily low price for such securities, as
compared with other securities of like quality and characteristics. A security
may also be sold when Symphony anticipates a change in the price of such
security, Symphony believes the price of a security has reached or is near a
realistic maximum, or there are other securities that Symphony believes are more
attractive given the Fund's investment objective.
The Fund may also engage to a limited extent in short-term trading
consistent with its investment objective. Securities may be sold in anticipation
of a market decline or purchased in anticipation of a market rise and later
sold, but the Fund will not engage in trading solely to recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its investment
objective by prudent selection of securities with a view to holding them for
investment. While there can be no assurance thereof, the Fund anticipates that
its annual portfolio turnover rate will generally not exceed 50%. However, the
rate of turnover will not be a limiting factor when the Fund deems it desirable
to sell or purchase securities. Therefore, depending upon market conditions, the
annual portfolio turnover rate of the Fund may exceed 50% in particular years. A
higher portfolio turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Fund. High
portfolio turnover may result in the realization of net short-term capital gains
by the Fund which, when distributed to shareholders, will be taxable as ordinary
income.
INTEREST RATE TRANSACTIONS
The Fund expects that the Fund's portfolio investments in Senior Loans
and other adjustable rate debt instruments will serve as a hedge against the
risk that common share net income and/or returns may decrease due to rising
market dividend or interest rates on FundPreferred shares or Borrowings. If
market conditions are deemed favorable, the Fund also may enter into interest
rate swap or cap transactions to attempt to protect itself from such interest
rate risk on the remaining amount of outstanding FundPreferred shares and/or
S-30
Borrowings. Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty
agreeing to pay the Fund a payment at a variable rate that is expected to
approximate the rate on the Fund's variable rate payment obligation on
Borrowings or any variable rate FundPreferred shares. The payment obligations
would be based on the notional amount of the swap. The Fund may use an interest
rate cap, which would require it to pay a premium to the cap counterparty and
would entitle it, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, to receive from the counterparty payment of the
difference based on the notional amount. The Fund would use interest rate swaps
or caps only with the intent to reduce or eliminate the risk that an increase in
short-term interest rates could have on Common Share net earnings as a result of
leverage.
Because both Senior Loans and the Fund's FundPreferred shares and
Borrowings generally pay interest or dividends based on short-term market
interest rates, the Fund's investments in Senior Loans may potentially offset
the leverage risks borne by the Fund relating to the fluctuations on Common
Share income due to variations in the FundPreferred share dividend rate and/or
the interest rate on Borrowings.
The Fund will usually enter into swaps or caps on a net basis; that is,
the two payment streams will be netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian 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 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 overall performance on the Common Shares. 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 net asset value of
the Common Shares. 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
Common Share 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 Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the Common Shares 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. The Fund will not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the remainder of the
outstanding amount of the Fund's leverage, less the amount of floating rate
Senior Loans in the Fund's portfolio. The Fund has no current intention of
selling an interest rate swap or cap. The Fund will monitor its interest rate
swap and cap transactions with a view to insuring that it remains in compliance
with all applicable federal income tax requirements.
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. If the counterparty defaults,
the Fund would not be able to use the anticipated net receipts under the swap or
cap to offset the interest payments on Borrowings or dividend payments on the
FundPreferred shares. 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 performance of the Common Shares.
Although this will not guarantee that the counterparty does not
default, the Fund will not enter into an interest rate swap or cap transaction
with any counter-party that NIAC believes does not have the
S-31
financial resources to honor its obligation under the interest rate swap or cap
transaction. Further, NIAC will continually monitor the financial stability of a
counterparty to an interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments.
In addition, at the time the 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 performance of the Fund's Common Shares.
The Fund may choose or be required to prepay any Borrowings or redeem
some or all of the FundPreferred shares. This redemption would likely result in
the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at 15. None of the trustees who are not "interested persons" of
the Fund has ever been a director or employee of, or consultant to, Nuveen,
Symphony or their affiliates. The Trustees serve annual terms until the next
annual shareholder meeting. The names and business addresses of the trustees and
officers of the Fund, their principal occupations and other affiliations during
the past five years, the number of portfolios each oversees and other
directorships they hold are set forth below.
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
TRUSTEE WHO IS AN "INTERESTED PERSON" OF THE FUND:
Timothy R. Schwertfeger* 03/28/49 Chairman of the Board Chairman and Director (since 1996) of 144
333 West Wacker Drive and Trustee, 2004 Nuveen Investments, Inc., Nuveen
Chicago, IL 60606 Investments, LLC, Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp.;
Chairman and Director (since 1997) of
Nuveen Asset Management, Inc.; Director
(since 1996) of Institutional Capital
Corporation; Chairman and Director (since
1999) of Rittenhouse Asset Management,
Inc.; Chairman of Nuveen Investments
Advisers Inc. (since 2002).
----------------
* Mr.Schwertfeger is an "interested person" of the Fund, as defined in
the Investment Company Act of 1940, because he is an officer and
director of Nuveen Investments, Inc., Nuveen Investments, LLC and NIAC.
S-32
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
TRUSTEES WHO ARE NOT "INTERESTED PERSONS" OF THE FUND:
Robert P. Bremner 8/22/40 Trustee, 2004 Private Investor and Management 144
333 West Wacker Drive Consultant.
Chicago, Il 60606
Lawrence H. Brown 7/29/34 Trustee, 2004 Retired (since 1989) as Senior Vice 144
333 West Wacker Drive President of The Northern Trust Company;
Chicago, Il 60606 Director, Community Advisory Board for
Highland Park and Highwood, United Way of
the North Shore (since 2002).
Jack B. Evans 10/22/48 Trustee, 2004 President, The Hall-Perrine Foundation, a 144
333 West Wacker Drive private philanthropic corporation (since
Chicago, IL 60606 1996); Director, Alliant Energy; Director
and Vice Chairman, United Fire & Casualty
Company; Director, Federal Reserve Bank
of Chicago; formerly, President and Chief
Operating Officer, SCI Financial Group,
Inc., a regional financial services firm.
S-33
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- ------------
William C. Hunter*** 3/6/48 Trustee, 2004 Dean and Distinguished Professor of 36
Finance, School of Business at the
University of Connecticut (since 2002);
previously, Senior Vice President and
Director of Research at the Federal
Reserve Bank of Chicago (1995-2003);
Director (since 1997), Credit Research
Center at Georgetown University; Director
of Xerox Corporation (since 2004).
Anne E. Impellizzeri** 1/26/33 Trustee, 2004 Retired, formerly Executive Director 144
333 West Wacker Drive (1998-2001) of Manitoga (Center for
Chicago, IL 60606 Russel Wright's Design with Nature);
formerly, President and Executive Officer
of Blanton-Peale Institutes Chief of
Religion and Health (since 1990); prior
thereto, Vice President, Metropolitan
Life Insurance Co.
William L. Kissick** 7/29/32 Trustee, 2004 Professor Emeritus, School of Medicine 144
333 West Wacker Drive and the Wharton School of Management and
Chicago, IL 60606 former Chairman, Leonard Davis Institute
of Health Economics, University of
Pennsylvania; Adjunct Professor, Health
Policy and Management, Yale University.
Thomas E. Leafstrand** 11/11/31 Trustee, 2004 Retired; previously, Vice President in 144
333 West Wacker Drive charge of Municipal Underwriting and
Chicago, IL 60606 Dealer Sales at The Northern Trust
Company.
Peter R. Sawers** 4/3/33 Trustee, 2004 Adjunct Professor of Business and 144
333 West Wacker Drive Economics, University of Dubuque, Iowa;
Chicago, IL 60606 formerly (1991-2000) Adjunct Professor,
Lake Forest Graduate
----------------
** Under the Fund's retirement policy for Independent Board Members, which
provides that Independent Board Members will retire at the earlier of
age 72 or after board service of 15 years, current Board Members
Leafstrand and Wellington will be retiring on June 30, 2004. In
addition current Board Members Impellizzeri, Kissick and Sawers, who
will not then have reached the age or service period at which
retirement would be called for under the retirement policy, will also
be retiring on June 30, 2004. At the time of their retirement, Board
Members Impellizzeri, Kissick and Sawers will each receive a payment of
$75,000 as partial compensation for the earnings they would have
received if they had continued as Independent Board Members until the
term specified in the current retirement policy.
*** Trustee Hunter is also a trustee designee of 108 funds and is expected
to become a trustee of those funds on May 17, 2004.
S-34
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
School of Management, Lake Forest, Illinois;
prior thereto, Executive Director, Towers
Perrin Australia, a management consulting
firm; Chartered Financial Analyst; Director,
Executive Service Corps of Chicago, a
not-for-profit organization; Certified
Management Consultant.
William J. Schneider 9/24/44 Trustee, 2004 Senior Partner and Chief Operating 144
333 West Wacker Drive Officer, Miller-Valentine Group, Vice
Chicago, IL 60606 President, Miller-Valentine Realty, a
construction company; Chair, Miami Valley
Hospital; Chair, Dayton Development
Coalition; formerly Member, Community
Advisory Board, National City Bank, Dayton,
Ohio and Business Advisory Council,
Cleveland Federal Reserve Bank.
Judith M. Stockdale 12/29/47 Trustee, 2004 Executive Director, Gaylord and Dorothy 144
333 West Wacker Drive Donnelley Foundation (since 1994); prior
Chicago, IL 60606 thereto, Executive Director, Great Lakes
Protection Fund (from 1990 to 1994)
Sheila W. Wellington*** 2/24/32 Trustee, 2004 Clinical Professor of Management, 144
333 West Wacker Drive Stern/NYU Business School (since 2003);
Chicago, IL 60606 formerly, President (1993-2003) of
Catalyst (a not- for-profit organization
focusing on women's leadership development
in business and the professions).
OFFICERS OF THE FUND:
Gifford R. Zimmerman 9/9/56 Chief Administrative Managing Director (since 2002), Assistant 144
333 West Wacker Drive Officer, 2004 Secretary and Associate
Chicago, IL 60606 General Counsel, formerly, Vice President
and Assistant General Counsel of Nuveen
Investments, LLC; Managing Director
(since 2002), General Counsel and
Assistant Secretary, formerly, Vice
President of Nuveen Advisory Corp. and
S-35
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
Nuveen Institutional Advisory Corp.;
Managing Director (since 2002), Assistant
Secretary and Associate General Counsel,
formerly, Vice President (since 2000), of
Nuveen Asset Management, Inc.; Assistant
Secretary of Nuveen Investments, Inc.
(since 1994); Assistant Secretary of NWQ
Investment Management Company, LLC.
(since 2002); Vice President and
Assistant Secretary of Nuveen Investments
Advisers Inc. (since 2002); Managing
Director, Associate General Counsel and
Assistant Secretary of Rittenhouse Asset
Management, Inc. (since May 2003);
Chartered Financial Analyst.
Michael T. Atkinson 2/3/66 Vice President and Vice President (since 2002), formerly 144
333 West Wacker Drive Assistant Secretary, Assistant Vice President (since 2000),
Chicago, IL 60606 2004 previously, Associate of Nuveen
Investments, LLC.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments, LLC 144
333 West Wacker Drive Treasurer, 2004 (since 1999), prior thereto, Assistant
Chicago, IL 60606 Vice President (from 1997); Vice
President and Treasurer (since 1999) of
Nuveen Investments, Inc.; Vice President
and Treasurer (since 1999) of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Vice President and
Treasurer of Nuveen Asset Management,
Inc. (since 2002) and of Nuveen
Investments Advisers Inc.; Assistant
Treasurer of NWQ Investment Management
Company, LLC. (since 2002); Vice
President and Treasurer of Nuveen
Rittenhouse Asset Management, Inc. (since
May, 2003); Chartered Financial Analyst.
S-36
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
Susan M. DeSanto 9/8/54 Vice President, 2004 Vice President of Nuveen Advisory Corp. 144
333 West Wacker Drive (since 2001); previously, Vice President
Chicago, IL 60606 of Van Kampen Investment Advisory Corp.
(since 1998); prior thereto, Assistant
Vice President of Van Kampen Investment
Advisory Corp. (since 1994).
Jessica R. Droeger 9/24/64 Vice President and Vice President (since 2002) and Assistant 144
333 West Wacker Drive Secretary, 2004 General Counsel (since 1998); formerly,
Chicago, IL 60606 Assistant Vice President (since 1998), of
Nuveen Investments, LLC; Vice President
(since 2002) and Assistant Secretary
(since 1998), formerly Assistant Vice
President, of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.
Lorna C. Ferguson 10/24/45 Vice President, 2004 Managing Director (since 2004), 144
333 West Wacker Drive previously, Vice President of Nuveen
Chicago, IL 60606 Investments, LLC; Managing Director
(since 2004), previously, Vice President
(since 1998) of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President, 2004 Managing Director (since 2002) of Nuveen 144
333 West Wacker Drive Investments, LLC; Managing Director
Chicago, IL 60606 (since 2001), formerly, Vice President of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp. (since
1995); Managing Director of Nuveen Asset
Management, Inc. (since 2001); Vice
President of Nuveen Investments Advisers
Inc. (since 2002); Chartered Financial
Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President (since 1993) and Funds 144
333 West Wacker Drive Controller, 2004 Controller (since 1998) of Nuveen
Chicago, IL 60606 Investments, LLC; Vice President and
Funds Controller (since 1998) of Nuveen
Investments, Inc.; Certified Public
Accountant.
S-37
POSITIONS AND NUMBER OF
OFFICES WITH THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS, INCLUDING FUND COMPLEX
FIRST ELECTED OR OTHER DIRECTORSHIPS HELD, DURING PAST OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED FIVE YEARS TRUSTEE
---------------- --------- ---------------- ------------------------------------- -------------
David J. Lamb 3/22/63 Vice President, 2004 Vice President (since 2000) of Nuveen 144
333 West Wacker Drive Investments, LLC, previously Assistant
Chicago, IL 60606 Vice President (since 1999); prior
thereto, Associate of Nuveen Investments,
LLC; Certified Public Accountant.
Tina M. Lazar 8/27/61 Vice President, 2004 Vice President (since 1999), previously 144
333 West Wacker Drive Assistant Vice President (since 1993) of
Chicago, IL 60606 Nuveen Investments, LLC.
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary 144
333 West Wacker Drive Assistant Secretary, Assistant Secretary, and Assistant
Chicago, IL 60606 2003 General Counsel of 2004 Nuveen
Investments, LLC; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Assistant Secretary of Nuveen
Investments, Inc. and (since 1997) of
Nuveen Asset Management, Inc.; Vice
President (since 2000), Assistant
Secretary and Assistant General Counsel
(since 1998) of Rittenhouse Asset
Management, Inc.; Vice President and
Assistant Secretary of Nuveen Investments
Advisers Inc. (since 2002); Assistant
Secretary of NWQ Investment Management
Company, LLC. (since 2002).
Edward F. Neild, IV 7/7/65 Vice President, 2004 Managing Director (since 2002) of Nuveen 144
333 W. Wacker Drive Investments, LLC; Managing Director
Chicago, IL 60606 (since 1997), formerly Vice President
(since 1996) of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.;
Managing Director of Nuveen Asset
Management, Inc. (since 1999); Chartered
Financial Analyst.
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the compliance, risk management and regulatory oversight
committee. Because the Fund is newly organized, none of the
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committees have met during the Fund's last fiscal year. The executive committee
met once prior to the commencement of the Fund's operations.
Robert P. Bremner, Anne E. Impellizzeri and Timothy R. Schwertfeger,
Chair, serve as members of the executive committee of the Board of Trustees of
the Fund. The executive committee, which meets between regular meetings of the
Board of Trustees, is authorized to exercise all of the powers of the Board of
Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are Robert P. Bremner, Lawrence H. Brown, Jack B.
Evans, Thomas E. Leafstrand, William J. Schneider, Chair, and Peter R. Sawers.
The nominating and governance committee is responsible for Board
selection and tenure, selection and review of committees and Board education and
operations. In addition, the committee monitors performance of legal counsel and
other service providers; periodically reviews and makes recommendations about
any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities -- including retaining special
counsel and other experts or consultants at the expense of the Fund. In the
event of a vacancy on the Board, the nominating and governance committee
receives suggestions from various sources (including shareholders) as to
suitable candidates. Suggestions should be sent in writing to Lorna Ferguson,
Vice President for Board Relations, Nuveen Investments, LLC, 333 West Wacker
Drive, Chicago, IL 60606. The nominating and governance committee sets
appropriate standards and requirements for nominations for new trustees and
reserves the right to interview all candidates and to make the final selection
of any new trustees. The members of the nominating and governance committee are
Robert P. Bremner, Chair, Lawrence H. Brown, Jack B. Evans, William C. Hunter,
Anne E. Impellizzeri, William L. Kissick, Thomas E. Leafstrand, Peter R. Sawers,
William J. Schneider, Judith M. Stockdale and Sheila W. Wellington.
The dividend committee is authorized to declare distributions on the
Fund's shares including, but not limited to, regular and special dividends,
capital gains and ordinary income distributions. The members of the dividend
committee are Timothy R. Schwertfeger, Chair, Lawrence H. Brown, Jack B. Evans
and Thomas E. Leafstrand.
The compliance, risk management and regulatory oversight committee is
responsible for the oversight of compliance issues, risk management, and other
regulatory matters affecting the Fund which are not otherwise the jurisdiction
of the other board committees. As part of its duties regarding compliance
matters the committee is responsible for the oversight of the Pricing Procedures
of the Fund and the Valuation Group. The members of the compliance, risk
management and regulatory oversight committee are Lawrence H. Brown, William C.
Hunter, Thomas E. Leafstrand, and Judith M. Stockdale.
The trustees, except William C. Hunter, are also trustees of 6 Nuveen
open-end funds and 14 closed-end funds managed by NIAC and 30 open-end and 93
closed-end funds managed by Nuveen Advisory Corp. ("NAC"). William C. Hunter is
also trustee of 35 closed-end funds managed by NAC. None of the independent
trustees, nor any of their immediate family members, has ever been a director,
officer, or employee of, or a consultant to, NIAC, Nuveen or their affiliates.
In addition, none of the independent trustees owns beneficially or of record,
any security of NIAC, Nuveen or any person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with NIAC or Nuveen.
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The Common Shareholders of the Fund will elect trustees at the next
annual meeting of Common Shareholders, unless any FundPreferred shares are
outstanding at that time, in which event holders of FundPreferred shares, voting
as a separate class, will elect two trustees, and the remaining trustees shall
be elected by Common Shareholders and holders of FundPreferred shares, voting
together as a single class. Holders of FundPreferred shares will be entitled to
elect a majority of the Fund's trustees under certain circumstances. See
"Description of Shares -- FundPreferred Shares -- Voting Rights." The following
table sets forth the dollar range of equity securities beneficially owned by
each trustee as of December 31, 2003:
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
DOLLAR RANGE OF EQUITY ALL REGISTERED INVESTMENT COMPANIES OVERSEEN
NAME OF TRUSTEE SECURITIES IN THE FUND BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES
--------------- ---------------------- ----------------------------------------------
Timothy R. Schwertfeger.............. $0 Over $100,000
Robert P. Bremner.................... $0 Over $100,000
Lawrence H. Brown.................... $0 Over $100,000
Jack B. Evans........................ $0 Over $100,000
William C. Hunter.................... $0 $0
Anne E. Impellizzeri................. $0 Over $100,000
William L. Kissick................... $0 Over $100,000
Thomas E. Leafstrand................. $0 Over $100,000
Peter R. Sawers...................... $0 Over $100,000
William S. Schneider ................ $0 Over $100,000
Judith M. Stockdale.................. $0 Over $100,000
Sheila W. Wellington................. $0 Over $100,000
No trustee who is not an interested person of the Fund owns
beneficially or of record, any security of NIAC, Nuveen, Symphony, Citigroup
Global Markets Inc. or any person (other than a registered investment company)
directly or indirectly controlling, controlled by or under common control with
NIAC, Nuveen, Symphony or Citigroup Global Markets Inc.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Fund
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
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ESTIMATED AGGREGATE TOTAL AMOUNT OF TOTAL
COMPENSATION COMPENSATION FROM FUND AND COMPENSATION THAT HAS BEEN
NAME OF TRUSTEE FROM FUND* FUND COMPLEX** DEFERRED
--------------- ---------- -------------- --------
Timothy R. Schwertfeger........ $ -- $ -- $ --
Robert P. Bremner.............. 99,200 11,438
Lawrence H. Brown.............. 100,750 --
Jack B. Evans.................. 70,583 14,211
William C. Hunter.............. -- --
Anne E. Impellizzeri........... 95,550 73,800
William L. Kissick............. 65,083 20,513
Thomas E. Leafstrand........... 71,133 38,471
Peter R. Sawers................ 95,750 73,029
William S. Schneider........... 98,750 76,066
Judith M. Stockdale............ 94,000 18,204
Sheila W. Wellington........... 61,583 46,174
----------------------
* Based on the estimated compensation to be earned by the independent
trustees for the 12-month period ending 7/31/2005, representing the
Fund's first full fiscal year, for services to the Fund.
** Based on the compensation paid to the trustees for the one year period
ending 12/31/03 for services to the Nuveen open-end and closed-end
funds.
The Fund has no employees. Its officers are compensated by Nuveen
Investments, Inc. or its affiliates.
Nuveen Investments, Inc. maintains charitable contributions programs to
encourage the active support and involvement of individuals in the civic
activities of their community. These programs include a matching contributions
program and a direct contributions program. The Independent Board Members of the
funds managed by NIAC are eligible to participate in the charitable
contributions program of Nuveen Investments, Inc. Under the matching program,
Nuveen Investments, Inc. will match the personal contributions of a Board Member
to Section 501(c)(3) organizations up to an aggregate maximum amount of $10,000
during any calendar year. Under its direct (non-matching) program, Nuveen
Investments, Inc. makes contributions to qualifying Section 501(c)(3)
organizations, as approved by the Corporate Contributions Committee of Nuveen
Investments, Inc. The Independent Board Members are also eligible to submit
proposals to the committee requesting that contributions be made under this
program to Section 501(c)(3) organizations identified by the Board Member, in an
aggregate amount not to exceed $5,000 during any calendar year. Any contribution
made by Nuveen Investments, Inc. under the direct program is made solely at the
discretion of the Corporate Contributions Committee.
INVESTMENT ADVISERS
NIAC will be responsible for determining the Fund's overall investment
strategy and its implementation, including the use of leverage and hedging. NIAC
also is responsible for the ongoing monitoring of the Symphony, managing the
Fund's business affairs and providing certain clerical, bookkeeping and other
administrative services to the Fund. For additional information regarding the
management services performed by NIAC, see "Management of the Fund" in the
Fund's Prospectus.
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, a registered
investment adviser, is a wholly owned subsidiary of Nuveen Investments, Inc.
According to data from Thomson Wealth Management, Nuveen Investments, Inc. is
the leading sponsor of closed-end exchange-traded funds as measured by number of
funds (108) and fund assets under management (approximately $48.8 billion) as of
March 31, 2004. Founded in 1898, Nuveen Investments, Inc. and its affiliates
had approximately
S-41
$100.9 billion in assets under management as of March 31, 2004. Nuveen
Investments, Inc. is a publicly-traded company and a majority owned subsidiary
of The St. Paul Travelers Companies, Inc. ("St. Paul Travelers"). St. Paul
Travelers is a publicly-traded company principally engaged in providing
property-liability insurance through subsidiaries.
Nuveen Investments, Inc. provides investment services to financial
advisors serving high-net-worth clients and institutional clients. Nuveen
Investments today markets its capabilities -- which include tax-free investing,
separately-managed accounts and market-neutral alternative investment portfolios
-- under four distinct brands: Nuveen, NWQ, Rittenhouse and Symphony. Nuveen
Investments, Inc. is listed on the New York Stock Exchange and trades under the
symbol "JNC."
Nuveen Investments, Inc. disclosed the following information in its
annual report on Form 10-K, which was filed with the Securities and Exchange
Commission on March 15, 2004: Nuveen Investments, Inc. has received from the
Securities and Exchange Commission the following requests for information, each
of which Nuveen Investments, Inc. believes was sent broadly to several
investment-management firms: a September 4, 2003 letter regarding mutual fund
"market timing" and related topics, a September 11, 2003 letter regarding the
valuation of portfolio securities of funds that invest at least a majority of
assets in securities that trade in non-U.S. markets and frequent trading in such
funds, a January 29, 2004 letter regarding mutual fund revenue sharing and fund
portfolio brokerage commissions, and a February 4, 2004 letter regarding high
yield municipal bond funds. In addition, Nuveen Investments, Inc. received a
subpoena dated November 4, 2003 from the Securities Division of the Commonwealth
of Massachusetts in connection with a proceeding brought by the Securities
Division against the Boston, Massachusetts office of a national broker-dealer
firm. Nuveen Investments, Inc. has responded to the Securities and Exchange
Commission requests of September 4, September 11, January 29 and February 4 and
is continuing to respond to various related follow up requests. Nuveen
Investments, Inc. has also responded to the subpoena from the Massachusetts
Securities Division. In responding to these various requests, Nuveen
Investments, Inc. has identified certain deficiencies in its historical e-mail
archives, and it is taking steps to improve its overall record retention
practices. Nuveen Investments, Inc. has from time to time discovered instances
where shareholders of open-end funds managed by affiliates of Nuveen
Investments, Inc. traded in and out of a fund more frequently than appropriate.
In addition, during the process of responding to the requests referenced above,
Nuveen Investments, Inc. identified certain additional instances where open-end
fund shareholders were able to trade in and out of a fund more frequently than
appropriate, which occurred in most cases because they traded in dollar amounts
below the monitoring threshold established to implement the fund's policy. In
the regular course of its business, whenever Nuveen Investments, Inc. has
identified inappropriate trading activity in a fund, it has taken steps to
terminate the related account.
Symphony, 555 California Street, Suite 2975, San Francisco, CA 94104,
is the Fund's subadviser responsible for managing the Fund's Managed Assets.
Symphony specializes in the management of market-neutral equity and debt
strategies and Senior Loan and other debt portfolios. Symphony, a registered
investment adviser, commenced operations in 1994 and had approximately $3.8
billion in assets under management as of March 31, 2004. Symphony is an
indirect wholly owned subsidiary of Nuveen.
Gunther Stein and Lenny Mason are the portfolio managers at Symphony
responsible for investing its portion of the Fund's Managed Assets. Mr. Stein is
the Director of Fixed Income Strategies at Symphony and has been lead portfolio
manager for high yield strategies at Symphony since 1999. He is also a Vice
President of NIAC. Prior to joining Symphony in 1999, Mr. Stein was a high yield
portfolio manager at Wells Fargo. Mr. Mason is a fixed income portfolio manager
at Symphony. He is also a Vice President of NIAC. Prior to joining Symphony in
2001, Mr. Mason was a Managing Director
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in FleetBoston's Technology and Communications Group. Mr. Stein and Mr. Mason
also are co-portfolio managers of other closed-end funds sponsored by Nuveen.
Pursuant to an investment management agreement between NIAC and the
Fund, the Fund has agreed to pay an annual management fee for the services and
facilities provided by NIAC, payable on a monthly basis, according to the
following schedule:
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
---------------------------- --------------
Up to $500 million...................................... .8500%
$500 million to $1.0 billion............................ .8250%
$1.0 billion to $1.5 billion............................ .8000%
$1.5 billion to $2.0 billion............................ .7750%
$2.0 billion and over................................... .7500%
Pursuant to investment subadvisory agreements between NIAC and
Symphony, Symphony will receive from NIAC a management fee equal to the portion
specified below of the management fee payable by the Fund to NIAC (net of the
reimbursements described below), payable on a monthly basis:
PERCENTAGE OF NET
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
---------------------------- --------------
Up to $125 million...................................... 50.0%
$125 million to $150 million............................ 47.5%
$150 million to $175 million............................ 45.0%
$$175 million to $200 million........................... 42.5%
$200 million and over................................... 40.0%
In addition to the fee of NIAC, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses associated with any Borrowings, expenses of issuing any
FundPreferred shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any. All fees and expenses are accrued daily and
deducted before payment of dividends to investors.
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For the first eight full years of the Fund's operation, the Advisers
have contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF YEAR ENDING (AS A PERCENTAGE OF
MARCH 31, MANAGED ASSETS) MARCH 31, MANAGED ASSETS)
--------- --------------- --------- ---------------
2004(1) .32% 2009 .32%
2005 .32% 2010 .24%
2006 .32% 2011 .16%
2007 .32% 2012 .08%
2008 .32%
------------------
(1) From the commencement of operations.
The Advisers have not agreed to reimburse the Fund for any portion of
its fees and expenses beyond March 31, 2012.
Unless earlier terminated as described below, the Fund's investment
management agreement with NIAC and the Fund's investment subadvisory agreement
(the "management agreements") will remain in effect until August 1, 2005. The
management agreements continue in effect from year to year so long as such
continuation is approved at least annually by (1) the Board of Trustees or the
vote of a majority of the outstanding voting securities of the Fund, and (2) a
majority of the trustees who are not interested persons of any party to the
investment management agreement, cast in person at a meeting called for the
purpose of voting on such approval. The investment management agreement may be
terminated at any time, without penalty, by either the Fund or NIAC upon 60
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act. The investment subadvisory agreement may
be terminated at any time, without penalty, by the Fund, NIAC or Symphony
thereto upon 60 days' written notice after the initial term of the agreement,
and is automatically terminated in the event of its assignment as defined in the
1940 Act.
The management agreements have been approved by a majority of the
independent trustees of the Fund and the sole shareholder of the Fund. The
independent trustees have determined that the terms of the Fund's management
agreements are fair and reasonable and that the agreements are in the Fund's
best interests. The independent trustees believe that the management agreements
will enable the Fund to obtain high quality investment management services at a
cost that they deem appropriate, reasonable, and in the best interests of the
Fund and its shareholders. In making such determination, the independent
trustees met independently from the interested trustee of the Fund and any
officers of NIAC, Symphony and their affiliates. The independent trustees also
relied upon the assistance of counsel to the independent trustees.
In evaluating the investment management agreement between the Fund and
NIAC, the independent trustees reviewed materials furnished by NIAC at the
annual advisory contract renewal meeting held in May 2003, including information
regarding NIAC, its affiliates and its personnel, operations and financial
condition. In evaluating the investment subadvisory agreements the independent
trustees reviewed materials furnished by Symphony in May 2003, including
information regarding Symphony, its respective affiliates and personnel,
operations and financial condition. The independent trustees reviewed additional
information furnished by Symphony in July 2003. The independent trustees also
reviewed, among other things, the nature and quality of services to be provided
by NIAC and Symphony, the proposed fees to be charged by NIAC and Symphony for
investment management services, the profitability to NIAC and Symphony of their
relationships with the Fund, fall-out benefits to NIAC and Symphony from that
relationship, economies of scale achieved by NIAC and Symphony, the
S-44
experience of the investment advisory and other personnel providing services to
the Fund, the historical quality of the services provided by NIAC and Symphony
and comparative fees and expense ratios of investment companies with similar
objective and strategies managed by other investment advisers, and other factors
that the independent trustees deemed relevant. The independent trustees, at
various times, discussed with representatives of NIAC and Symphony the Fund's
operations and each of NIAC's and Symphony's ability to provide advisory and
other services to the Fund.
The Fund, NIAC, Nuveen, Symphony, and other related entities have
adopted codes of ethics which essentially prohibit certain of their personnel,
including the Fund's portfolio managers, from engaging in personal investments
which compete or interfere with, or attempt to take advantage of a client's,
including the Fund's, anticipated or actual portfolio transactions, and are
designed to assure that the interests of clients, including Fund shareholders,
are placed before the interests of personnel in connection with personal
investment transactions. Text-only versions of the codes of ethics of the Fund,
NIAC, Nuveen and Symphony can be viewed online or downloaded from the EDGAR
Database on the SEC's internet web site at www.sec.gov. You may also review and
copy those documents by visiting the SEC's Public Reference Room in Washington,
DC. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of those codes of ethics
may be obtained, after mailing the appropriate duplicating fee, by writing to
the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC
20549-0102 or by e-mail request at publicinfo@sec.gov.
The Fund is responsible for voting proxies on securities held in its
portfolio. When the Fund receives a proxy, the decision regarding how to vote
such proxy will be made by Symphony in accordance with Symphony's proxy voting
procedures.
The Fund has granted to Symphony the authority to vote proxies on its
behalf. A senior member of Symphony is responsible for oversight of the Fund's
proxy voting process. Symphony has engaged the services of Institutional
Shareholder Services, Inc. ("ISS") to make recommendations to Symphony on the
voting of proxies relating to securities held by the Fund. ISS provides voting
recommendations based upon established guidelines and practices. Symphony
reviews ISS recommendations and frequently follows the ISS recommendations.
However, on selected issues, Symphony may not vote in accordance with the ISS
recommendations when it believes that specific ISS recommendations are not in
the best economic interest of the Fund. If Symphony manages the assets of a
company or its pension plan and any of Symphony's clients hold any securities of
that company, Symphony will vote proxies relating to such company's securities
in accordance with the ISS recommendations to avoid any conflict of interest. If
a client requests Symphony to follow specific voting guidelines or additional
guidelines, Symphony will review the request and inform the client only if
Symphony is not able to follow the client's request.
Symphony has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on
Symphony's general voting policies.
When required by applicable regulations, information regarding how the
Fund voted proxies relating to portfolio securities will be available without
charge by calling (800) 257-8787 or by accessing the Securities and Exchange
Commission's website at http://www.sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, Symphony, is
responsible for decisions to buy and sell securities for the Fund, the
negotiation of the prices to be paid for principal trades and the allocation of
transactions among various dealer firms. Transactions on stock exchanges involve
the payment by the Fund of brokerage commissions. There generally is no stated
commission in the case of securities traded in the over-the-counter market but
the
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price paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In certain instances, the Fund may make purchases of underwritten
issues at prices which include underwriting fees.
Portfolio securities may be purchased directly from an underwriter or
in the over-the-counter market from the principal dealers in such securities,
unless it appears that a better price or execution may be obtained through other
means. Portfolio securities will not be purchased from Nuveen or its affiliates
or affiliates of Symphony except in compliance with the 1940 Act.
With respect to interests in Senior Loans, the Fund generally will
engage in privately negotiated transactions for purchase or sale in which
Symphony will negotiate on behalf of the Fund, although a more developed market
may exist for many Senior Loans. The Fund may be required to pay fees, or forgo
a portion of interest and any fees payable to the Fund, to the lender selling
participations or assignments to the Fund. Symphony will determine the lenders
from whom the Fund will purchase assignments and participations by considering
their professional ability, level of service, relationship with the borrower,
financial condition, credit standards and quality of management. See "Risk
Factors" in the Prospectus.
It is the policy of Symphony to seek the best execution under the
circumstances of each trade. Symphony will evaluate price as the primary
consideration, with the financial condition, reputation and responsiveness of
the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be Symphony's practice to select dealers which, in
addition, furnish research information (primarily credit analyses of issuers and
general economic reports) and statistical and other services to Symphony. It is
not possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to Symphony's own
research efforts, the receipt of research information is not expected to reduce
significantly Symphony's expenses. While Symphony will be primarily responsible
for the placement of the business of the Fund, the policies and practices of
Symphony in this regard must be consistent with the foregoing and will, at all
times, be subject to review by the Board of Trustees of the Fund.
Symphony may manage other investment accounts and investment companies
for other clients that may invest in the same types of securities as the Fund
and which may have investment objectives similar to those of the Fund. Symphony
seeks to allocate portfolio transactions equitably whenever concurrent decisions
are made to purchase or sell assets or securities by the Fund and another
advisory account. If an aggregated order cannot be filled completely,
allocations will generally be made on a pro rata basis. An order may not be
allocated on a pro rata basis where, for example (i) consideration is given to
portfolio managers who have been instrumental in developing or negotiating a
particular investment; (ii) consideration is given to an account with
specialized investment policies that coincide with the particulars of a specific
investment; (iii) pro rata allocation would result in odd-lot or de minimis
amounts being allocated to a portfolio or other client; or (iv) where the
Adviser reasonably determines that departure from a pro rata allocation is
advisable. There may also be instances where the Fund will not participate at
all in a transaction that is allocated among other accounts. While these
allocation procedures could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of the
Board of Trustees that the benefits available from Symphony's management
outweigh any disadvantage that may arise from Symphony's larger management
activities and its need to allocate securities.
NET ASSET VALUE
The Fund will determine the net asset value of its Common Shares daily,
as of the close of regular session trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time). Net asset value is computed by dividing the
value of all assets of the Fund (including accrued interest and dividends), less
S-46
all liabilities (including accrued expenses and dividends declared but unpaid),
by the total number of shares outstanding. Any swap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have a
positive or negative value for purposes of calculating net asset value. Any cap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have no value or a positive value. In addition, accrued
payments to the Fund under such transactions will be assets of the Fund and
accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Trustees shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ("Nasdaq") National List are
valued in a like manner except that Nasdaq National List securities are valued
using the Nasdaq Official Closing Price for such securities. Portfolio
securities traded on more than one securities exchange are valued at the last
sale price on the business day as of which such value is being determined as
reflected on the tape at the close of the exchange representing the principal
market for such securities.
Readily marketable securities traded in the over-the counter market,
including listed securities whose primary market is believed by the investment
adviser to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq National List, are valued at the mean of the current bid and asked
prices as reported by Nasdaq or, in the case of securities not quoted by Nasdaq,
the National Quotation Bureau or such other comparable source as the Trustees
deem appropriate to reflect their fair market value. The prices of fixed-income
securities and senior loans are provided by a pricing service approved by the
Fund's Board of Trustees and based on the mean between the bid and asked price.
When price quotes are not readily available for fixed-income securities, the
pricing service establishes fair market value based on yields or prices of
securities of comparable quality, type of issue, coupon, maturity and rating,
indications of value from security dealers, evaluations of anticipated cash
flows or collateral and general market conditions. When price quotes are not
readily available for senior loans, the pricing service establishes fair market
value using a wide range of market data, evaluations of anticipated cash flows
or collateral and other information and analysis, including the obligor's credit
characteristics considered relevant by the pricing service. Where securities are
traded on more than one exchange and also over-the-counter, the securities will
generally be valued using the quotations the Board of Trustees believes reflect
most closely the value of such securities. In addition, if it is determined that
preset prices for a security are unavailable or inappropriate, the Board of
Trustees, or its designee may determine the fair value for the security.
ADDITIONAL INFORMATION CONCERNING AUCTIONS
FOR FUNDPREFERRED SHARES
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York) which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for each series of FundPreferred shares so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
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Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for FundPreferred shares. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
FundPreferred shares. One certificate for all of the shares of each series of
FundPreferred shares will be registered in the name of Cede & Co., as nominee of
the securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of FundPreferred shares contained in the Statement. The Fund will also issue
stop-transfer instructions to the transfer agent for each series of
FundPreferred shares. Prior to the commencement of the right of holders of
preferred shares to elect a majority of the Fund's trustees, as described under
"Description of FundPreferred Shares--Voting Rights" in the Prospectus, Cede &
Co. will be the holder of record of all shares of each series of FundPreferred
shares and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in FundPreferred shares, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of FundPreferred shares, the Auction Agent's registry
of Existing Holders, the results of Auctions and notices from any Broker-Dealer
(or other Person, if permitted by the Fund) with respect to transfers described
under "The Auction--Secondary Market Trading and Transfer of FundPreferred
Shares" in the Prospectus and notices from the Fund. The Auction Agent is not
required to accept any such notice for an Auction unless it is received by the
Auction Agent by 3:00 p.m., New York City time, on the Business Day preceding
such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of FundPreferred shares
will pay to each Broker-Dealer, from funds provided by the Fund, a service
charge at the annual rate of 1/4 of 1% in the case of any Auction immediately
preceding a Rate Period of less than one year, or a percentage agreed to by the
Fund and the Broker-Dealers in the case of any Auction immediately preceding a
Rate Period of
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one year or longer, of the purchase price of FundPreferred shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
FundPreferred shares will be placed by a Broker-Dealer if such shares were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial owners
or (b) the subject of an order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (ii) a Submitted
Bid of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that Auction.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or to convert the Fund
to open-end status. Specifically, the Declaration requires a vote by holders of
at least two-thirds of the Common Shares and FundPreferred shares, voting
together as a single class, except as described below, to authorize (1) a
conversion of the Fund from a closed-end to an open-end investment company, (2)
a merger or consolidation of the Fund, or a series or class of the Fund, with
any corporation, association, trust or other organization or a reorganization of
the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all
or substantially all of the Fund's assets (other than in the regular course of
the Fund's investment activities), (4) in certain circumstances, a termination
of the Fund, or a series or class of the Fund or (5) a removal of trustees by
shareholders, and then only for cause, unless, with respect to (1) through (4),
such transaction has already been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders of
at least a majority of the Fund's Common Shares and FundPreferred shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), the required vote by only the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund
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issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Common Shares and FundPreferred shares, voting together as a
single class. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
FundPreferred shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the Fund's FundPreferred shares
outstanding at the time, voting as a separate class, or, if such action has been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the Bylaws, the affirmative vote of
the holders of at least a majority of the Fund's FundPreferred shares
outstanding at the time, voting as a separate class. The votes required to
approve the conversion of the Fund from a closed-end to an open-end investment
company or to approve transactions constituting a plan of reorganization which
adversely affects the holders of FundPreferred shares are higher than those
required by the 1940 Act. The Board of Trustees believes that the provisions of
the Declaration relating to such higher votes are in the best interest of the
Fund and its shareholders.
The provisions of the Declaration described above could have the effect
of depriving the Common Shareholders of opportunities to sell their Common
Shares at a premium over market value by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered the foregoing anti-takeover
provisions and concluded that they are in the best interests of the Fund and its
Common Shareholders.
Reference should be made to the Declaration on file with the Commission
for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount.
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Notwithstanding the foregoing, at any time when the Fund's
FundPreferred shares are outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its Common Shares unless (1) all accrued FundPreferred
shares dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the net asset value of the Fund's portfolio (determined after
deducting the acquisition price of the Common Shares) is at least 200% of the
liquidation value of the outstanding FundPreferred shares (expected to equal the
original purchase price per share plus any accrued and unpaid dividends
thereon). The staff of the Commission currently requires that any tender offer
made by a closed-end investment company for its shares must be at a price equal
to the net asset value of such shares on the close of business on the last day
of the tender offer. Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the New York Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Code (which would make the Fund a
taxable entity, causing the Fund's income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Fund) or
as a registered closed-end investment company under the 1940 Act; (2) the Fund
would not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objective and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting the Fund or the
issuers of its portfolio securities by Federal or state authorities on the
extension of credit by lending institutions or on the exchange of non-U.S.
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees of the Fund may in the future modify these
conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and FundPreferred
shares outstanding at the time, voting together as a single class, and of the
holders of at least two-thirds of the Fund's FundPreferred shares outstanding at
the time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all FundPreferred shares then outstanding, and the Fund's
Common Shares would no longer be listed on the New York Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in
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certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Board of Trustees of the Fund may at any time propose conversion of the Fund
to an open-end company depending upon their judgment as to the advisability of
such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when FundPreferred shares are outstanding will increase the leverage applicable
to the outstanding Common Shares then remaining. See the Fund's Prospectus under
"Risk Factors--Risks of Investing in FundPreferred Shares--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of Trustees would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
FEDERAL INCOME TAX MATTERS
The following is intended to be a general summary of certain federal
income tax consequences of investing in FundPreferred shares. It is not intended
to be a complete discussion of all such federal income tax consequences, nor
does it purport to deal with all categories of investors. Except as discussed
under "Other Taxation," the discussion generally applies only to holders of
FundPreferred shares that are U.S. holders. You will be a U.S. holder if you are
an individual who is a citizen or resident of the United States, a U.S. domestic
corporation, or any other person that is subject to U.S. federal income tax on a
net income basis in respect of an investment in the FundPreferred shares. This
summary deals only with U.S. holders that hold FundPreferred shares as capital
assets. It does not address considerations that may be relevant to you if you
are an investor that is subject to special tax rules, such as a financial
institution, insurance company, regulated investment company, real estate
investment trust, investor in pass-through entities, U.S. holder of
FundPreferred shares whose "functional currency" is not the United States
dollar, tax-exempt organization, dealer in securities or currencies, trader in
securities or commodities that elects mark to market treatment, person who holds
FundPreferred shares in a qualified tax deferred account such as an IRA, or
person that will hold FundPreferred shares as a position in a "straddle,"
"hedge" or as part of a "constructive sale" for federal income tax purposes. In
addition, this discussion does not address the application of the U.S. federal
alternative minimum tax.
This summary is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury Regulations promulgated
thereunder, judicial authority and current administrative rulings, as in effect
on the date of this summary, all of which may change. Any change could apply
retroactively and could affect the continued validity of this summary. Investors
are therefore advised to consult with their own tax advisers before making an
investment in the Fund.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify, and to elect to be treated, as a
regulated investment company under Subchapter M of the Code and intends to
qualify under those provisions each year. To qualify as a regulated investment
company, the Fund must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stocks, securities or currencies; and (b)
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the market value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater in value than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or
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securities of other regulated investment companies) or of two or more issuers
controlled by the Fund and engaged in the same, similar or related trades or
businesses.
As a regulated investment company, in any taxable year with respect to
which the Fund distributes at least 90% of its investment company taxable income
(as that term is defined in the Code, without regard to the deduction for
dividends paid), the Fund (but not its shareholders) generally will be relieved
of U.S. federal income taxes on its investment company taxable income and net
capital gain (i.e., the Fund's net long-term capital gain in excess of the sum
of its net short-term capital loss and capital loss carryovers from prior years)
if any, that it distributes to shareholders. However, the Fund will be subject
to federal income tax (currently imposed at a maximum effective rate of 35%) on
any undistributed investment company taxable income and net capital gain. The
Fund intends to distribute to its shareholders, at least annually,all or
substantially all of its investment company taxable income and net capital gain.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax payable by the Fund. To prevent imposition of this tax, the Fund must
distribute, or be deemed to have distributed, during each calendar year an
amount at least equal to the sum of (1) 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the twelve-month period ending on October 31 of the calendar year,
and (3) all such ordinary income and capital gains for previous years that were
not distributed during such years. For this purpose, any income or gain retained
by the Fund that is subject to corporate federal income tax will be considered
to have been distributed by year-end. To prevent application of this excise tax,
the Fund intends to make distributions to satisfy the calendar year distribution
requirement. Compliance with the calendar year distribution requirement may
limit the extent to which the Fund will be able to retain its net capital gain
for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation and distributions to its shareholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify as a regulated investment company, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, will constitute dividends, which will generally be
eligible for the dividends received deduction available to corporate
shareholders under section 243 of the Code (the "Dividends Received Deduction").
Furthermore, in such event, individual and other noncorporate shareholders of
the Fund would generally be able to treat such distributions as "qualified
dividend income" eligible for reduced rates of federal income taxation in
taxable years beginning on or before December 31, 2008.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Shares and/or the FundPreferred shares until the asset coverage is
restored. See "Description of FundPreferred Shares--Restrictions on Dividend,
Redemption and Other Payments" in the Prospectus. Such a suspension of
distributions might prevent the Fund from distributing 90% of its investment
company taxable income as is required in order to qualify for special tax
treatment as a regulated investment company, cause the Fund to incur an income
tax liability, a non-deductible 4% federal excise tax on its undistributed
taxable income (including gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) FundPreferred shares in order to maintain or restore the requisite
asset coverage and avoid failure to remain qualified as a regulated investment
company. The determination to repurchase or redeem FundPreferred shares and the
amounts to be repurchased or redeemed, if any, will be made in the sole
discretion of the Fund. However, under
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certain circumstances, the failure of the Fund to meet the asset coverage
requirements of the 1940 Act will require a mandatory redemption of
FundPreferred shares.
Use of the Fund's cash to repurchase or redeem FundPreferred shares may
adversely affect the Fund's ability to distribute annually at least 90% of its
investment company taxable income, which distribution is required to qualify for
taxation as a regulated investment company. The Fund may also recognize income
in connection with funding repurchases or redemptions of FundPreferred shares,
and such income would be taken into account in determining whether or not the
above-described distribution requirements have been met. Depending on the size
of the Fund's assets relative to its outstanding senior securities, redemption
of FundPreferred shares might restore asset coverage. Payment of distributions
after restoration of asset coverage could requalify (or avoid a disqualification
of) the Fund as a regulated investment company, depending upon the facts and
circumstances.
Since the Fund may invest in securities of non-U.S. issuers, its income
from such securities may be subject to non-U.S. taxes. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes.
Shareholders of the Fund generally will not be entitled to a credit or deduction
with respect to such taxes paid by the Fund.
Under Section 988 of the Code, gains or losses attributable to
fluctuations in exchange rates between the time the Fund accrues income or
receivables or expenses or other liabilities denominated in a foreign currency
and the time the Fund actually collects such income or receivables or pays such
liabilities are generally treated as ordinary income or loss. Similarly, gains
or losses on foreign currency forward contracts and the disposition of debt
securities denominated in a foreign currency, to the extent attributable to
fluctuations in exchange rates between the acquisition and disposition dates,
are also generally treated as ordinary income or loss.
The Fund may invest in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, any other securities
with original issue discount. The Fund must accrue income on such investments
(and investments with market discount if the Fund elects to include market
discount in income currently) 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, including such accrued income, to shareholders to 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 leverage itself by borrowing the cash, to satisfy the
distribution requirements under the Code.
The Fund's transactions, if any, in forward contracts, options, futures
contracts and hedged investments will be subject to special provisions of the
Code that, among other things, may affect the character of gain and loss
realized by the Fund (i.e., may affect whether gain or loss is ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses, and
affect whether capital gain and loss is characterized as long-term or
short-term. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also may require the Fund to
mark-to-market certain types of positions in its portfolio (i.e., treat them as
if they were closed out), which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions, make the appropriate tax elections, and make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract, or hedged investment in order to mitigate
the effect of these rules, prevent disqualification of the Fund as a regulated
investment company, and minimize the imposition of federal income and excise
taxes.
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The Fund may invest in preferred securities, convertible securities,
securities that are below investment grade or other types of securities, the
federal income tax treatment of which is uncertain or subject to
recharacterization by the Internal Revenue Service. To the extent the tax
treatment of such securities differs from the tax treatment expected by the
Fund, it could affect the timing or character of income recognized by the Fund,
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.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF FUNDPREFERRED SHARES
Under present law and based in part on the fact that there is no
express or implied agreement between or among a Broker-Dealer or any other
party, and the Fund or any owners of the FundPreferred shares, that the
Broker-Dealer or any other party will guarantee or otherwise arrange to ensure
that an owner of FundPreferred shares will be able to sell his or her shares,
the Fund is of the opinion that the FundPreferred shares will constitute equity
of the Fund for federal income tax purposes, and thus distributions with
respect to the FundPreferred shares (other than distributions in redemption of
the FundPreferred shares subject to Section 302(b) of the Code) will generally
constitute dividends to the extent of the Fund's current or accumulated earnings
and profits, as calculated for federal income tax purposes. The following
discussion assumes such treatment will apply.
The Fund's income will consist of investment company taxable income and
may also consist of net capital gain. The character of the Fund's income will
not affect the amount of dividends to which the holders of the FundPreferred
shares are entitled. Holders of the FundPreferred shares are entitled to receive
only the amount of dividends as determined by periodic auctions. For federal
income tax purposes, however, the Internal Revenue Service currently requires
that a regulated investment company that has two or more classes of shares
allocate to each such class proportionate amounts of each type of its income
(such as ordinary income and net capital gain) for each tax year. Accordingly,
the Fund intends to designate dividends made with respect to the Common Shares
and the FundPreferred shares as consisting of particular types of income (e.g.,
net capital gain, ordinary income, dividends qualifying for the Dividends
Received Deduction, if any, and qualified dividend income, if any) in accordance
with each class's proportionate share of the total dividends paid to both
classes for such taxable year. Thus, if the Fund designates any dividend as a
capital gain dividend, capital gains will be allocated to the FundPreferred
shares in proportion to the FundPreferred shares' proportionate share of the
total dividends paid on both the FundPreferred shares and the Common Shares
during the year. Each holder of the FundPreferred shares during the year will be
notified of the allocation of income within 60 days after the end of the year.
The amount of the net capital gain realized by the Fund may not be significant,
and there is no assurance that any such income will be realized by the Fund in
any year. Distributions of the Fund's investment company taxable income will
generally be taxable to shareholders as ordinary income to the extent of the
Fund's current or
S-55
accumulated earnings and profits, as calculated for Federal income tax purposes.
Such distributions generally will not qualify for the Dividends Received
Deduction or the reduced rates of federal income taxation for qualified dividend
income currently available to individual and other noncorporate shareholders.
Distributions designated by the Fund as derived from net capital gain, if any,
are taxable to shareholders at rates applicable to long-term capital gains,
regardless of the length of time the FundPreferred shares have been held by
holders. For taxable years beginning on or before December 31, 2008, the maximum
federal income tax rate applicable to long-term capital gains for individual and
other noncorporate investors has been reduced to 15%. Distributions in excess of
the Fund's earnings and profits, if any, will first reduce a shareholder's
adjusted tax basis in his or her FundPreferred shares and, after the adjusted
tax basis is reduced to zero, will constitute capital gains to a holder of
FundPreferred shares who holds such shares as a capital asset. Earnings and
profits are treated, for federal income tax purposes, as first being used to pay
distributions on the FundPreferred shares, and then to the extent remaining, if
any, to pay distributions on the Common Shares.
Although the Fund is required to distribute annually at least 90% of
its investment company taxable income, the Fund is not required to distribute
net capital gain to the shareholders. The Fund may retain and reinvest such
gains and pay federal income taxes on such gains (the "net undistributed capital
gain"). However, it is unclear whether a portion of the net undistributed
capital gain would have to be allocated to the FundPreferred shares for federal
income tax purposes. Until and unless the Fund receives acceptable guidance from
the Internal Revenue Service as to the allocation of the net undistributed
capital gain between the Common Shares and the FundPreferred shares, the Fund
intends to distribute its net capital gain for any year during which it has
FundPreferred shares outstanding. Such distribution will affect the tax
character, but not the amount, of dividends to which holders of FundPreferred
shares are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December with a record date in such
months, and paid in January of the following year, will be treated as having
been distributed by the Fund and received by the shareholders on December 31 of
the year in which the dividend was declared. In addition, solely for the purpose
of satisfying the 90% distribution requirement and the distribution requirement
for avoiding income taxes, certain distributions made after the close of a
taxable year of the Fund may be "spilled back" and treated as paid during such
taxable year. In such case, shareholders will be treated as having received such
dividends in the taxable year in which the distribution was actually made. The
Internal Revenue Service has ruled privately that dividends paid following the
close of the taxable year that are treated for tax purposes as derived from
income from the prior year will be treated as dividends "paid" in the prior year
for purposes of determining the proportionate share of a particular type of
income for each class. Accordingly, the Fund intends to treat any such dividends
that are paid following the close of a taxable year as "paid" in the prior year
for purposes of determining a class's proportionate share of a particular type
of income. However, the private ruling is not binding on the Internal Revenue
Service, and there can be no assurance that the Internal Revenue Service will
respect such treatment.
S-56
The Fund will notify holders of FundPreferred shares of the source and
tax status of all distributions shortly after the close of each calendar year.
SALE OF SHARES
A holder's sale of FundPreferred shares will generally be a taxable
transaction for federal income tax purposes. Selling holders of such shares will
generally recognize gain or loss in an amount equal to the difference between
the amount received and their adjusted tax basis in the FundPreferred shares
sold. If such FundPreferred shares are held as a capital asset at the time of
sale, the gain or loss will generally be a capital gain or loss. Similarly, a
redemption (including a redemption by the Fund resulting from liquidation of the
Fund), if any, of all the FundPreferred shares actually and constructively held
by a shareholder generally will give rise to capital gain or loss under Section
302(b) of the Code if the shareholder does not own (and is not regarded under
certain federal income tax law rules of constructive ownership as owning) any
Common Shares in the Fund and provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may also give rise to
capital gain or loss, if several conditions imposed by Section 302(b) of the
Code are satisfied. Any loss realized on a sale or exchange will be disallowed
to the extent that substantially identical shares are reacquired within a period
of 61 days beginning 30 days before and ending 30 days after the disposition of
the shares. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized upon a taxable disposition of
FundPreferred shares held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain received (or
deemed received) with respect to such shares.
REGULATIONS ON "REPORTABLE TRANSACTIONS"
Treasury Regulations provide that if a shareholder recognizes a loss
with respect to FundPreferred shares of $2 million or more in a single taxable
year (or $4 million or more in any combination of taxable years) for
shareholders who are individuals, S corporations or trusts, or $10 million or
more in a single taxable year (or $20 million or more in any combination of
taxable years) for a corporate shareholder, the shareholder must file with the
Internal Revenue Service a disclosure statement on Form 8886. Direct
shareholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance, shareholders of a regulated
investment company are not excepted. Future guidance may extend the current
exception from this reporting requirement to shareholders of most or all
regulated investment companies. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer's
treatment of the loss is proper. Shareholders should consult their tax advisors
to determine the applicability of these regulations in light of their particular
circumstances.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income purposes a
portion of all taxable distributions (including redemption proceeds) payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or who fail to make required certifications, or if the
Fund or a shareholder has been notified by the Internal Revenue Service that the
shareholder is subject to backup withholding. Certain corporate and other
shareholders specified in the Code are exempt from such backup withholding.
Backup withholding is not an additional tax. Any amounts withheld may be
credited against such shareholder's U.S. federal income tax liability provided
the appropriate information is furnished to the Internal Revenue Service.
S-57
OTHER TAXATION
Non-U.S. shareholders, including shareholders who, with respect to the
United States, are nonresident alien individuals, may be subject to U.S.
withholding tax on certain distributions at a rate of 30%, or such lower rates
as may be prescribed by any applicable treaty, provided the Fund receives
certain certifications from such non-U.S. shareholder.
Investors are advised to consult their own tax advisors with respect to
the application of the above-described general federal income tax rules to their
own circumstances and with respect to other federal, state, local or foreign tax
consequences to them before making an investment in FundPreferred shares.
EXPERTS
The Financial Statements of the Fund as of March 4, 2004, appearing
in this Statement of Additional Information have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Ernst & Young LLP
provides accounting and auditing services to the Fund. The principal business
address of Ernst & Young LLP is 233 South Wacker Drive, Chicago, Illinois 60606.
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT, DIVIDEND DISBURSING AGENT
AND REDEMPTION AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The custodian performs
custodial, fund accounting and portfolio accounting services. The Fund's
transfer, shareholder services and dividend paying agent is also State Street
Bank and Trust Company, One Federal Street, Boston, Massachusetts 02110. The
Bank of New York is the Auction Agent with respect to the FundPreferred shares
and acts as transfer agent, registrar, dividend disbursing agent and redemption
agent with respect to the FundPreferred shares.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission, Washington, D.C. The Fund's Prospectus and this Statement
of Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement. Statements contained in
the Fund's Prospectus and this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
S-58
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of
Nuveen Floating Rate Income Fund
We have audited the accompanying statement of assets and liabilities of Nuveen
Floating Rate Income Fund (the "Fund") as of March 4, 2004 and
the related statement of operations for the period from January 15, 2004 (date
of organization) through March 4, 2004. 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 auditing standards generally
accepted in the 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 present fairly, in
all material respects, the financial position of the Fund at March 4, 2004,
and the results of its operations for the period from January 15, 2004 (date of
organization) through March 4, 2004, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 5, 2004
F-1
NUVEEN FLOATING RATE INCOME FUND
FINANCIAL STATEMENTS
Nuveen Floating Rate Income Fund
Statement of Assets and Liabilities
March 4, 2004
Assets:
Cash.............................................................. $ 100,275
Offering costs.................................................... 1,000,000
Receivable from Adviser........................................... 11,500
----------
Total assets................................................... 1,111,775
----------
Liabilities:
Accrued offering costs............................................ 1,000,000
Payable for organization costs.................................... 11,500
----------
Total liabilities.............................................. 1,011,500
----------
FundPreferred Shares, $25,000 liquidation value; unlimited number of
shares authorized, no shares outstanding.......................... -
----------
Net assets applicable to Common Shares............................... $ 100,275
==========
Net asset value per Common Share outstanding ($100,275 divided
by 7,000 Common Shares outstanding)............................... $ 14.325
==========
Net Assets Applicable to Common Shares Represent:
Common Shares, $.01 par value; unlimited number of shares
authorized, 7,000 shares outstanding........................... $ 70
Paid-in surplus................................................... 100,205
----------
$ 100,275
==========
F-2
NUVEEN FLOATING RATE INCOME FUND
Statement of Operations
Period from January 15, 2004 (date of organization) through March 4, 2004
Investment income.................................................. $ --
--------
Expenses:
Organization costs................................................ 11,500
Expense reimbursement............................................. (11,500)
--------
Total expenses.................................................. --
--------
Net investment income.............................................. $ --
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on January 15, 2004,
and has been inactive since that date except for matters relating to its
organization and registration as a diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 7,000 Common Shares to
Nuveen Institutional Advisory Corp., the Fund's investment adviser (the
"Adviser"), a wholly owned subsidiary of Nuveen Investments, Inc.
Nuveen Investments, LLC, also a wholly owned subsidiary of Nuveen Investments,
Inc., has agreed to reimburse all organization expenses (approximately $11,500)
and pay all Common share offering costs (other than the sales load) that exceed
$.03 per Common Share.
The Fund seeks to provide a high level of current income by investing primarily
in adjustable rate senior loans.
The Fund is authorized by its Declaration of Trust to utilize financial leverage
through borrowing, issuing commercial paper or notes and/or offering Preferred
Shares ("FundPreferred Shares"). FundPreferred Shares may have a liquidation
value of $25,000 per share and may be issued in one or more classes or series,
with dividend, liquidation preference and other rights as determined by the
Fund's Board of Trustees without approval of the Common Shareholders.
Note 2: Significant Accounting Policies
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. Actual results may differ from those estimates.
The Fund's share of Common share offering costs will be recorded as a reduction
of the proceeds from the sale of Common Shares upon the commencement of Fund
operations.
If the Fund offers FundPreferred shares, the offering costs will be
borne by Common Shareholders as a direct reduction to paid-in surplus.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund, upon commencement of Fund operations, has agreed to pay a management
fee, payable on a monthly basis, at an annual rate ranging from .8500% of the
first $500 million of the average daily net assets (including net assets
attributable to FundPreferred Shares and/or the principal amount of any
borrowings, commercial paper and/or notes issued ("Managed Assets")) to .7500%
of the average daily Managed Assets in excess of $2 billion.
In addition to the reimbursement and waiver of organization and Common share
offering costs discussed in Note 1, the Adviser has contractually agreed to
reimburse the Fund for fees and expenses in the amount of .32% of average daily
Managed Assets for the first five full years of the Fund's operations, .24% in
year 6, .16% in year 7 and .08% in year 8. The Adviser has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond March 31,
2012.
Note 4: Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
investment income, in addition to any significant amounts of net realized
capital gains from investment transactions, if any.
F-3
Statement of
ASSETS AND LIABILITIES April 30, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments (including Repurchase Agreement of $158,536,355), at value (cost $822,786,577) $822,907,943
Cash 5,355
Interest receivable 1,325,604
Other assets 87,500
------------------------------------------------------------------------------------------------------------------------------------
Total assets 824,326,402
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment purchased 181,462,736
SAMI, net unrealized depreciation 37,500
Accrued expenses:
Management fees 267,247
Organization and offering costs 1,212,643
Other 59,072
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 183,039,198
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $641,287,204
====================================================================================================================================
Common shares outstanding 44,807,000
====================================================================================================================================
Net asset value per Common share outstanding (net assets applicable
to Common shares, divided by Common shares outstanding) $ 14.31
====================================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
------------------------------------------------------------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 448,070
Paid-in surplus 640,204,562
Undistributed net investment income 550,706
Net unrealized appreciation of investments 121,366
Net unrealized appreciation (depreciation) of SAMI (37,500)
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $641,287,204
====================================================================================================================================
Authorized shares:
Common Unlimited
FundPreferred Unlimited
====================================================================================================================================
See accompanying notes to financial statements.
F-4
Statement of
OPERATIONS for the Period March 25, 2004 (commencement of operations)
through April 30, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $ 858,129
Fees 42,994
------------------------------------------------------------------------------------------------------------------------------------
Total investment income 901,123
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 457,754
Shareholders' servicing agent fees and expenses 1,096
Custodian's fees and expenses 22,477
Trustees' fees and expenses 1,447
Professional fees 18,402
Shareholders' reports - printing and mailing expenses 15,127
Investor relations expense 7,428
------------------------------------------------------------------------------------------------------------------------------------
Total expenses before expense waivers 523,731
Expense waivers from the Adviser (173,314)
------------------------------------------------------------------------------------------------------------------------------------
Net expenses 350,417
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 550,706
------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Change in net unrealized appreciation of investments 121,366
Change in net unrealized appreciation (depreciation) of SAMI (37,500)
------------------------------------------------------------------------------------------------------------------------------------
Net gain from investments 83,866
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares from operations $ 634,572
====================================================================================================================================
See accompanying notes to financial statements.
F-5
Statement of
CHANGES IN NET ASSETS for the Period March 25, 2004 (commencement of operations)
through April 30, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 550,706
Change in net unrealized appreciation of investments 121,366
Change in net unrealized appreciation (depreciation) of SAMI (37,500)
------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares from operations 634,572
------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 640,552,357
------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares 641,186,929
Net assets applicable to Common shares at the beginning of period 100,275
------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares at the end of period $ 641,287,204
============================================================================================================
Undistributed net investment income at the end of period $ 550,706
============================================================================================================
See accompanying notes to financial statements.
F-6
Statement of
CASH FLOWS for the Period March 25, 2004 (commencement of operations)
through April 30, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHARES FROM OPERATIONS $ 634,572
Adjustments to Reconcile the Net Increase in Net Assets Applicable to Common Shares from Operations
to Net Cash used in by Operating Activities:
Purchase of investment securities (352,807,308)
Short-term investment securities, net (480,466,137)
Proceeds from disposition of investment securities 10,499,572
Accretion/Amortization of discounts and premiums, net 50,867
Increase in interest receivable (1,325,604)
Increase in other assets (87,500)
Increase in payable for investments purchased 181,462,736
Increase in SAMI, net unrealized depreciation 37,500
Increase in management fees payable 267,247
Increase in other liabilities 59,072
Net unrealized appreciation of investments (121,366)
Net realized gain from paydowns (63,571)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (641,859,920)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common shares 640,552,357
Organization and offering costs payable 1,212,643
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 641,765,000
------------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (94,920)
Cash at the beginning of period 100,275
------------------------------------------------------------------------------------------------------------------------------------
CASH AT THE END OF PERIOD $ 5,355
====================================================================================================================================
See accompanying notes to financial statements.
F-7
Notes to
FINANCIAL STATEMENTS (Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Nuveen Floating Rate Income Fund (the "Fund") is a diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's Common shares are listed on the New York Stock
Exchange and trade under the ticker symbol "JFR". The Fund was organized as a
Massachusetts business trust on January 15, 2004.
Prior to the commencement of operations, the Fund had no operations other than
those related to organizational matters, the initial capital contribution of
$100,275 by Nuveen Institutional Advisory Corp. (the "Adviser"), a wholly owned
subsidiary of Nuveen Investments, Inc. ("Nuveen"), and the recording of the
organization expenses ($11,500) and their reimbursement by Nuveen Investments,
LLC, also a wholly owned subsidiary of Nuveen.
The Fund seeks to provide a high level of current income by investing primarily
in senior loans (both secured and unsecured) whose interest rates float or
adjust periodically based on a benchmark interest rate index. The Fund seeks to
increase the income available for distribution to Common shareholders by
utilizing financial leverage.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with
accounting principles generally accepted in the United States.
Investment Valuation
The prices of senior loans, bonds and other securities in the Fund's investment
portfolio are generally provided by one or more independent pricing services
approved by the Fund's Board of Trustees. The pricing services typically value
exchange-listed securities at the last sale price on that day; and value senior
loans, bonds and other securities traded in the over-the-counter market at the
mean of the highest bona fide bid and lowest bona fide ask prices when current
quotations are readily available. The pricing services may value senior loans,
bonds and other securities for which current quotations are not readily
available at fair value using a wide range of market data and other information
and analysis, including the obligor's credit characteristics considered relevant
by such pricing service to determine valuations. The Board of Trustees of the
Fund has approved procedures which permit the Adviser to determine the fair
value of securities for which the applicable pricing service or services is not
providing a price, using market data and other factors such as the obligor's
credit characteristics, and to override the price provided by the independent
pricing service in certain limited circumstances. Short-term investments which
mature within 60 days are valued at amortized cost, which approximates market
value.
The senior loans in which the Fund primarily invests are not listed on an
organized exchange and the secondary market for such investments may be less
liquid relative to markets for other fixed income securities. Consequently, the
value of a senior loan, determined as described above, may differ significantly
from the value that would have been determined had there been an active market
for that senior loan.
Investment Transactions
Investment transactions are recorded on a trade date basis. Trade date for
senior loans purchased in the primary market is considered the date on which the
loan allocations are determined. Realized gains and losses from investment
transactions are determined on the specific identification method. Investments
purchased on a when-issued or delayed delivery basis may have extended
settlement periods. Any investments so purchased are subject to market
fluctuation during this period. The Fund has instructed the custodian to
segregate assets with a current value at least equal to the amount of the
when-issued and delayed delivery purchase commitments. At April 30, 2004, the
Fund had outstanding when-issued and delayed delivery purchase commitments of
$175,905,667.
Investment Income
Interest income, which includes the amortization of premiums and accretion of
discounts for financial reporting purposes, is recorded on an accrual basis.
Interest income also includes paydown gains and losses on senior loans. Facility
fees on senior loans purchased are treated as market discounts. Market premiums
and discounts are amortized over the expected life of each respective borrowing.
Fees consist primarily of amendment fees. Amendment fees are earned as
compensation for evaluating and accepting changes to the original senior loan
agreement.
Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute substantially all
of its net investment income to its shareholders. Therefore, no federal income
tax provision is required.
F-8
Notes to
FINANCIAL STATEMENTS (Unaudited) (continued)
Dividends and Distributions to Common Shareholders
Commencing with the first dividend, the Fund intends to declare monthly income
distributions to Common shareholders. Net realized capital gains from investment
transactions, if any, are distributed to shareholders not less frequently than
annually. Furthermore, capital gains are distributed only to the extent they
exceed available capital loss carryforwards.
Distributions to Common shareholders are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from accounting principles generally
accepted in the United States.
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, options, exchange-traded and over-the-counter options on securities
or indices, index-linked securities, swaps and currency exchange transactions.
Derivative transactions will be marked-to-market daily.
Organization and Offering Costs
Nuveen Investments, LLC has agreed to reimburse all organization expenses
(approximately $11,500) and pay all Common share offering costs (other than the
sales load) that exceed $.03 per Common share. The Fund's share of Common share
offering costs of $1,207,643 was recorded as a reduction of the proceeds from
the sale of Common shares.
If the Fund offers FundPreferred shares, the offering costs will be borne by
Common shareholders as a direct reduction to paid-in surplus.
Repurchase Agreements
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the fair value of which exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral may be delayed or limited.
Custodian Fee Credit
The Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on the Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments. During the period March 25, 2004 (commencement of operations)
through April 30, 2004, no such credit was recorded.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
2. FUND SHARES
The Fund sold 44,800,000 Common shares during the period March 25, 2004
(commencement of operations) through April 30, 2004.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments) during the
period March 25, 2004 (commencement of operations) through April 30, 2004,
aggregated $352,807,308 and $10,499,572, respectively.
F-9
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis. Differences
between amounts for financial statement and federal income tax purposes are
primarily due to the treatment of paydown gains and losses on investments and
timing differences in recognizing certain gains and losses on investment
transactions.
At April 30, 2004, the cost of investments owned was $822,842,444.
The net unrealized appreciation of investments at April 30, 2004, aggregated
$65,499 of which $1,293,528 related to appreciated securities and $1,228,029
related to depreciated securities.
5. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Fund's investment management agreement with the Adviser, the Fund pays
an annual management fee, payable monthly, at the rates set forth below, which
are based upon the average daily managed assets of the Fund. "Managed Assets"
means the average daily net assets of the Fund (including net assets
attributable to FundPreferred shares and/or the principal amount of any
borrowings, commercial paper and/or notes issued, if any).
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
For the first $500 million .8500%
For the next $500 million .8250
For the next $500 million .8000
For the next $500 million .7750
For Managed Assets over $2 billion .7500
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser has entered
into a Sub-Advisory Agreement with Symphony Asset Management, LLC ("Symphony"),
an indirect wholly owned subsidiary of Nuveen, under which Symphony manages
the investment portfolio of the Fund. Symphony is compensated for its services
to the Fund from the management fee paid to the Adviser.
The Fund pays no compensation directly to those of its Trustees who are
affiliated with the Adviser or to its officers, all of whom receive remuneration
for their services to the Fund from the Adviser or its affiliates.
For the first eight years of the Fund's operations, the Advisers have agreed to
reimburse the Fund, as a percentage of average daily Managed Assets, for fees
and expenses in the amounts and for the time periods set forth below:
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
2004* .32% 2009 .32%
2005 .32 2010 .24
2006 .32 2011 .16
2007 .32 2012 .08
2008 .32
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond March 31, 2012.
F-10
Notes to
FINANCIAL STATEMENTS (Unaudited) (continued)
6. SELECT AGGREGATE MARKET INDEX
The Fund has invested in a Select Aggregate Market Index ("SAMI") with Credit
Suisse First Boston ("CSFB") to synthetically increase its exposure to the
senior secured loan market during a period when the Fund otherwise would have
excess uninvested cash. The SAMI is designed to replicate the performance and
risk of the CSFB Leveraged Loan Index. An investment in a SAMI, when combined
with a short-term high-grade investment such as repurchase agreements related
to U.S. government securities in an amount equal to the notional amount of the
SAMI is designed to provide an aggregate return equivalent to an investment in
a basket of senior secured bank loan debt ("Reference Obligations"), less
certain costs.
Upon entering into a SAMI, the Fund may pay CSFB a premium based on the
notional amount. The premium, if any, will be amortized over the life of the
SAMI and will be included in other assets in the Statement of Assets and
Liabilities. The Fund will receive from CSFB a quarterly fixed-rate interest
payment based on the notional amount of the contract. In exchange for the
interest payment, the Fund protects CSFB from the risk of loss at the time of a
credit event, such as a bankruptcy or default, affecting any of the Reference
Obligations. Interest is recorded on an accrual basis and included in the
Statement of Operations. The Fund is required to provide collateral to CSFB
based on the notional amount of the SAMI and has instructed the custodian to
segregate liquid assets with a current value at least equal to the remaining
notional amount of the SAMI. The SAMI is marked-to-market daily and any change
in value is recorded as unrealized appreciation (depreciation) in the Statement
of Operations. Although there are economic advantages of entering into SAMI
transactions, there are also additional risks, including but not limited to
senior loan credit risk and the inability of CSFB to meet its interest payment
obligations.
On April 30, 2004, the Fund held the following SAMI:
UNREALIZED
NOTIONAL FIXED TERMINATION APPRECIATION
AMOUNT RATE DATE (DEPRECIATION)
---------------------------------------------------------------------
$10,000,000 2.300% March 20, 2009 $(37,500)
---------------------------------------------------------------------
7. COMMITMENTS
Pursuant to the terms of certain of the variable rate senior loan agreements,
the Fund may have unfunded senior loan commitments. The Fund will maintain with
its custodian, cash, liquid securities and/or liquid senior loans having an
aggregate value at least equal to the amount of unfunded senior loan
commitments. At April 30, 2004, there was an unfunded senior loan commitment
of $15,000,000.
8. SENIOR LOAN PARTICIPATION COMMITMENTS
With respect to the senior loans held in the Fund's portfolio, the Fund may:
1) invest in assignments; 2) act as a participant in primary lending syndicates;
or 3) invest in participations. If the Fund purchases a participation of a
senior loan interest, the Fund would typically enter into a contractual
agreement with the lender or other third party selling the participation, rather
than directly with the Borrower. As such, the Fund not only assumes the credit
risk of the Borrower, but also that of the Selling Participant or other persons
interpositioned between the Fund and the Borrower. At April 30, 2004, there were
no such outstanding participation commitments.
9. SUBSEQUENT EVENTS
On May 11, 2004, the Fund issued an additional 2,350,000 Common Shares in
connection with a partial exercise by the underwriters of their over allotment
option.
The Fund declared a Common Share dividend distribution of $.0675 per share from
its net investment income which will be paid on June 1, 2004, to shareholders of
record on May 17, 2004.
F-11
NUVEEN FLOATING RATE INCOME FUND (JFR)
PORTFOLIO OF INVESTMENTS (UNAUDITED)
APRIL 30, 2004
RATINGS*
PRINCIPAL --------------- STATED
AMOUNT (000) DESCRIPTION (1) MOODY'S S&P MATURITY** VALUE
----------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE SENIOR LOAN INTERESTS(2) AND INTEREST
BEARING SECURITIES - 53.4% (41.5% OF TOTAL ASSETS)
AUTO COMPONENTS - 4.4% (3.4% OF TOTAL ASSETS)
$ 12,000 Federal-Mogul Corporation, Term Loan A (a) (b) NR NR 02/24/04 $ 11,145,000
2,000 Federal-Mogul Corporation, Term Loan B (a) (b) NR NR 02/24/05 1,858,126
5,000 J.L. French Corp., Term Loan B (b) B2 NR 10/21/06 5,025,000
5,000 Meridian Automotive Systems, First Lien Term Loan (b) B2 B- 04/28/10 5,056,250
5,000 Metaldyne Company/Metalync Company, LLC, Term Loan D B2 BB- 12/31/09 5,014,375
----------------------------------------------------------------------------------------------------------------------------------
28,098,751
----------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 1.8% (1.4% OF TOTAL ASSETS)
6,390 GenTek Inc., Term Loan NR B 11/10/08 6,443,644
5,000 Hercules Inc., Term Loan Ba1 BB 10/08/10 5,071,875
----------------------------------------------------------------------------------------------------------------------------------
11,515,519
----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 1.6% (1.2% OF TOTAL ASSETS)
4,000 Allied Waste North America, Inc., Term Loan B (b) Ba2 BB 01/15/10 4,069,284
5,000 Allied Waste North America, Inc., Term Loan C (b) Ba2 BB 01/15/10 5,084,375
1,000 Allied Waste North America, Inc., Term Loan D Ba2 BB 01/15/10 1,015,469
----------------------------------------------------------------------------------------------------------------------------------
10,169,128
----------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 1.5% (1.2% OF TOTAL ASSETS)
9,500 Nextel Finance Company, Term Loan E (c) Ba2 BBB 12/15/10 9,614,067
----------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING - 0.8% (0.7% OF TOTAL ASSETS)
5,000 Beazer Homes USA, Bond, 8.375% Ba2 BB 04/15/12 5,437,500
----------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS - 1.3% (1.0% OF TOTAL ASSETS)
8,000 K. Hovnanian Enterprises, Bond, 8.000% Ba2 BB 04/01/12 8,640,000
----------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 2.9% (2.3% OF TOTAL ASSETS)
4,996 Graham Packaging Company, Term Loan B-1 (c) B2 B 02/14/10 5,078,454
4,000 Owens-Illinois Group, Inc., Term Loan B (c) B1 BB- 04/01/08 4,032,142
-- Owens-Illinois Group, Inc., Term Loan D NR NR 04/01/08 37,500
7,344 Smurfit-Stone Container Corporation, Term Loan B (c) B2 NR 06/30/09 7,408,037
693 Smurfit-Stone Container Corporation, Term Loan C B2 NR 06/30/09 698,653
1,543 United States Can Company, Term Loan B (b) B2 B 01/04/06 1,553,262
----------------------------------------------------------------------------------------------------------------------------------
18,808,048
----------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 1.7% (1.3% OF TOTAL ASSETS)
10,000 Calpine Construction Finance Company, Term Loan B (b) NR B+ 02/26/09 10,652,500
----------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 1.2% (0.9% OF TOTAL ASSETS)
5,000 Dole Foods Co., Bond, 8.875% B2 BB- 03/15/11 5,350,000
2,000 Dole Foods Co., Bond, 8.625% B2 BB- 05/01/09 2,150,000
----------------------------------------------------------------------------------------------------------------------------------
7,500,000
----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.1% (0.9% OF TOTAL ASSETS)
7,270 Kinetic Concepts, Inc., Term Loan B-1 (c) B1 BB- 08/11/10 7,360,636
----------------------------------------------------------------------------------------------------------------------------------
HOTELS RESTAURANTS & LEISURE - 11.0% (8.4% OF TOTAL ASSETS)
12,500 Aladdin Gaming, LLC, Term Loan C (b) NR NR 02/26/08 12,104,163
2,700 Alliance Gaming Corporation, Term Loan B (b) B1 BB- 09/05/09 2,732,906
7,280 Aztar Corporation, Bond, 9.000% Ba3 B+ 08/15/11 8,208,200
7,434 Extended Stay America, Inc., Term Loan B Ba3 BB- 06/30/07 7,455,904
17,000 MGM Inc., Term Loan B (b) NR NR 04/26/11 17,074,375
5,000 Park Place Entertainment, Bond, 9.375% Ba2 BB- 02/15/07 5,537,500
2,000 Park Place Entertainment, Bond, 8.500% Ba1 BB+ 11/15/06 2,200,000
3,992 Wyndham International, Inc., Term Loan 1 NR NR 06/30/06 3,883,844
10,979 Wyndham International, Inc., Term Loan 2 (c) NR NR 04/01/06 10,802,664
----------------------------------------------------------------------------------------------------------------------------------
69,999,556
----------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 3.2% (2.5% OF TOTAL ASSETS)
5,000 KB Home, Bond, 7.750% Ba2 BB- 02/01/10 5,250,000
12,000 Sealy Mattress, Term Loan (b) B2 B+ 04/06/12 12,168,750
3,000 Standard Pacific Corporation, Bond, 9.500% Ba2 BB 09/15/10 3,322,500
----------------------------------------------------------------------------------------------------------------------------------
20,741,250
----------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 2.5% (2.0% OF TOTAL ASSETS)
16,000 Prestige Brands, Term Loan B (c) B1 B 04/06/11 16,160,000
----------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.2% (0.9% OF TOTAL ASSETS)
5,378 Conseco, Inc., Term Loan A-1 (c) Caa1 B- 09/10/09 5,395,823
625 Conseco, Inc., Term Loan A-3 Caa1 B- 09/10/09 626,939
1,613 Conseco, Inc., Term Loan B-1 (c) Caa1 B- 09/10/10 1,618,747
187 Conseco, Inc., Term Loan B-3 Caa1 B- 09/10/10 188,082
----------------------------------------------------------------------------------------------------------------------------------
7,829,591
----------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 1.4% (1.1% OF TOTAL ASSETS)
4,000 Mueller Group, Inc., Term Loan B2 B+ 04/25/11 4,040,000
2,970 Terex Corporation, Incremental Term B1 BB- 12/31/09 2,990,048
1,661 Terex Corporation, Term Loan B B1 BB- 07/03/09 1,670,243
----------------------------------------------------------------------------------------------------------------------------------
8,700,291
----------------------------------------------------------------------------------------------------------------------------------
MEDIA - 8.8% (6.8% OF TOTAL ASSETS)
3,000 Century Cable Holdings, LLC, Discretionary Term
Loan (a) (b) NR NR 12/31/09 2,922,750
5,000 Century Cable Holdings, LLC, Revolver (a) (b) NR NR 10/25/10 4,859,375
20,000 Charter Communications Operating, LLC, Term Loan B (b) B2 B 04/07/11 19,954,170
10,000 Vivendi Universal Entertainment, Term Loan B (b) Ba2 BB+ 06/30/08 10,081,255
18,000 Warner Music, Term Loan B1 NR 02/27/11 18,263,250
----------------------------------------------------------------------------------------------------------------------------------
56,080,800
----------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 1.5% (1.2% OF TOTAL ASSETS)
2,000 Amsted Industries Incorporated, Term Loan B (b) B1 BB- 10/15/10 2,038,750
4,000 Ispat Sidbec, Term Loan B (b) NR B- 01/15/06 3,943,334
F-12
4,000 Ispat Sidbec, Term Loan C (b) NR B- 01/15/06 3,943,334
----------------------------------------------------------------------------------------------------------------------------------
9,925,418
----------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 1.2% (0.9% OF TOTAL ASSETS)
7,000 Chesapeake Energy Corp. Bond, 8.375% Ba3 BB- 11/01/08 7,708,750
----------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 1.6% (1.3% OF TOTAL ASSETS)
4,000 Georgia Pacific, Bond, 9.375% Ba2 BB+ 02/01/13 4,670,000
5,000 Georgia Pacific, Bond, 8.125% Ba3 BB+ 05/15/11 5,662,500
----------------------------------------------------------------------------------------------------------------------------------
10,332,500
----------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 2.7% (2.1% OF TOTAL ASSETS)
12,000 Laidlaw Inc., Term Loan B-1 (b) Ba3 BB+ 06/19/09 12,230,001
5,000 National Equipment Service, Term Loan A (b) NR NR 02/17/10 4,937,500
----------------------------------------------------------------------------------------------------------------------------------
17,167,501
----------------------------------------------------------------------------------------------------------------------------------
Total Variable Rate Senior Loan Interests and Interest Bearing
Securities (cost $342,320,440) 342,441,806
-----------------------------------------------------------------------------------------------------------------
PRINCIPAL STATED MARKET
AMOUNT (000) DESCRIPTION MATURITY VALUE
----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 74.9% (58.3% OF TOTAL ASSETS)
$ 158,536 State Street Repurchase Agreement, 0.86%, dated 4/30/04,
repurchase price $158,547,717, collateralized by U.S. Treasury
Notes and Bonds 05/03/04 158,536,355
321,930 State Street Time Deposit, 0.86% 321,929,782
----------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments (cost $480,466,137) 480,466,137
-----------------------------------------------------------------------------------------------------------------
Total Investments (cost $822,786,577) - 128.3% (99.8% of
Total Assets) 822,907,943
-----------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities - (28.3)% (181,620,739)
-----------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 641,287,204
=================================================================================================================
(1) All percentages shown in the Portfolio of Investments are based on
net assets applicable to Common shares unless otherwise noted.
(2) Senior Loans in which the Fund invests generally pay interest at
rates which are periodically adjusted by reference to a base
short-term, floating lending rate plus a premium. These base lending
rates are generally (i) the lending rate offered by one or more
major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more major United
States banks, or (iii) the certificate of deposit rate.
Senior Loans are generally considered to be restricted in that the
Fund ordinarily is contractually obligated to receive approval from
the Agent Bank and/or Borrower prior to the disposition of a Senior
Loan.
* Ratings below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.
** Senior Loans in the Fund's portfolio generally are subject to
mandatory and/or optional prepayment. Because of these mandatory
prepayment conditions and because there may be significant economic
incentives for a Borrower to prepay, prepayments of Senior Loans in
the Fund's portfolio may occur. As a result, the actual remaining
maturity of Senior Loans held in the Fund's portfolio may be
substantially less than the stated maturities shown. The Fund
estimates that the actual average maturity of the Senior Loans held
in its portfolio will be approximately 18-24 months.
(a) At or subsequent to April 30, 2004, this issue was under the
protection of the federal bankruptcy court.
(b) Security purchased on a when-issued or delayed delivery basis.
(c) Portion of security purchased on a delayed delivery basis.
NR Not rated.
See accompanying notes to financial statements.
F-13
APPENDIX A
STATEMENT OF PREFERENCES
NUVEEN FLOATING RATE INCOME FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES
OF FUNDPREFERRED SHARES
Nuveen Floating Rate Income Fund (the "Fund"), a Massachusetts business
trust, certifies that:
FIRST, pursuant to the authority expressly vested in the Board of the
Fund by Articles IV and VI of the Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time, are together with this
Statement herein called the "Declaration"), the Board of Trustees has, by
resolution, authorized the issuance of 16,000 preferred shares of beneficial
interest ("Preferred Shares"), $.01 par value, classified as FundPreferred
shares ("FundPreferred shares"), and further classified as Series M, Series T,
Series W and Series F FundPreferred shares (each series, and together with
additional series of FundPreferred shares that may be authorized and issued, a
"Series") each with a liquidation preference of $25,000 per share;
SECOND, the preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of such series of FundPreferred shares are as follows:
DESIGNATION
Series M: A series of 4,000 Preferred Shares, liquidation
preference $25,000 per share, is designated "Series M FundPreferred shares"
("FundPreferred shares Series M"). The initial Dividend Period for
FundPreferred shares Series M shall be the period from and including the Date
of Original Issue thereof to but excluding ___________, 200_. Each share of
FundPreferred shares Series M shall have an Applicable Rate for its initial
Dividend Period equal to __% per annum and an initial Dividend Payment Date of
_________, 200_ and each share of FundPreferred shares Series M shall have such
other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to
those required by applicable law or set forth in the Declaration applicable to
preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The FundPreferred shares Series M shall constitute a separate series
of Preferred Shares of the Fund.
Series T: A series of 4,000 Preferred Shares, liquidation
preference $25,000 per share, is designated "Series T FundPreferred shares"
("FundPreferred shares Series T"). The initial Dividend Period for
FundPreferred shares Series T shall be the period from and including the Date
of Original Issue thereof to but excluding ___________, 200_. Each share of
FundPreferred shares Series T shall have an Applicable Rate for its initial
Dividend Period equal to __% per annum and an initial Dividend Payment Date of
_________, 200_ and each share of FundPreferred shares Series T shall have such
other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to
those required by applicable law or set forth in the Declaration applicable to
preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The FundPreferred shares Series T shall constitute a separate series
of Preferred Shares of the Fund.
Series W: A series of 4,000 Preferred Shares, liquidation preference
$25,000 per share, is designated "Series W FundPreferred shares" ("FundPreferred
shares Series W"). The initial Dividend Period for FundPreferred shares Series W
shall be the period from and including the Date of Original Issue thereof to but
excluding ___________, 200_. Each share of FundPreferred shares Series W shall
have an Applicable Rate for its initial Dividend Period equal to __% per annum
and an initial Dividend
Payment Date of _________, 200_ and each share of FundPreferred shares Series W
shall have such other preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, in addition to those required by applicable law or set forth in the
Declaration applicable to preferred shares of the Fund, as are set forth in Part
I and Part II of this Statement. The FundPreferred shares Series W shall
constitute a separate series of Preferred Shares of the Fund.
Series F: A series of 4,000 Preferred Shares, liquidation
preference $25,000 per share, is designated "Series F FundPreferred shares"
("FundPreferred shares Series F"). The initial Dividend Period for
FundPreferred shares Series F shall be the period from and including the Date
of Original Issue thereof to but excluding ___________, 200_. Each share of
FundPreferred shares Series F shall have an Applicable Rate for its initial
Dividend Period equal to __% per annum and an initial Dividend Payment Date of
_________, 200_ and each share of FundPreferred shares Series F shall have such
other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to
those required by applicable law or set forth in the Declaration applicable to
preferred shares of the Fund, as are set forth in Part I and Part II of this
Statement. The FundPreferred shares Series F shall constitute a separate series
of Preferred Shares of the Fund.
Subject to the provisions of Section 11 of Part I hereof, the Board of
Trustees of the Fund may, in the future, authorize the issuance of additional
shares of the Fund's Preferred Shares as FundPreferred shares Series M, Series
T, Series W and Series F, with the same preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption and other terms of the respective series herein
described, except that the Applicable Rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth shall be as set forth in an amendment to this Statement.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 18 of Part I.
PART I: FUNDPREFERRED SHARES TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting
each of FundPreferred shares Series M, Series T, Series W and Series F, is
4,000, 4,000, 4,000 and 4,000, shares, respectively. No fractional shares of
FundPreferred shares, Series M, Series T, Series W and Series F shall be issued.
(b) Any shares of each Series of FundPreferred shares
which at any time have been redeemed or purchased by the Fund shall, after such
redemption or purchase, have the status of authorized but unissued shares of
Preferred Shares.
(c) The shares of each Series of FundPreferred shares
shall rank on a parity with shares of any other series of Preferred Shares
(including any other FundPreferred shares) as to the payment of dividends to
which such shares are entitled and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
(d) No holder of shares of any Series of FundPreferred
shares shall have, solely by reason of being such a holder, any preemptive
right, or, unless otherwise determined by the Trustees other right to acquire,
purchase or subscribe for any shares of any Series of FundPreferred shares,
shares of Common Shares of the Fund or other securities of the Fund which the
Fund may hereafter issue or sell.
2. Dividends.
(a) The Holders of shares of any Series of FundPreferred
shares shall be entitled to receive, when, as and if declared by the Board of
Trustees, out of funds legally available therefor, cumulative cash dividends on
their shares at the Applicable Rate, determined as set forth in paragraph (c) of
this Section 2, and no more, payable on the respective dates determined as set
forth in paragraph (b) of this Section 2. Dividends on the Outstanding shares of
any Series of FundPreferred shares issued on the Date of Original Issue shall
accumulate from the Date of Original Issue.
(b) (i) Dividends shall be payable when, as and if
declared by the Board of Trustees following the initial Dividend
Payment Date, subject to subparagraph (b)(ii) of this Section 2, on the
shares of each Series of FundPreferred shares, with respect to any
Dividend
A-2
Period on the first Business Day following the last day of such
Dividend Period; provided, however, if the Dividend Period is greater
than 30 days then on a monthly basis on the first Business Day of each
month within such Dividend Period and on the Business Day following the
last day of such Dividend Period.
(ii) If a day for payment of dividends resulting
from the application of subparagraph (b)(i) above is not a Business
Day, (A) then the Dividend Payment Date shall be the first Business Day
following such day for payment of dividends in the case of a Series of
FundPreferred shares designated as "Series M" or "Series F" or (B) then
the Dividend Payment Date shall be the first Business Day that falls
prior to such day for payment of dividends in the case of a Series of
FundPreferred shares designated as "Series T," "Series W," or "Series
TH."
(iii) The Fund shall pay to the Paying Agent not
later than 3:00 p.m., New York City time, on the Business Day next
preceding each Dividend Payment Date for the shares of each Series of
FundPreferred shares, an aggregate amount of funds available on the
next Business Day in the City of New York, New York, equal to the
dividends to be paid to all Holders of such shares on such Dividend
Payment Date. The Fund shall not be required to establish any reserves
for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the
payment of dividends shall be held in trust for the payment of such
dividends by the Paying Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends, including interest earned on such
moneys, will, to the extent permitted by law, be repaid to the Fund at
the end of 90 days from the date on which such moneys were to have been
so applied.
(v) Each dividend on a Series of FundPreferred
shares shall be paid on the Dividend Payment Date therefor to the
Holders of that series as their names appear on the share ledger or
share records of the Fund on the Business Day next preceding such
Dividend Payment Date. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to the Holders as their names appear on
the share ledger or share records of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed
by the Board of Trustees. No interest will be payable in respect of any
dividend payment or payments which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of
each Series of FundPreferred shares during the period from and after
the Date of Original Issue to and including the last day of the initial
Dividend Period therefor shall be equal to the rate per annum set forth
under "Designation" above. For each subsequent Dividend Period with
respect to the FundPreferred shares Outstanding thereafter, the
dividend rate shall be equal to the rate per annum that results from an
Auction; provided, however, that if an Auction for any subsequent
Dividend Period of a Series of FundPreferred shares is not held for any
reason or if Sufficient Clearing Bids have not been made in an Auction
(other than as a result of all shares of a Series of FundPreferred
shares being the subject of Submitted Hold Orders), then the dividend
rate on the shares of a Series of FundPreferred shares for any such
Dividend Period shall be the Maximum Rate (except (i) during a Default
Period when the dividend rate shall be the Default Rate, as set forth
in Section 2(c)(ii) below) or (ii) after a Default Period and prior to
the beginning of the next Dividend Period when the dividend rate shall
be the Maximum Rate at the close of business on the last day of such
Default Period). The All Hold Rate will apply automatically following
an Auction in which all of the Outstanding shares of a Series of
FundPreferred shares are subject (or are deemed to be
A-3
subject) to Hold Orders. The rate per annum at which dividends are
payable on shares of a Series of FundPreferred shares as determined
pursuant to this Section 2(c)(i) shall be the "Applicable Rate."
(ii) Subject to the cure provisions below, a
"Default Period" with respect to a particular Series will commence on
any date the Fund fails to deposit irrevocably in trust in same-day
funds, with the Paying Agent by 12:00 noon, New York City time, (A) the
full amount of any declared dividend on that Series payable on the
Dividend Payment Date (a "Dividend Default") or (B) the full amount of
any redemption price (the "Redemption Price") payable on the date fixed
for redemption (the "Redemption Date") (a "Redemption Default") and
together with a Dividend Default, hereinafter referred to as
"Default"). Subject to the cure provisions of Section 2(c)(iii) below,
a Default Period with respect to a Dividend Default or a Redemption
Default shall end on the Business Day on which, by 12:00 noon, New York
City time, all unpaid dividends and any unpaid Redemption Price shall
have been deposited irrevocably in trust in same-day funds with the
Paying Agent. In the case of a Dividend Default, the Applicable Rate
for each Dividend Period commencing during a Default Period will be
equal to the Default Rate, and each subsequent Dividend Period
commencing after the beginning of a Default Period shall be a Standard
Dividend Period; provided, however, that the commencement of a Default
Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period with respect
to a Dividend Default applicable to that Series of FundPreferred
shares.
(iii) No Default Period with respect to a Dividend
Default or Redemption Default shall be deemed to commence if the amount
of any dividend or any Redemption Price due (if such default is not
solely due to the willful failure of the Fund) is deposited irrevocably
in trust, in same-day funds with the Paying Agent by 12:00 noon, New
York City time within three Business Days after the applicable Dividend
Payment Date or Redemption Date, together with an amount equal to the
Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365 for each
Series. The Default Rate shall be equal to the Reference Rate
multiplied by three (3).
(iv) The amount of dividends per share payable
(if declared) on each Dividend Payment Date of each Dividend Period of
less than one (1) year (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall be
computed by multiplying the Applicable Rate (or the Default Rate) for
such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period
(or portion thereof) that such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and the denominator
of which will be 365, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent. During any
Dividend Period of one (1) year or more, the amount of dividends per
share payable on any Dividend Payment Date (or in respect of dividends
on another date in connection with a redemption during such Dividend
Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of
twelve 30-day months.
(d) Any dividend payment made on shares of any Series of
FundPreferred shares shall first be credited against the earliest accumulated
but unpaid dividends due with respect to such Series.
(e) For so long as the FundPreferred shares are
Outstanding, except as contemplated by Part I of this Statement, the Fund will
not declare, pay or set apart for payment any
A-4
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, Common
Shares or other shares of beneficial interest, if any, ranking junior to the
FundPreferred shares as to dividends or upon liquidation) in respect to Common
Shares or any other shares of the Fund ranking junior to or on a parity with the
FundPreferred shares as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to the FundPreferred shares as to
dividends and upon liquidation) or any such parity shares (except by conversion
into or exchange for shares of the Fund ranking junior to or on a parity with
the FundPreferred shares as to dividends and upon liquidation), unless (i)
immediately after such transaction, the Fund would have Eligible Assets with an
aggregate Discounted Value at least equal to the FundPreferred Shares Basic
Maintenance Amount and the 1940 Act FundPreferred Shares Asset Coverage would be
achieved, (ii) full cumulative dividends on the FundPreferred Shares due on or
prior to the date of the transaction have been declared and paid and (iii) the
Fund has redeemed the full number of FundPreferred shares required to be
redeemed by any provision for mandatory redemption contained in Section
3(a)(ii).
(f) The Fund will not declare, pay or set apart for
payment any dividend or other distribution in respect to the FundPreferred
shares unless (i) there is not an event of default under indebtedness senior to
the FundPreferred shares, if any, or (ii) immediately after such transaction,
the Fund would have eligible portfolio holdings with an aggregate discounted
value at least equal to the asset coverage requirements under the indebtedness
senior to the FundPreferred shares.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the
provisions of this Section 3 and to the extent permitted under the 1940
Act and Massachusetts law, the Fund may, at its option, redeem in whole
or in part out of funds legally available therefor shares of a Series
of FundPreferred shares herein designated as (A) having a Dividend
Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than
15 days and not more than 40 days prior to the date fixed for such
redemption, at a redemption price per share equal to $25,000, plus an
amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) to the date fixed for redemption ("Redemption
Price"), or (B) having a Dividend Period of more than one year, on any
Business Day prior to the end of the relevant Dividend Period by
delivering a notice of redemption not less than 15 days and not more
than 40 days prior to the date fixed for such redemption, at the
Redemption Price, plus a redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set
forth in any applicable Specific Redemption Provisions at the time of
the designation of such Dividend Period as set forth in Section 4 of
this Statement; provided, however, that during a Dividend Period of
more than one year no shares of a Series of FundPreferred shares will
be subject to optional redemption except in accordance with any
Specific Redemption Provisions approved by the Board of Trustees after
consultation with the Broker-Dealers at the time of the designation of
such Dividend Period. Notwithstanding the foregoing, the Fund shall not
give a notice of or effect any redemption pursuant to this Section
3(a)(i) unless, on the date on which the Fund intends to give such
notice and on the date of redemption (a) the Fund has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less
than the amount (including any applicable premium) due to Holders of a
Series of FundPreferred shares by reason of the redemption of such
FundPreferred shares on such date fixed for the redemption and (b) the
Fund would satisfy the FundPreferred Shares Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to
occur on such date, it being understood that the
A-5
provisions of paragraph (d) of this Section 3 shall be applicable in
such circumstances in the event the Fund makes the deposit and takes
the other action required thereby.
(ii) If the Fund fails to maintain, as of any
Valuation Date, the FundPreferred Shares Basic Maintenance Amount
or, as of the last Business Day of any month, the 1940 Act
FundPreferred Shares Asset Coverage, and such failure is not cured
within ten Business Days following such Valuation Date in the case of a
failure to maintain the FundPreferred Shares Basic Maintenance Amount
or on the last Business Day of the following month in the case of a
failure to maintain the 1940 Act FundPreferred Shares Asset Coverage as
of such last Business Day (each an "Asset Coverage Cure Date"), the
FundPreferred shares will be subject to mandatory redemption out of
funds legally available therefor. The number of FundPreferred shares to
be redeemed in such circumstances will be equal to the lesser of (A)
the minimum number of FundPreferred shares the redemption of which, if
deemed to have occurred immediately prior to the opening of business on
the relevant Asset Coverage Cure Date, would result in the Fund
satisfying the FundPreferred Shares Basic Maintenance Amount, or
sufficient to satisfy 1940 Act FundPreferred Shares Asset Coverage, as
the case may be, in either case as of the relevant Asset Coverage Cure
Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of FundPreferred
shares then Outstanding will be redeemed), and (B) the maximum number
of FundPreferred shares that can be redeemed out of funds expected to
be available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) of this Section 3.
(iii) In determining the FundPreferred shares
required to be redeemed in accordance with the foregoing Section
3(a)(ii), the Fund shall allocate the number of shares required to be
redeemed to satisfy the FundPreferred Shares Basic Maintenance Amount
or the 1940 Act FundPreferred Shares Asset Coverage, as the case may
be, pro rata among the Holders of FundPreferred shares in proportion to
the number of shares they hold and shares of other Preferred Shares
subject to mandatory redemption provisions similar to those contained
in this Section 3, subject to the further provisions of this
subparagraph (iii). The Fund shall effect any required mandatory
redemption pursuant to subparagraph (a)(ii) of this Section 3 no later
than 40 days after the Asset Coverage Cure Date (the "Mandatory
Redemption Date"), except that if the Fund does not have funds legally
available for the redemption of, or is not otherwise legally permitted
to redeem, the number of shares of the FundPreferred shares which would
be required to be redeemed by the Fund under clause (A) of subparagraph
(a)(ii) of this Section 3 if sufficient funds were available, together
with shares of other Preferred Shares which are subject to mandatory
redemption under provisions similar to those contained in this Section
3, or the Fund otherwise is unable to effect such redemption on or
prior to such Mandatory Redemption Date, the Fund shall redeem those
shares of the FundPreferred shares, and shares of other Preferred
Shares which it was unable to redeem, on the earliest practicable date
on which the Fund will have such funds available, upon notice pursuant
to Section 3(b) to record owners of the FundPreferred shares to be
redeemed and the Paying Agent. The Fund will deposit with the Paying
Agent funds sufficient to redeem the specified number of FundPreferred
shares with respect to a redemption required under subparagraph (a)(ii)
of this Section 3, by 1:00 p.m., New York City time, of the Business
Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding FundPreferred shares are to be redeemed pursuant
to this Section 3(a)(iii), the number of shares to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to the
number of such shares held by such Holders, by lot or by such other
method as the Fund shall deem fair and equitable, subject, however, to
the terms of any applicable Specific Redemption Provisions. "Mandatory
Redemption Price" means the
A-6
Redemption Price plus (in the case of a Dividend Period of one year or
more only) a redemption premium, if any, determined by the Board of
Trustees after consultation with the Broker-Dealers and set forth in
any applicable Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section
3(a), the Fund will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Fund shall deliver a notice of redemption to the Auction Agent (the "Notice of
Redemption") containing the information set forth below (i) in the case of an
optional redemption pursuant to subparagraph (a)(i) above, one Business Day
prior to the giving of notice to the Holders and (ii) in the case of a mandatory
redemption pursuant to subparagraph (a)(ii) above, on or prior to the 30th day
preceding the Mandatory Redemption Date. The Auction Agent will use its
reasonable efforts to provide notice to each Holder of shares of each Series of
FundPreferred shares called for redemption by electronic or other reasonable
means not later than the close of business on the Business Day immediately
following the day on which the Auction Agent determines the shares to be
redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives Notice of Redemption from the Fund). The
Auction Agent shall confirm such notice in writing not later than the close of
business on the third Business Day preceding the date fixed for redemption by
providing the Notice of Redemption to each Holder of shares called for
redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository. Notice of Redemption will be addressed to the registered
owners of each Series of FundPreferred shares at their addresses appearing on
the share records of the Fund. Such Notice of Redemption will set forth (i) the
date fixed for redemption, (ii) the number and identity of FundPreferred shares
to be redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by applicable law. If fewer than
all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares to be redeemed
from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of
this Section 3, but subject to Section 7(e), no FundPreferred shares may be
redeemed unless all dividends in arrears on the Outstanding FundPreferred shares
and all shares of beneficial interest of the Fund ranking on a parity with the
FundPreferred shares with respect to payment of dividends or upon liquidation,
have been or are being contemporaneously paid or set aside for payment;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of all Outstanding FundPreferred shares pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, Holders of all Outstanding FundPreferred shares.
(d) Upon the deposit of funds sufficient to redeem shares
of any Series of FundPreferred shares with the Paying Agent and the giving of
the Notice of Redemption to the Auction Agent under paragraph (b) of this
Section 3, dividends on such shares shall cease to accumulate and such shares
shall no longer be deemed to be Outstanding for any purpose (including, without
limitation, for purposes of calculating whether the Fund has maintained the
requisite FundPreferred Shares Basic Maintenance Amount or the 1940 Act
FundPreferred Shares Asset Coverage), and all rights of the holder of the shares
so called for redemption shall cease and terminate, except the right of such
holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price shall be paid by the
Paying Agent to the nominee of the Securities Depository. The Fund shall be
entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the FundPreferred
A-7
shares called for redemption on such date and (ii) such other amounts, if any,
to which Holders of shares of each Series of FundPreferred shares called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of two years from such redemption date shall, to the extent permitted by law, be
paid to the Fund, after which time the Holders of FundPreferred shares so called
for redemption may look only to the Fund for payment of the redemption price and
all other amounts, if any, to which they may be entitled. The Fund shall be
entitled to receive, from time to time after the date fixed for redemption, any
interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of the absence of legally
available funds therefor, or is otherwise prohibited, such redemption shall be
made as soon as practicable to the extent such funds become legally available or
such redemption is no longer otherwise prohibited. Failure to redeem shares of
any Series of FundPreferred shares shall be deemed to exist at any time after
the date specified for redemption in a Notice of Redemption when the Fund shall
have failed, for any reason whatsoever, to deposit in trust with the Paying
Agent the redemption price with respect to any shares for which such Notice of
Redemption has been given. Notwithstanding the fact that the Fund may not have
redeemed shares of any Series of FundPreferred shares for which a Notice of
Redemption has been given, dividends may be declared and paid on FundPreferred
shares Series and shall include those FundPreferred shares for which Notice of
Redemption has been given but for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of
the redemption price of shares of any Series of FundPreferred shares called for
redemption shall be held in trust by the Paying Agent for the benefit of holders
of shares so to be redeemed.
(g) So long as any shares of any Series of FundPreferred
shares are held of record by the nominee of the Securities Depository, the
redemption price for such shares will be paid on the date fixed for redemption
to the nominee of the Securities Depository for distribution to Agent Members
for distribution to the persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing
contained in this Statement limits any right of the Fund to purchase or
otherwise acquire any shares of each Series of FundPreferred shares outside of
an Auction at any price, whether higher or lower than the price that would be
paid in connection with an optional or mandatory redemption, so long as, at the
time of any such purchase, there is no arrearage in the payment of dividends on,
or the mandatory or optional redemption price with respect to, any shares of any
Series of FundPreferred shares for which Notice of Redemption has been given and
the Fund is in compliance with the 1940 Act FundPreferred Shares Asset Coverage
and the FundPreferred Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Fund shall have no voting
rights. If fewer than all the Outstanding shares of any Series of FundPreferred
shares are redeemed or otherwise acquired by the Fund, the Fund shall give
notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Trustees.
(i) In the case of any redemption pursuant to this
Section 3, only whole shares of FundPreferred shares shall be redeemed, and in
the event that any provision of the Declaration would require redemption of a
fractional share, the Auction Agent shall be authorized to round up so that only
whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary,
including, without limitation, Sections 2(e), 6(f) and 11 of Part I hereof, the
Board of Trustees may authorize, create or issue any class or series of shares
of beneficial interest, including other series of FundPreferred shares, ranking
prior to or on a parity with the FundPreferred shares with respect to the
payment of dividends or the
A-8
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, to the extent permitted by the 1940 Act, as amended, if,
upon issuance, either (A) the net proceeds from the sale of such shares of
beneficial interest (or such portion thereof needed to redeem or repurchase the
Outstanding FundPreferred shares) are deposited with the Auction Agent in
accordance with Section 3(d) of Part I hereof, Notice of Redemption as
contemplated by Section 3(b) of Part I hereof has been delivered prior thereto
or is sent promptly thereafter, and such proceeds are used to redeem all
Outstanding FundPreferred shares or (B) the Fund would meet the 1940 Act
FundPreferred Shares Asset Coverage, the FundPreferred Shares Basic Maintenance
Amount and the requirements of Section 11 of Part I hereof.
4. Designation of Dividend Period.
(a) The initial Dividend Period for each Series of
FundPreferred shares is as set forth under "Designation" above. The Fund will
designate the duration of subsequent Dividend Periods of each Series of
FundPreferred shares; provided, however, that no such designation is necessary
for a Standard Dividend Period and, provided further, that any designation of a
Special Dividend Period shall be effective only if (i) notice thereof shall have
been given as provided herein, (ii) any failure to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or the redemption price of,
FundPreferred shares shall have been cured as provided above, (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special Dividend Period,
(iv) if the Fund shall have mailed a Notice of Redemption with respect to any
shares, the redemption price with respect to such shares shall have been
deposited with the Paying Agent, and (v) in the case of the designation of a
Special Dividend Period, the Fund has confirmed that as of the Auction Date next
preceding the first day of such Special Dividend Period, it satisfies the
FundPreferred Shares Basic Maintenance Amount, and the Fund has consulted with
the Broker-Dealers and has provided notice of such designation and otherwise
complied with the Rating Agency Guidelines.
(b) If the Fund proposes to designate any Special
Dividend Period, not fewer than 7 (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than 8 days) nor more than 30 Business Days prior to the first day of such
Special Dividend Period, notice shall be (i) made by press release and (ii)
communicated by the Fund by telephonic or other means to the Auction Agent and
confirmed in writing promptly thereafter. Each such notice shall state (A) that
the Fund proposes to exercise its option to designate a succeeding Special
Dividend Period, specifying the first and last days thereof and (B) that the
Fund will by 3:00 p.m., New York City time, on the second Business Day next
preceding the first day of such Special Dividend Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special
Dividend Period, subject to the terms of any Specific Redemption Provisions, or
(y) its determination not to proceed with such Special Dividend Period, in which
latter event the succeeding Dividend Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has
determined to designate the next succeeding Dividend Period as a
Special Dividend Period, specifying the first and last days thereof and
(B) the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has
determined not to exercise its option to designate a Special Dividend
Period.
A-9
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the confirmation provided in clause (v) of Paragraph (a) of this Section 4
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Fund shall be deemed to
have delivered a notice to the Auction Agent with respect to such Dividend
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Dividend Period.
5. Restrictions on Transfer. Shares of a Series of FundPreferred
shares may be transferred only (a) pursuant to an order placed in an Auction,
(b) to or through a Broker-Dealer or (c) to the Fund or any Affiliate.
Notwithstanding the foregoing, a transfer other than pursuant to an Auction will
not be effective unless the selling Existing Holder or the Agent Member of such
Existing Holder, in the case of an Existing Holder whose shares are listed in
its own name on the books of the Auction Agent, or the Broker-Dealer or Agent
Member of such Broker-Dealer, in the case of a transfer between persons holding
FundPreferred shares through different Broker-Dealers, advises the Auction Agent
of such transfer. The certificates representing the shares of a Series of
FundPreferred shares issued to the Securities Depository will bear legends with
respect to the restrictions described above and stop-transfer instructions will
be issued to the Transfer Agent and/or Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Declaration,
herein or as otherwise required by applicable law, (i) each Holder of shares of
any Series of FundPreferred shares shall be entitled to one vote for each share
of any Series of FundPreferred shares held on each matter submitted to a vote of
shareholders of the Fund, and (ii) the holders of Outstanding shares of
Preferred Shares, including each Series of FundPreferred shares, and shares of
Common Shares shall vote together as a single class on all matters submitted to
shareholders; provided, however, that, at any meeting of the shareholders of the
Fund held for the election of Trustees, the holders of Outstanding shares of
Preferred Shares, including each Series of FundPreferred shares, represented in
person or by proxy at said meeting, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of shares of
beneficial interest of the Fund, to elect two Trustees of the Fund, each share
of Preferred Shares, including each Series of FundPreferred shares, entitling
the holder thereof to one vote. The identity of the nominees of such Trustees
may be fixed by the Board of Trustees. Subject to paragraph (b) of this Section
6, the holders of Outstanding shares of Common Shares and Preferred Shares,
including each Series of FundPreferred shares, voting together as a single
class, shall elect the balance of the Trustees.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred to herein as
a "Voting Period"), the number of Trustees constituting the Board of Trustees
shall be automatically increased by the smallest number that, when added to the
two Trustees elected exclusively by the holders of shares of Preferred Shares,
including each Series of FundPreferred shares, would constitute a majority of
the Board of Trustees as so increased by such smallest number; and the holders
of shares of Preferred Shares, including each Series of FundPreferred shares,
shall be entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of shares of the
Fund), to elect such smallest number of additional Trustees, together with the
two Trustees that such holders are in any event entitled to elect. A Voting
Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared)
on Preferred Shares equal to at least two full years' dividends shall
be due and unpaid; or
A-10
(ii) if at any time holders of any Preferred
Shares are entitled under the 1940 Act to elect a majority of the
Trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Shares,
including each Series of FundPreferred shares, upon the further occurrence of
any of the events described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right
of the Holders of shares of Preferred Shares, including each Series of
FundPreferred shares, to elect additional Trustees as described in paragraph (b)
of this Section 6, the Fund shall notify the Auction Agent, and the Auction
Agent shall instruct the Trustees to call a special meeting of such holders and
shall mail a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 30 days after the date of mailing of such
notice. If the Fund fails to send such notice to the Auction Agent or if such
special meeting is not called, it may be called by any such holder on like
notice. The record date for determining the holders entitled to notice of and to
vote at such special meeting shall be the close of business on the fifth
Business Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of shares of Preferred Shares,
including each Series of FundPreferred shares, held during a Voting Period at
which Trustees are to be elected, such holders, voting together as a class (to
the exclusion of the holders of all other securities and classes of capital
stock of the Fund), shall be entitled to elect the number of Trustees prescribed
in paragraph (b) of this Section 6 on a one-vote-per-share basis.
(d) The terms of office of all persons who are Trustees
of the Fund at the time of a special meeting of holders of the FundPreferred
shares and holders of other Preferred Shares to elect Trustees shall continue,
notwithstanding the election at such meeting by the holders and such other
holders of the number of Trustees that they are entitled to elect, and the
persons so elected by such holders, together with the two incumbent Trustees
elected by such holders and the remaining incumbent Trustees, shall constitute
the duly elected Trustees of the Fund.
(e) Simultaneously with the termination of a Voting
Period, the terms of office of the additional directors elected by the Holders
of the FundPreferred shares and holders of other Preferred Shares pursuant to
paragraph (b) of this Section 6 shall terminate, the remaining Trustees shall
constitute the Trustees of the Fund and the voting rights of such holders to
elect additional Trustees pursuant to paragraph (b) of this Section 6 shall
cease, subject to the provisions of the last sentence of paragraph (b) of this
Section 6.
(f) So long as any of the shares of Preferred Shares,
including each Series of FundPreferred shares, are Outstanding, the Fund will
not, without the affirmative vote of the holders of a majority of the
Outstanding shares of Preferred Shares determined with reference to a "majority
of outstanding voting securities" as that term is defined in Section 2(a)(42) of
the 1940 Act, voting as a separate class, (i) amend, alter or repeal any of the
preferences, rights or powers of such class so as to affect materially and
adversely such preferences, rights or powers as defined in Section 6(h) below;
(ii) increase the authorized number of shares of Preferred Shares; (iii) create,
authorize or issue shares of any class of shares of beneficial interest ranking
senior to or on a parity with the Preferred Shares with respect to the payment
of dividends or the distribution of assets, or any securities convertible into,
or warrants, options or similar rights to purchase, acquire or receive, such
shares of beneficial interest ranking senior to or on a parity with the
Preferred Shares or reclassify any authorized shares of beneficial interest of
the Fund into any shares ranking senior to or on a parity with the Preferred
Shares (except that, notwithstanding the foregoing, but subject to the
provisions of either Section 3(j) or 11, as applicable, the Board of Trustees,
without the vote or consent of the holders of the Preferred Shares, may from
time to
A-11
time authorize, create and classify, and the Fund may from time to time issue,
shares or series of Preferred Shares, including other series of FundPreferred
shares, ranking on a parity with the FundPreferred shares with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up to the affairs of the Fund, and may authorize,
reclassify and/or issue any additional shares of each Series of FundPreferred
shares, including shares previously purchased or redeemed by the Fund, subject
to continuing compliance by the Fund with 1940 Act FundPreferred Shares Asset
Coverage and FundPreferred Shares Basic Maintenance Amount requirements); (iv)
institute any proceedings to be adjudicated bankrupt or insolvent, or consent to
the institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
FundPreferred shares or arising in connection with any futures contracts or
options thereon, interest rate swap or cap transactions, forward rate
transactions, put or call options, short sales of securities or other similar
transactions; (D) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
permitted under clause (vi) below and (E) liens to secure payment for services
rendered including, without limitation, services rendered by the Fund's
custodian and the Auction Agent; or (vi) create, authorize, issue, incur or
suffer to exist any indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness, except the Fund may borrow as may be permitted
by the Fund's investment restrictions; provided, however, that transfers of
assets by the Fund subject to an obligation to repurchase shall not be deemed to
be indebtedness for purposes of this provision to the extent that after any such
transaction the Fund satisfies the FundPreferred Shares Basic Maintenance Amount
as of the immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of
the Outstanding shares of Preferred Shares, including each Series of
FundPreferred shares, voting as a separate class, determined with reference to a
"majority of outstanding voting securities" as that term is defined in Section
2(a)(42) of the 1940 Act, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
Preferred Shares is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Fund shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify any Rating Agency and which so requires
that such vote is to be taken and the nature of the action with respect to which
such vote is to be taken and shall, not later than ten Business Days after the
date on which such vote is taken, notify such Rating Agency, as applicable, of
the results of such vote.
(h) The affirmative vote of the holders of a majority of
the Outstanding shares of any series of Preferred Shares, including any Series
of FundPreferred shares, voting separately from any other series, determined
with reference to a "majority of outstanding voting securities" as that term is
defined in Section 2(a)(42) of the 1980 Act, (shall be required with respect to
any matter that materially and adversely affects the rights, preferences, or
powers of that series in a manner different from that of
A-12
other series of classes of the Fund's shares of beneficial interest. For
purposes of the foregoing, no matter shall be deemed to adversely affect any
right, preference or power unless such matter (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right
in respect of redemption of such series; or (iii) creates or alters (other than
to abolish) any restriction on transfer applicable to such series. The vote of
holders of any shares described in this Section 6(h) will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or
Preferred Shares, if any, necessary to authorize the action in question.
(i) The Board of Trustees, without the vote or consent of
any holder of shares of Preferred Shares, including any Series of FundPreferred
shares, or any other shareholder of the Fund, may from time to time adopt,
amend, alter or repeal any or all of the definitions contained herein, add
covenants and other obligations of the Fund, or confirm the applicability of
covenants and other obligations set forth herein, in connection with obtaining
or maintaining the rating of any Rating Agency which is then rating the
FundPreferred shares, and any such adoption, amendment, alteration or repeal
will not be deemed to affect the preferences, rights or powers of Preferred
Shares, including FundPreferred shares, or the Holders thereof, provided that
the Board of Trustees receives written confirmation from such Rating Agency, as
applicable (with such confirmation in no event being required to be obtained
from a particular Rating Agency with respect to definitions or other provisions
relevant only to and adopted in connection with another Rating Agency's rating
of any Series of FundPreferred shares) that any such amendment, alteration or
repeal would not adversely affect the rating then assigned by such Rating
Agency.
Notwithstanding anything herein to the contrary, the Rating Agency
Guidelines, as they may be amended from time to time by the respective Rating
Agency will be reflected in a written document and may be amended by the
respective Rating Agency without the vote, consent or approval of the Fund, the
Board of Trustees and any holder of shares of Preferred Shares, including any
Series of FundPreferred shares, or any other shareholder of the Fund.
In addition, subject to compliance with applicable law, the Board of
Trustees may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of the Preferred
Shares, including any Series of FundPreferred shares, or any other shareholder
of the Fund, and without receiving any confirmation from any Rating Agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the FundPreferred Shares
Basic Maintenance Amount.
(j) Unless otherwise required by law, holders of shares
of any Series of FundPreferred shares shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein. The holders of shares of any Series of FundPreferred shares shall have
no rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the shares of any Series of FundPreferred shares, the exclusive
remedy of the holders shall be the right to vote for Trustees pursuant to the
provisions of this Section 6.
(k) The foregoing voting provisions will not apply with
respect to any Series of FundPreferred shares if, at or prior to the time when a
vote is required, such shares have been (i) redeemed or (ii) called for
redemption and sufficient funds shall have been deposited in trust to effect
such redemption.
A-13
7. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, the holders of each
Series of FundPreferred shares then Outstanding, together with holders of shares
of any class of shares ranking on a parity with each Series of FundPreferred
shares upon dissolution, liquidation or winding up, shall be entitled to receive
and to be paid out of the assets of the Fund (or the proceeds thereof) available
for distribution to its shareholders after satisfaction of claims of creditors
of the Fund an amount equal to the liquidation preference with respect to such
shares. The liquidation preference for shares of each Series of FundPreferred
shares shall be $25,000 per share, plus an amount equal to all accumulated
dividends thereon (whether or not earned or declared but without interest) to
the date payment of such distribution is made in full or a sum sufficient for
the payment thereof is set apart with the Paying Agent. No redemption premium
shall be paid upon any liquidation even if such redemption premium would be paid
upon optional or mandatory redemption of the relevant shares.
(b) If, upon any such liquidation, dissolution or winding
up of the affairs of the Fund, whether voluntary or involuntary, the assets of
the Fund available for distribution among the holders of all outstanding
Preferred Shares, including the FundPreferred shares, shall be insufficient to
permit the payment in full to such holders of the amounts to which they are
entitled, then such available assets shall be distributed among the holders of
all outstanding Preferred Shares, including the FundPreferred shares, ratably in
any such distribution of assets according to the respective amounts which would
be payable on all such shares if all amounts thereon were paid in full.
(c) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, until payment in full
is made to the holders of FundPreferred shares of the liquidation distribution
to which they are entitled, no dividend or other distribution shall be made to
the holders of shares of Common Shares or any other class of shares of
beneficial interest of the Fund ranking junior to FundPreferred shares upon
dissolution, liquidation or winding up and no purchase, redemption or other
acquisition for any consideration by the Fund shall be made in respect of the
shares of Common Shares or any other class of shares of beneficial interest of
the Fund ranking junior to FundPreferred shares upon dissolution, liquidation or
winding up.
(d) A consolidation, reorganization or merger of the Fund
with or into any other trust or company, or a sale, lease or exchange of all or
substantially all of the assets of the Fund in consideration for the issuance of
equity securities of another trust or company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7.
(e) After the payment to the Holders of Preferred Shares,
including FundPreferred shares, of the full preferential amounts provided for in
this Section 7, the holders of Preferred Shares, including FundPreferred shares,
as such shall have no right or claim to any of the remaining assets of the Fund.
(f) In the event the assets of the Fund or proceeds
thereof available for distribution to the Holders of FundPreferred shares, upon
any dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled pursuant to paragraph (a) of this Section 7, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with FundPreferred shares unless
proportionate distributive amounts shall be paid on account of the FundPreferred
shares, ratably, in proportion to the full distributable amounts to which
holders of all such parity shares are entitled upon such dissolution,
liquidation or winding up.
A-14
(g) Subject to the rights of the holders of shares of any
Series or class or classes of stock ranking on a parity with FundPreferred
shares with respect to the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund, after payment shall have been made in
full to the holders of the FundPreferred shares as provided in paragraph (a) of
this Section 7, but not prior thereto, any other series or class or classes of
stock ranking junior to FundPreferred shares with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund
shall, subject to any respective terms and provisions (if any) applying thereto,
be entitled to receive any and all assets remaining to be paid or distributed,
and the holders of the FundPreferred shares shall not be entitled to share
therein.
8. Auction Agent. For so long as any FundPreferred shares are
Outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its Affiliates (which, however, may engage or have
engaged in business transactions with the Fund or its Affiliates) and at no time
shall the Fund or any of its Affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any FundPreferred shares are
Outstanding, the Fund shall use its best efforts promptly thereafter to appoint
another qualified commercial bank, trust company or financial institution to act
as the Auction Agent.
9. 1940 Act FundPreferred Shares Asset Coverage. The Fund shall
maintain, as of the last Business Day of each month in which any shares of the
FundPreferred shares are Outstanding, asset coverage with respect to the
FundPreferred shares which is equal to or greater than the 1940 Act
FundPreferred Shares Asset Coverage; provided, however, that Section 3(a)(ii)
shall be the sole remedy in the event the Fund fails to do so.
10. FundPreferred Shares Basic Maintenance Amount. So long as the
FundPreferred shares are Outstanding and any Rating Agency is then rating the
FundPreferred shares, the Fund shall maintain, as of each Valuation Date,
the FundPreferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Fund fails to do so.
11. Certain Other Restrictions. For so long as any shares of
FundPreferred shares are Outstanding and any Rating Agency is then rating the
shares of FundPreferred shares, the Fund will not engage in certain proscribed
transactions set forth in the Rating Agency Guidelines, unless it has received
written confirmation from each such Rating Agency that proscribes the applicable
transaction in its Rating Agency Guidelines that any such action would not
impair the rating then assigned by such Rating Agency to a Series of
FundPreferred shares.
12. Compliance Procedures for Asset Maintenance Tests. For so long
as any FundPreferred shares are Outstanding and any Rating Agency is then rating
such shares:
(a) As of each Valuation Date, the Fund shall determine
in accordance with the procedures specified herein (i) whether the FundPreferred
Shares Basic Maintenance Amount is met as of that date; and (ii) whether the
1940 Act FundPreferred Shares Asset Coverage is met as of that date.
(b) Upon any failure to maintain the required
FundPreferred Shares Basic Maintenance Amount or 1940 Act FundPreferred Shares
Asset Coverage on any Valuation Date, the Fund may use reasonable commercial
efforts (including, without limitation, altering the composition of its
portfolio, purchasing FundPreferred shares outside of an Auction or in the event
of a failure to file a
A-15
Rating Agency Certificate (as defined below) on a timely basis, submitting the
requisite Rating Agency Certificate) to re-attain (or certify in the case of a
failure to file on a timely basis, as the case may be) the required
FundPreferred Shares Basic Maintenance Amount or 1940 Act FundPreferred Shares
Asset Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the FundPreferred Shares Basic
Maintenance Amount and 1940 Act FundPreferred Shares Asset Coverage tests shall
be determined with reference to those FundPreferred shares which are deemed to
be Outstanding hereunder.
(d) The Fund shall deliver to each Rating Agency which is
then rating FundPreferred shares and any other party specified in the Rating
Agency Guidelines all certificates that are set forth in the respective Rating
Agency Guidelines regarding 1940 Act FundPreferred Shares Asset Coverage,
FundPreferred Shares Basic Maintenance Amount and/or related calculations at
such times and containing such information as set forth in the respective Rating
Agency Guidelines (each, a "Rating Agency Certificate").
(e) In the event that any Rating Agency Certificate is
not delivered within the time periods set forth in the Rating Agency Guidelines,
the Fund shall be deemed to have failed to maintain the FundPreferred Shares
Basic Maintenance Amount or the 1940 Act FundPreferred Shares Asset Coverage, as
the case may be, on such Valuation Date for purposes of Section 12(b). In the
event that any Rating Agency Certificate with respect to an applicable Asset
Coverage Cure Date is not delivered within the time periods set forth in the
Rating Agency Guidelines, the Fund shall be deemed to have failed to satisfy
the FundPreferred Shares Basic Maintenance Amount or to meet the 1940
FundPreferred Shares Asset Coverage, as the case may be, as of the related
Valuation Date, and such failure shall be deemed not to have been cured as of
such Asset Coverage Cure Date for purposes of the mandatory redemption
provisions.
13. Notice. All notices or communications hereunder, unless
otherwise specified in this Statement, shall be sufficiently given if in writing
and delivered in person, by telecopier, by electronic means or mailed by
first-class mail, postage prepaid. Notices delivered pursuant to this Section 13
shall be deemed given on the earlier of the date received or the date five days
after which such notice is mailed.
14. Waiver. Holders of at least a majority of the Outstanding
FundPreferred shares, acting collectively, or each Series of FundPreferred
shares acting as a separate series, determined with reference to a "majority of
the outstanding voting securities" as that term is defined in Section 2(a)(42)
of the 1940 Act, may waive any provision hereof intended for their respective
benefit in accordance with such procedures as may from time to time be
established by the Board of Trustees.
15. Termination. In the event that no FundPreferred shares are
Outstanding, all rights and preferences of such shares established and
designated hereunder shall cease and terminate, and all obligations of the Fund
under this Statement, shall terminate.
16. Amendment. Subject to the provisions of this Statement, the
Board of Trustees may, by resolution duly adopted, without shareholder approval
(except as otherwise provided by this Statement or required by applicable law),
amend this Statement to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of FundPreferred shares or
additional shares of a series of FundPreferred shares (and terms relating
thereto) to the series and shares of FundPreferred shares theretofore described
thereon. All such additional shares shall be governed by the terms of this
Statement, except as set forth in such amendment with respect to such additional
shares. To the extent permitted by applicable law, the Board
A-16
of Trustees may interpret, amend or adjust the provisions of this Statement to
resolve any inconsistency or ambiguity or to remedy any defect.
17. Definitions. As used in Part I and Part II of this Statement,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
(a) "Affiliate" means any person controlled by, in
control of or under common control with the Fund; provided that no Broker-Dealer
controlled by, in control of or under common control with the Fund shall be
deemed to be an Affiliate nor shall any corporation or any person controlled by,
in control of or under common control with such corporation one of the trustees,
directors or executive officers of which is also a Trustee of the Fund be deemed
to be an Affiliate solely because such Trustee, director or executive officer is
also a Trustee of the Fund.
(b) "Agent Member" means a member of or participant in
the Securities Depository that will act on behalf of a Bidder.
(c) "All Hold Rate" means 80% of the Reference Rate.
(d) "Applicable Rate" means, with respect to each Series
of FundPreferred shares for each Dividend Period (i) if Sufficient Clearing
Orders exist for the Auction in respect thereof, the Winning Bid Rate, (ii) if
Sufficient Clearing Orders do not exist for the Auction in respect thereof, the
A-17
Maximum Applicable Rate and (iii) in the case where all the shares of
FundPreferred shares are the subject of Hold Orders for the Auction in respect
thereof, the All Hold Rate.
(e) "Applicable Percentage" means the percentage determined
based on the higher of the credit ratings assigned to the series of
FundPreferred on such date by Moody's and S&P or equivalent credit rating by any
Other Rating Agency as follows:
CREDIT RATINGS
-------------------------------
MOODY'S S&P APPLICABLE PERCENTAGE
------------- ------------- ---------------------
Aaa AAA 125%
Aa3 to Aa1 AA- to AA+ 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 250%
Ba1 and lower BB+ and lower 300%
The Applicable Percentage as so determined shall be further
subject to upward but not downward adjustment in the discretion of the Board of
Trustees of the Fund after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with
FundPreferred Basic Maintenance Amount.
(f) "Applicable Spread" means the spread determined based on
the higher of the credit rating assigned to the series of FundPreferred shares
on such date by Moody's and S&P (or equivalent credit rating by any Other Rating
Agency) as follows:
CREDIT RATINGS
-------------------------------
MOODY'S S&P SPREAD
------------- ------------- ---------------------
Aaa AAA 125 bps
Aa3 to Aa1 AA- to AA+ 150 bps
A3 to A1 A- to A+ 200 bps
Baa3 to Baa1 BBB- to BBB+ 250 bps
Ba1 and lower BB+ and lower 300 bps
The Applicable Spread as so determined shall be further
subject to upward but not downward adjustment in the discretion of the Board of
Trustees after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the
FundPreferred Basic Maintenance Amount.
(g) "Asset Coverage Cure Date" has the meaning set forth
in Section 3(a)(ii).
(h) "Auction" means each periodic operation of the
procedures set forth under "Auction Procedures."
(i) "Auction Agent" means The Bank of New York unless and
until another commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into an agreement with
the Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
(j) "Auction Date" means the first Business Day next
preceding the first day of a Dividend Period for each Series of FundPreferred
shares.
(k) "Auction Procedures" means the procedures for
conducting Auctions set forth in Part II hereof.
(l) "Beneficial Owner," with respect to shares of each
Series of FundPreferred shares, means a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of shares of such Series.
(m) "Bid" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(n) "Bidder" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be permitted to be a Bidder in
an Auction, except that any Broker-Dealer that is an affiliate of the Fund may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
(o) "Board of Trustees" or "Board" means the Board of
Trustees of the Fund or any duly authorized committee thereof as permitted by
applicable law.
(p) "Broker-Dealer" means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the functions
required of a Broker-Dealer by the Auction Procedures, that has been selected by
the Fund and has entered into a Broker-Dealer Agreement that remains effective.
(q) "Broker-Dealer Agreement" means an agreement among
the Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer
agrees to follow the Auction Procedures.
(r) "Business Day" means a day on which the New York
Stock Exchange is open for trading and which is not a Saturday, Sunday or other
day on which banks in the City of New York, New York are authorized or obligated
by law to close.
(s) "Code" means the Internal Revenue Code of 1986, as
amended.
(t) "Commission" means the Securities and Exchange
Commission.
A-18
(u) "Common Share" means the shares of beneficial
interest, par value $.01 per share, of the Fund.
(v) "Date of Original Issue" means, with respect to
Series M, Series T, Series W and Series F FundPreferred shares, _________, 200_.
(w) "Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(x) "Default Period" has the meaning set forth in Section
2(c)(ii) of this Part I.
(y) "Default Rate" means the Reference Rate multiplied by
three (3).
(z) "Deposit Securities" means cash and any obligations
or securities, including short term money market instruments that are Eligible
Assets, rated at least AAA, A-2 or SP-2 by S&P, except that, for purposes of
section 3(a)(i) of this Part I, such obligations or securities shall be
considered "Deposit Securities" only if they are also rated at least P-2 by
Moody's.
(aa) "Discount Factor" means the Moody's Discount Factor
(if Moody's is then rating the FundPreferred shares), S&P Discount Factor (if
S&P is then rating the FundPreferred shares) or an Other Rating Agency
Discount Factor, whichever is applicable.
(bb) "Discounted Value" means the quotient of the Market
Value of an Eligible Asset divided by the applicable Discount Factor.
(cc) "Dividend Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(dd) "Dividend Payment Date" with respect to a Series of
FundPreferred shares means any date on which dividends are payable pursuant to
Section 2(b) of this Part I.
(ee) "Dividend Period" means, with respect to a Series of
FundPreferred shares, the period commencing on the Date of Original Issue
thereof and ending on the date specified for such series on the Date of Original
Issue thereof and thereafter, as to such series, the period commencing on the
day following each Dividend Period for such series and ending on the day
established for such series by the Fund.
(ff) "Eligible Assets" means Moody's Eligible Assets or
Fitch's Eligible Assets (if Moody's or Fitch are then rating the FundPreferred
shares) and/or Other Rating Agency Eligible Assets, whichever is applicable.
(gg) "Existing Holder," with respect to shares of a series
of FundPreferred shares, shall mean a Broker-Dealer (or any such other Person as
may be permitted by the Fund) that is listed on the records of the Auction Agent
as a holder of shares of such series.
(hh) "Fitch" means Fitch Ratings and its successors at
law.
A-19
(ii) "FundPreferred Shares Basic Maintenance Amount" as of
any Valuation Date has the meaning set forth in the Rating Agency Guidelines.
(jj) "FundPreferred shares Series M, Series T, Series W
and Series F" means the shares of Series M, Series T, Series W and Series F of
the FundPreferred shares or any other shares of Preferred Shares hereinafter
designated as shares of Series M, Series T, Series W and Series F of the
FundPreferred shares.
(kk) "Holder" means, with respect to FundPreferred shares,
the registered holder of shares of each Series of FundPreferred shares as the
same appears on the share ledger or share records of the Fund.
(ll) "Hold Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(mm) "LIBOR Rate" on any Auction Date, means (i) the rate
for deposits in U.S. dollars for the designated Rate Period, which appears on
display page 3750 of Moneyline's Telerate Service ("Telerate Page 3750") (or
such other page as may replace that page on that service, or such other service
as may be selected by Citigroup Global Markets Inc. or it successors) as of
11:00 a.m., London time, on the day that is the London Business Day on the
Auction Date or, if the Auction Date is not a London Business Day, 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) Citigroup Global Markets Inc. shall
determine the arithmetic mean of the offered quotations of the reference banks
to leading banks in the London interbank market for deposits in U.S. dollars for
the designated Rate Period in an amount determined by Citigroup Global Markets
Inc. by reference to requests for quotations as of approximately 11:00 a.m.
(London time) on such date made by Citigroup Global Markets Inc. to the
reference banks, (B) if at least two of the reference banks provide such
quotations, LIBOR Rate shall equal such arithmetic mean of such quotations, (C)
if only one or none of the reference banks provide such quotations, LIBOR Rate
shall be deemed to be the arithmetic mean of the offered quotations that leading
banks in The City of New York selected by Citigroup Global Markets Inc. (after
obtaining the Fund's approval) are quoting on the relevant LIBOR determination
Date for deposits in U.S. dollars for the designated Rate Period in an amount
determined by Citigroup Global Markets Inc. (after obtaining the Fund's
approval) that is representative of a single transaction in such market at such
time by reference to the principal London offices of leading banks in the London
interbank market; provided, however, that at if Citigroup Global Markets Inc. is
not a Broker-Dealer or 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 other Broker-Dealer selected by the Fund to provide
such rate or rates not being supplied by Citigroup Global Markets Inc.; provided
further, that if Citigroup Global Markets Inc. and/or a substitute Broker-Dealer
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 most recently
determinable LIBOR Rate. If the number of Rate 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 that 49 days, such rate shall be 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 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 that 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 days but fewer than 365 days,
such rate shall be the twelve-month LIBOR rate.
(nn) "London Business Day" means any day on which
commercial banks are generally open for business in London.
(oo) "Mandatory Redemption Date" has the meaning set forth
in Section 3(a)(iii) of this Part I.
(pp) "Mandatory Redemption Price" has the meaning set
forth in Section 3(a)(iii) of this Part I.
(qq) "Market Value" means the fair market value of an
asset of the Fund as computed as follows: readily marketable portfolio
securities listed on the New York Stock Exchange are valued, except as indicated
below, at the last sale price reflected on the consolidated tape at the close of
the New York Stock Exchange on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the mean of the closing bid and asked prices on such day. If no bid or asked
prices are quoted on such day, then the security is valued by such method as the
Board of Trustees shall determine in good faith to reflect its fair market
value. Readily marketable securities not listed on the New York Stock Exchange
but listed on other domestic or foreign securities exchanges or admitted to
trading on the National Association of Securities Dealers Automated Quotations,
Inc. ("Nasdaq") National List are valued in a like manner. Portfolio securities
traded on more than one securities exchange are valued at the last sale price on
the business day as of which such value is being determined as reflected on the
tape at the close of the exchange representing the principal market for such
securities. Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
adviser to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq National List, are valued at the mean of the current bid and asked
prices as reported by Nasdaq or, in the case of securities not quoted by Nasdaq,
the National Quotation Bureau or such other comparable source as the Trustees
deem appropriate to reflect their fair market value. However, certain
fixed-income securities may be valued on the basis of prices provided by a
pricing service when such prices are believed by the Board of Trustees to
reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional size trading in similar groups
of securities and any developments related to specific securities. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Board of Trustees
believes reflect most closely the value of such securities.
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(rr) "Maximum Rate" means the greater of the Applicable
Percentage of the Reference Rate or the Applicable Spread plus the Reference
Rate. The Auction Agent will round each applicable Maximum Rate to the nearest
one-thousandth (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.
(ss) "Moody's" means Moody's Investors Service, Inc., a
Delaware corporation, and its successors at law.
(tt) "Moody's Discount Factor" means the discount factors
set forth in the Moody's Guidelines for use in calculating the Discounted Value
of the Fund's assets in connection with Moody's ratings of FundPreferred Shares.
(uu) "Moody's Eligible Assets" means assets of the Fund
set forth in the Moody's Guidelines as eligible for inclusion in calculating the
Discounted Value of the Fund's assets in connection with Moody's ratings of
FundPreferred Shares.
(vv) "Moody's Guidelines" mean the guidelines provided by
Moody's, as may be amended from time to time, in connection with Moody's ratings
of FundPreferred shares.
(ww) "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
(xx) "1940 Act FundPreferred Shares Asset Coverage" means
asset coverage, as determined in accordance with Section 18(h) of the 1940 Act,
of at least 200% with respect to all outstanding senior securities of the Fund
which are stock, including all Outstanding FundPreferred shares (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common shares),
determined on the basis of values calculated as of a time within 48 hours next
preceding the time of such determination.
(yy) "Notice of Redemption" means any notice with respect
to the redemption of shares of FundPreferred shares pursuant to Section 3.
(zz) "Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(aaa) "Other Rating Agency" means each rating agency, if
any, other than Moody's or S&P then providing a rating for the FundPreferred
shares pursuant to the request of the Fund.
(bbb) "Other Rating Agency Discount Factor" means the
discount factors set forth in the Other Rating Agency Guidelines of each Other
Rating Agency for use in calculating the Discounted Value of the Fund's assets
in connection with the Other Rating Agency's rating of FundPreferred Shares.
(ccc) "Other Rating Agency Eligible Assets" means assets of
the Fund set forth in the Other Rating Agency Guidelines of each Other Rating
Agency as eligible for inclusion in calculating
A-21
the Discounted Value of the Fund's assets in connection with the Other Rating
Agency's rating of FundPreferred shares.
(ddd) "Other Rating Agency Guidelines" mean the guidelines
provided by each Other Rating Agency, as may be amended from time to time, in
connection with the Other Rating Agency's rating of FundPreferred shares.
(eee) "Outstanding" or "outstanding" means, as of any date,
FundPreferred shares theretofore issued by the Fund except, without duplication,
(i) any shares of FundPreferred shares theretofore canceled, redeemed or
repurchased by the Fund, or delivered to the Auction Agent for cancellation or
with respect to which the Fund has given notice of redemption and irrevocably
deposited with the Paying Agent sufficient funds to redeem such FundPreferred
shares and (ii) any FundPreferred shares represented by any certificate in lieu
of which a new certificate has been executed and delivered by the Fund.
Notwithstanding the foregoing, (A) for purposes of voting rights (including the
determination of the number of shares required to constitute a quorum), any of
the FundPreferred shares to which the Fund or any Affiliate of the Fund shall be
the Existing Holder shall be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any Series of FundPreferred shares as to which the
Fund or any person known to the Auction Agent to be an Affiliate of the Fund
shall be the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the FundPreferred Shares Basic
Maintenance Amount, FundPreferred shares held by the Fund shall be disregarded
and not deemed Outstanding but shares held by any Affiliate of the Fund shall be
deemed Outstanding.
(fff) "Paying Agent" means The Bank of New York unless and
until another entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as paying agent, which paying agent may
be the same as the Auction Agent.
(ggg) "Person" or "person" means and includes an
individual, a partnership, a trust, a Fund, an unincorporated association, a
joint venture or other entity or a government or any agency or political
subdivision thereof.
(hhh) "Potential Beneficial Owner," with respect to shares
of a series of FundPreferred shares, shall mean a customer of a Broker-Dealer
that is not a Beneficial Owner of shares of such series but that wishes to
purchase shares of such series, or that is a Beneficial Owner of shares of such
series that wishes to purchase additional shares of such series.
(iii) "Preferred Share" means the preferred shares of
beneficial interest, par value $.01 per share, including the FundPreferred
shares, of the Fund from time to time.
(jjj) "Rating Agency" means each of S&P (if S&P is then
rating FundPreferred shares), Moody's (if Moody's is then rating FundPreferred
shares) and any Other Rating Agency.
(kkk) "Rating Agency Guidelines" mean S&P Guidelines (if
S&P is then rating FundPreferred shares), Moody's Guidelines (if Moody's is then
rating FundPreferred shares) and any Other Rating Agency Guidelines.
(lll) "Redemption Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(mmm) "Redemption Price" has the meaning set forth in
Section 3(a)(i) of this Part I.
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(nnn) "Reference Rate" means, with respect to the
determination of the Maximum Rate and Default Rate, the applicable LIBOR
Rate (for a Dividend Period of fewer than 365 days) or the applicable Treasury
Index Rate (for a Dividend Period of 365 days or more).
(ooo) "Rule 144A Securities" means securities which are
restricted as to resale under federal securities laws but are eligible for
resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's investment manager or portfolio manager acting pursuant to procedures
approved by the Board of Trustees of the Fund.
(ppp) "S&P" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., or its successors.
(qqq) "S&P Discount Factor" means the discount factors set
forth in the S&P Guidelines for use in calculating the Discounted Value of the
Fund's assets in connection with S&P's ratings of FundPreferred Shares.
(rrr) "S&P Eligible Asset" means assets of the Fund set
forth in the S&P Guidelines as eligible for inclusion in calculating the
Discounted Value of the Fund's assets in connection S&P's ratings of
FundPreferred Shares.
(sss) "S&P Guidelines" mean the guidelines provided by S&P,
as may be amended from time to time, in connection with S&P's ratings of
FundPreferred Shares.
(ttt) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(uuu) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any successor securities depository
selected by the Fund that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of
FundPreferred shares Series M, Series T, Series W and Series F.
(vvv) "Sell Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(www) "Special Dividend Period" means a Dividend Period
that is not a Standard Dividend Period.
(xxx) "Specific Redemption Provisions" means, with respect
to any Special Dividend Period of more than one year, either, or any combination
of (i) a period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Dividend Period are not subject to redemption at the option of the Fund
pursuant to Section 3(a)(i) and (ii) a period (a "Premium Call Period"),
consisting of a number of whole years as determined by the Board of Trustees
after consultation with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period shall be redeemable at the Fund's option
pursuant to Section 3(a)(i) and/or in connection with any mandatory redemption
pursuant to Section 3(a)(i) at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage or
percentages of $25,000 or expressed as a formula using specified variables as
determined by the Board of Trustees after consultation with the Broker-Dealers.
(yyy) "Standard Dividend Period" means a Dividend Period of
7 days.
(aaaa) "Submission Deadline" means 1:00 P.M., Eastern
Standard time, on any Auction Date or such other time on any Auction Date by
which Broker-Dealers are required to submit Orders to the Auction Agent as
specified by the Auction Agent from time to time.
(bbbb) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(cccc) "Submitted Hold Order" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(dddd) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
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(dddd) "Submitted Sell Order" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(eeee) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(ffff) "Treasury Index Rate" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities having the same number of 30-day periods to maturity as the length of
the applicable Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next shorter
and next longer number of 30-day periods to maturity treating all Dividend
Periods with a length greater than the longest maturity for such securities as
having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to the
Fund by at least three recognized dealers in U.S. Government securities selected
by the Fund.
(gggg) "Valuation Date" means every Friday, or, if such day
is not a Business Day, the next preceding Business Day; provided, however, that
the first Valuation Date may occur on any other date established by the Fund;
provided, further, however, that such first Valuation Date shall be not more
than one week from the date on which FundPreferred shares Series M, Series T,
Series W and Series F initially are issued.
(hhhh) "Winning Bid Rate" has the meaning set forth in
Section 3(a)(iii) of Part II of this Statement.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date
for shares of a series of FundPreferred shares:
(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 held by such Beneficial Owner which
such Beneficial Owner offers to sell if the Applicable Rate
for shares of 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
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(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 FundPreferred shares 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 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 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 FundPreferred shares subject
to an Auction on any Auction Date shall constitute an irrevocable offer
to sell:
A-25
(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 FundPreferred shares 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 Fund) with the provisions of Section 7 of this Part II or (2)
such Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a
Potential Holder of shares of a series of FundPreferred shares 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 FundPreferred shares other
than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction Date all Orders
for FundPreferred shares of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order
(which shall be the Broker-Dealer unless otherwise permitted by the
Fund);
(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:
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(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
shares of FundPreferred shares 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 28 Dividend Period 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.
(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 FundPreferred shares 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;
A-27
(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 FundPreferred shares 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 Bid Rate
and Applicable Rate.
(a) Not earlier than the Submission Deadline on each
Auction Date for shares of a series of FundPreferred shares, 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 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 FundPreferred shares" 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 Rate (for all Dividend Periods) 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 equal to or lower than the
Maximum Rate (for all Dividend Periods) for shares of such
series; and
A-28
(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 FundPreferred shares
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 Fund of the Maximum Rate for shares of the series of
FundPreferred shares 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 shares of such series for the next succeeding
Dividend Period thereof shall be equal to the Maximum Rate for shares
of such series; or
(iii) if all of the Outstanding shares of such
series are subject to Submitted Hold Orders, that the Applicable Rate
for all shares of such series for the next succeeding Dividend Period
thereof shall be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Existing Holders shall continue to hold the
FundPreferred shares that are subject to Submitted Hold Orders, and, based on
the determinations made pursuant to paragraph (a) of Section 3 of this Part II,
the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by
the Auction Agent and the Auction Agent shall take such other action as set
forth below:
(a) If Sufficient Clearing Bids for shares of a series of
FundPreferred shares have been made, all Submitted Sell Orders with respect to
shares of such series shall be accepted and,
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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 FundPreferred shares 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 FundPreferred shares
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 FundPreferred shares
subject to such Submitted Bid, unless the number of Outstanding
FundPreferred shares subject to all such Submitted Bids shall be
greater than the number of FundPreferred shares ("remaining shares") in
the excess of the Available FundPreferred shares of such series over
the number of FundPreferred shares 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
FundPreferred shares subject to such Submitted Bid, but only in an
amount equal to the number of FundPreferred shares of such series
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding FundPreferred
shares held by such Existing Holder subject to such Submitted Bid and
the denominator of which shall be the aggregate number of Outstanding
FundPreferred shares 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
FundPreferred shares of such series over the number of FundPreferred
shares subject to Submitted Bids described in clauses (ii) through (iv)
of this paragraph (a) by a fraction, the numerator of which shall be
the number of Outstanding FundPreferred shares subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding FundPreferred shares 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
FundPreferred shares 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 Rate for shares of such series shall be
A-30
rejected, thus entitling such Existing Holders to continue to hold the
FundPreferred shares 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 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 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 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
FundPreferred shares 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 FundPreferred shares 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 FundPreferred shares 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 shares of
FundPreferred shares.
(e) If, as a result of the procedures described in clause
(v) of paragraph (a) of this Section 4, any Potential Holder would be entitled
or required to purchase less than a whole share of a series of FundPreferred
shares on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate FundPreferred shares of such series
or purchase among Potential Holders so that only whole shares of FundPreferred
shares 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 FundPreferred shares of such series on
such Auction Date.
(f) Based on the results of each Auction for shares of a
series of FundPreferred shares, 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, FundPreferred
shares of such series. Notwithstanding any provision of the Auction Procedures
or the Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of FundPreferred shares 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
A-31
therefor, partial deliveries of shares of FundPreferred shares 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) Neither the Fund nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver
FundPreferred shares of any series or to pay for FundPreferred shares of any
series sold or purchased pursuant to the Auction Procedures or otherwise.
[Signature Page Follows]
A-32
IN WITNESS WHEREOF, NUVEEN FLOATING RATE INCOME FUND has caused these
presents to be signed as of __________, 2004 in its name and on its behalf by
its Vice-President, and its corporate seal to be hereunto affixed and attested
by its Assistant Secretary. The Fund's Declaration of Trust is on file with the
Secretary of State of the Commonwealth of Massachusetts, and the said officers
of the Fund have executed this Statement as officers and not individually, and
the obligations and rights set forth in this Statement are not binding upon any
such officers, or the Trustees or shareholders of the Fund, individually, but
are binding only upon the assets and property of the Fund.
NUVEEN FLOATING RATE INCOME FUND
By:__________________________________
Jessica R. Droeger, Vice President
ATTEST:
_______________________________________
Virginia L. O'Neal, Assistant Secretary
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation--A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P"), rating symbols and their meanings (as published
by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. 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;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights. The issue ratings definitions are expressed in terms
of default risk. As such, they pertain to senior obligations of an
entity. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted
above.
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.
B-1
A An obligation rated `A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated `BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
BB, B, Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded
CCC, as having significant speculative characteristics. `BB'
CC, indicates the least degree of speculation and `C' the highest.
and C 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.
CC An obligation rated `CC' is currently highly vulnerable to
nonpayment.
C The `C' rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued.
D An obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The `D' rating also
will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are
jeopardized.
Plus (+) or minus (-). The ratings from `AA' to `CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
B-2
c The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to
purchase tendered bonds if the long-term credit rating of the
issuer is below an investment-grade level and/or the issuer's
bonds are deemed taxable.
p The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on
the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash flows.
r The `r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience
high volatility or high variability in expected returns as a
result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and
options; and interest-only and principal-only mortgage
securities. The absence of an `r' symbol should not be taken
as an indication that an obligation will exhibit no volatility
or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories (`AAA', `AA', `A', `BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
- Amortization schedule -- the larger the final maturity
relative to other maturities, the more likely it will be
treated as a note; and
B-3
- Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet
its financial commitment on these obligations is extremely
strong.
A-2 A short-term obligation rated `A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated `B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
B-4
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.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc.-- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
MUNICIPAL BONDS
Aaa Bonds which are rated `Aaa' are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt 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 which are rated `Aa' are judged to be of high quality by
all standards. Together with the `Aaa' group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in `Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in `Aaa' securities.
A Bonds which are rated `A' possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated `Baa' are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest 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.
Ba Bonds which are rated `Ba' are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated `B' generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
B-5
Caa Bonds which are rated `Caa' are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated `Ca' represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated `C' are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
#(hatchmark): Represents issues that are secured by escrowed funds held
in cash, held in trust, invested and reinvested in direct, non-callable,
non-prepayable United States government obligations or non-callable,
non-prepayable obligations unconditionally guaranteed by the U.S. Government,
Resolution Funding Corporation debt obligations.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
(P): When applied to forward delivery bonds, indicates the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
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
issue ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes superior credit quality.
Excellent protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access to
the market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market access
for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of
protection.
COMMERCIAL PAPER
Issuers (or supporting institutions) rated Prime-1 have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
B-6
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures 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.
Issuers (or supporting institutions) rated Prime-2 have a strong
ability for repayment of 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.
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Ratings --A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
B-7
SPECULATIVE GRADE
BB Speculative. `BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of
adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are
not investment grade.
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC, High default risk. Default is a real possibility. Capacity for
CC, C meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A `CC'
rating indicates that default of some kind appears probable.
`C' ratings signal imminent default.
DDD, The ratings of obligations in this category are based on their
DD, prospects for achieving partial or full recovery in a
and D `DDD' reorganization or liquidation of the obligor. While
Default expected recovery values are highly speculative and cannot be
estimated with any precision, the following serve as general
guidelines. obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued
interest. DD' indicates potential recoveries in the range of
50%-90%, and `D' the lowest recovery potential, i.e., below
50%. Entities rated in this category have defaulted on some or
all of their obligations. Entities rated `DDD' have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated `D' have a poor prospect for
repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+"
to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade. B
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
B Speculative Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
B-8
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' Long-term
rating category, to categories below `CCC', or to Short-term ratings other than
`F1'.
`NR' indicates that Fitch Ratings does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
B-9
NUVEEN FLOATING RATE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
____________, 2004
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Statement of Assets and Liabilities, March 4, 2004 (audited)
Statement of Operations from January 15, 2004 (date of organization)
through March 4, 2004 (audited)
Statement of Assets and Liabilities, April 30, 2004 (unaudited)
Statement of Operations from March 25, 2004 (commencement of
operations) through April 30, 2004 (unaudited)
Statement of Changes in Net Assets from March 25, 2004 (commencement
of operations) through April 30, 2004 (unaudited)
Portfolio of Investments April 30, 2004 (unaudited)
2. Exhibits:
a.1 Declaration of Trust dated January 15, 2004. Filed on
January 23, 2004 as Exhibit a.1 to Registrant's
registration statement on Form N-2 (File No.
333-112179) and incorporated herein by reference.*
a.2 Amendment to Declaration of Trust dated February 23,
2004. Filed on February 24, 2004 as Exhibit a.2 to
Registrant's registration statement on Form N-2 (File
No. 333-112179) and incorporated herein by
reference.*
a.3 Form of Statement Establishing and Fixing the Rights
and Preferences of FundPreferred shares. Filed
herewith as Appendix A to the Statement of Additional
Information contained herein.
b. By-laws of Registrant. Filed on January 23, 2004 as
Exhibit b to Registrant's registration statement on
Form N-2 (File No. 333-112179) and incorporated
herein by reference.*
c. None.
d.1 Form of Share Certificate.**
d.2 S&P and Moody's Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment
Plan. Filed on March 24, 2004 as Exhibit e to
Registrant's registration statement on Form N-2 (File
No. 333-112179) and incorporated herein by
reference.*
f. None.
g.1 Investment Management Agreement between Registrant
and Nuveen Institutional Advisory Corp. dated
February 24, 2004. Filed on March 24, 2004 as Exhibit
g.1 to Registrant's registration statement on Form
N-2 (File No. 333-112179) and incorporated herein by
reference.*
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g.2 Investment Sub-Advisory Agreement between Nuveen
Institutional Advisory Corp. and Symphony Asset
Management, LLC dated February 24, 2004. Filed on
March 24, 2004 as Exhibit g.2 to Registrant's
registration statement on Form N-2 (File No.
333-112179) and incorporated herein by reference.*
h.1 Form of Underwriting Agreement.**
h.2 Form of Salomon Smith Barney Inc. Master Selected
Dealer Agreement.**
h.3 Form of Nuveen Master Selected Dealer Agreement.**
h.4 Form of Salomon Smith Barney Inc. Master Agreement
Among Underwriters.**
i. Nuveen Open-End and Closed-End Funds Deferred
Compensation Plan for Independent Directors and
Trustees. Filed on March 24, 2004 as Exhibit i to
Registrant's registration statement on Form N-2 (File
No. 333-112179) and incorporated herein by
reference.*
j. Master Custodian Agreement between Registrant and
State Street Bank and Trust Company dated August 19,
2002. Filed on March 24, 2004 as Exhibit j to
Registrant's registration statement on Form N-2 (File
No. 333-112179) and incorporated herein by
reference.*
k.1 Shareholder Transfer Agency and Service Agreement
between Registrant and State Street Bank and Trust
Company dated October 7, 2002. Filed on March 24,
2004 as Exhibit k.1 to Registrant's registration
statement on Form N-2 (File No. 333-112179) and
incorporated herein by reference.*
k.2 Expense Reimbursement Agreement between Registrant
and Nuveen Institutional Advisory Corp. dated
February 24, 2004. Filed on March 24, 2004 as Exhibit
k.2 to Registrant's registration statement on Form
N-2 (File No. 333-112179) and incorporated herein by
reference.*
k.3 Form of Auction Agency Agreement.**
k.4 Form of Broker-Dealer Agreement.**
k.5 Form of DTC Representations Letter.**
l.1 Opinion and consent of Vedder, Price, Kaufman &
Kammholz, P.C.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Subscription Agreement of Nuveen Institutional
Advisory Corp. dated March 4, 2004. Filed on March
24, 2004 as Exhibit p to Registrant's registration
statement on Form N-2 (File No. 333-112179) and
incorporated herein by reference.*
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q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.**
r.2 Code of Ethics of Symphony Asset Management, LLC.
Filed on February 24, 2004 as Exhibit r.2 to
Registrant's registration statement on Form N-2 (File
No. 333-112179) and incorporated herein by
reference.*
s. Powers of Attorney. Filed on February 25, 2004, as
Exhibit s to Registrant's registration statement on
Form N-2 (File No. 333-112179) and incorporated
herein by reference.*
------------------
* Previously filed.
** Filed herewith.
ITEM 25: MARKETING ARRANGEMENTS
Sections of the Form of Underwriting Agreement to be filed as Exhibit
h.1 to this Registration Statement.
See the Introductory Paragraph and Sections 1.2, 3.1, 3.2, 3.4-3.8,
4.1, 4.2, 5.1-5.4, 6.1, 10.9 and 10.10 of the Form of Salomon Smith Barney Inc.
Master Selected Dealer Agreement to be filed as Exhibit h.2 to this Registration
Statement and the Introductory Paragraph and Sections 2 and 3 of the Form
of Nuveen Master Selected Dealer Agreement to be filed as Exhibit h.3 to this
Registration Statement.
See the Introductory Paragraph and Sections 1.2, 3.1, 3.2, 3.4-3.8,
4.1, 4.2, 5.1-5.4, 6.1, 10.9 and 10.10 of the Form of Salomon Smith Barney Inc.
Master Agreement Among Underwriters to be filed as Exhibit h.4 to this
Registration Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen
and the Underwriters to be filed as Exhibit h.5 to this Registration Statement.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees................. $ 50,680
Printing and engraving expenses......................... 65,000
Legal Fees.............................................. 120,000
Accounting expenses..................................... 6,500
Rating Agency fees...................................... 175,000
Miscellaneous expenses.................................. 7,820
--------
Total................................................ $425,000
========
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At March 5, 2004
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NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares, $0.01 par value 1
ITEM 29: INDEMNIFICATION
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its
Shareholders by reason of a final adjudication by the court or other
body before which the proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interests of the
Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a) or (b))
and resulting in a payment by a Covered Person, unless there has been
either a determination that such Covered Person did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office by the court or
other body approving the settlement or other disposition or a
reasonable determination, based on a review of readily available facts
(as opposed to a full trial-type inquiry), that he did not engage in
such conduct:
(i) by a vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(ii) by written opinion of independent legal
counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if
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it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees then
in office act on the matter) or independent legal counsel in a written
opinion shall determine, based upon a review of the readily available
facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment
Trust Directors and Officers and Errors and Omission policies in the aggregate
amount of $50,000,000 against liability and expenses of claims of wrongful acts
arising out of their position with the Registrant and other Nuveen funds, except
for matters which involve willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of the
Registrant or where he or she had reasonable cause to believe this conduct was
unlawful). The policy has a $500,000 deductible, which does not apply to
individual trustees or officers.
Section 9 of the Form of Underwriting Agreement to be filed as Exhibit
h.1 to this Registration Statement provides for each of the parties thereto,
including the Registrant and the Underwriters, to indemnify the others, their
trustees, directors, certain of their officers, trustees, directors and persons
who control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
C-5
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Nuveen Institutional Advisory Corp. ("NIAC") serves as investment
adviser to the following open-end and closed-end management type investment
companies: Nuveen Investment Trust, Nuveen Investment Trust II, Nuveen
Investment Trust III, Nuveen Senior Income Fund, Nuveen Select Tax-Free Income
Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen California Select
Tax-Free Income, Nuveen New York Select Tax-Free Income Portfolio, Nuveen Real
Estate Income Fund, Nuveen Select Tax-Free Income Portfolio 3, Nuveen Quality
Preferred Income Fund, Nuveen Quality Preferred Income Fund 2, Nuveen Quality
Preferred Income Fund 3, Nuveen Preferred and Convertible Income Fund, Nuveen
Preferred and Convertible Income Fund 2, Nuveen Diversified Dividend and Income
Fund and Nuveen Tax-Advantaged Total Return Strategy Fund.
NIAC has no other clients or business at the present time. For a
description of other business, profession, vocation or employment of a
substantial nature in which any director or officer of the investment adviser
who serve as officers or Trustees of the Registrant has engaged during the last
two years for his or her account or in the capacity of director, officer,
employee, partner or trustee, see the descriptions under "Management of the
Fund" in Part B of this Registration Statement. Such information for the
remaining senior officers of NIAC appears below:
OTHER BUSINESS, PROFESSION, VOCATION OR
NAME AND POSITION WITH NIAC EMPLOYMENT DURING PAST TWO YEARS
--------------------------- --------------------------------
John P. Amboian, President and Director.................. President and Director of Nuveen Investments, Inc.,
Nuveen Investments, LLC, Nuveen Advisory Corp., Nuveen
Asset Management, Inc., Rittenhouse Asset Management,
Inc., Nuveen Investments Advisors Inc., and Nuveen
Investments Holdings, Inc.
Alan G. Berkshire, Senior Vice President and Secretary... Senior Vice President, Secretary and General Counsel of
Nuveen Investments, Inc., Nuveen Investments, LLC,
Nuveen Asset Management, Inc., Rittenhouse Asset
Management, Inc. and Nuveen Investments Holdings, Inc.;
Senior Vice President and Secretary of Nuveen Advisory
Corp. and Nuveen Investments Advisors Inc.; Assistant
Secretary of NWQ Investment Management Company, LLC and
Secretary of Symphony Asset Management, LLC.
Margaret E. Wilson, Senior Vice President, Senior Vice President, Finance of Nuveen Investments,
Finance.................................................. Inc., Nuveen Investments, LLC, Nuveen Asset Management,
Inc., Nuveen Advisory Corp., Rittenhouse Asset
Management, Inc., Nuveen Investments Advisors Inc. and
Nuveen Investments Holdings, Inc.
Symphony Asset Management, LLC currently serves as an investment
adviser or subadviser to three other funds. The address for Symphony Asset
Management, LLC is 555 California Street, Suite 2975, San Francisco, CA 94104.
See "Investment Advisers" in Part B of the Registration Statement.
Set forth below is a list of each director and officer of Symphony,
indicating each business, profession, vocation or employment of a substantial
nature in which such person has been, at any time
C-6
during the past two fiscal years, engaged for his or her own account or in the
capacity of director, officer, partner or trustee.
OTHER BUSINESS, PROFESSION, VOCATION OR
NAME AND POSITION WITH SYMPHONY EMPLOYMENT DURING PAST TWO YEARS*
------------------------------- ---------------------------------
Jeffrey L. Skelton Manager/Member, NetNet Ventures, LLC
Director, President, Chief Executive Officer
Neil L. Rudolph Manager/Member, NetNet Ventures, LLC
Chief Operating Officer; Chief
Financial Officer; Chief Compliance Officer
Michael J. Henman Manager/Member, NetNet Ventures, LLC
Secretary; Director of Business Development
Praveen K. Gottipalli Portfolio Manager and Manager/Member, NetNet Ventures,
Director of Investments LLC
Gunther M. Stein Portfolio Manager, Symphony Asset Management LLC;
Director of Fixed Income Strategies Portfolio Manager, Nuveen Senior Loan Asset Management
LLC; Portfolio Manager, Nuveen Institutional Advisory
Corp.
------------------
*Note: Officers' employment by Symphony Asset Management, Inc. terminated in
July 2001 (in conjunction with purchase of Symphony by Nuveen).
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Institutional Advisory Corp., 333 West Wacker Drive, Chicago,
Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees
and shareholders meetings and contracts of the Registrant and all advisory
material of the investment adviser.
Symphony Asset Management, LLC, 555 California Street, San Francisco,
CA 94104, maintenance certain of its advisory material.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Institutional Advisory Corp.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if: (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement; or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
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5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
b. For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 13th day of
May, 2004.
NUVEEN FLOATING RATE INCOME FUND
/s/ Jessica R. Droeger
------------------------------------------------
Jessica R. Droeger, Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller May 13, 2004
----------------------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
/s/ Gifford R. Zimmerman Chief Administrative Officer May 13, 2004
----------------------------------- (Principal Executive Officer)
Gifford R. Zimmerman
Timothy R. Schwertfeger* Chairman of the Board and Trustee By: /s/ Jessica R. Droeger
-----------------------
Jessica R. Droeger
Attorney-In-Fact
May 13, 2004
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Jack B. Evans* Trustee
William C. Hunter* Trustee
Anne E. Impellizzeri* Trustee
William L. Kissick* Trustee
Thomas E. Leafstrand* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
Sheila W. Wellington* Trustee
------------------
* Original powers of attorney authorizing Jessica R. Droeger and Gifford
R. Zimmerman, among others, to execute this Registration Statement, and
Amendments thereto, for each of the trustees of the Registrant on whose
behalf this Registration Statement is filed, have been executed and
filed as exhibits to Post-Effective Amendment No. 1 to Registrant's
registration statement on Form N-2 (File No. 333-112179) and are
incorporated herein by reference.
INDEX TO EXHIBITS
a.1 Declaration of Trust dated January 15, 2004.*
a.2 Amendment to Declaration of Trust dated February 23, 2004.*
a.3 Form of Statement Establishing and Fixing the Rights and Preferences of
FundPreferred shares. Filed herewith as Appendix A to the Statement of
Additional Information contained herein.
b. By-laws of Registrant.*
c. None.
d.1 Form of Share Certificate.**
d.2 S&P Guidelines and Moody's Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment Plan.*
f. None.
g.1 Investment Management Agreement between Registrant and Nuveen
Institutional Advisory Corp. dated February 24, 2004.*
g.2 Investment Sub-Advisory Agreement between Nuveen Institutional Advisory
Corp. and Symphony Asset Management, LLC dated February 24, 2004.*
h.1 Form of Underwriting Agreement.**
h.2 Form of Salomon Smith Barney Inc. Master Selected Dealer Agreement.**
h.3 Form of Nuveen Master Selected Dealer Agreement.**
h.4 Form of Salomon Smith Barney Inc. Master Agreement Among
Underwriters.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.*
j. Master Custodian Agreement between Registrant and State Street Bank and
Trust Company dated August 19, 2002.*
k.1 Shareholder Transfer Agency and Service Agreement between Registrant
and State Street Bank and Trust Company dated October 7, 2002.*
k.2 Expense Reimbursement Agreement between Registrant and Nuveen
Institutional Advisory Corp. dated February 24, 2004.*
k.3 Form of Auction Agency Agreement.**
k.4 Form of Broker-Dealer Agreement.**
k.5 Form of DTC Representation Letter.**
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz, P.C.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory Corp. dated
March 4, 2004.*
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.**
r.2 Code of Ethics of Symphony Asset Management, LLC.*
s. Powers of Attorney.*
------------------
* Previously filed.
** Filed herewith.