AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 2004
1933 ACT FILE NO. 333-117123
1940 ACT FILE NO. 811-21579
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. 6
NUVEEN FLOATING RATE INCOME OPPORTUNITY 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, P.C. 111 W. MONROE 425 LEXINGTON AVENUE
222 N. LASALLE STREET CHICAGO, IL 60603 NEW YORK, NY 10017
CHICAGO, IL 60601
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
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If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[ ] when declared effective pursuant to section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
-----------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED BEING REGISTERED PER UNIT PRICE(1) REGISTRATION FEE(2)
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FundPreferred shares, $0.01 par
value............................. 9,600 Shares $25,000 $240,000,000 $30,408
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $126.70 has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRATION
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 SEPTEMBER 16, 2004
PROSPECTUS
(NUVEEN INVESTMENTS LOGO)
$240,000,000
NUVEEN FLOATING RATE INCOME OPPORTUNITY FUND
FUNDPREFERRED(TM) SHARES
3,200 SHARES, SERIES M
3,200 SHARES, SERIES TH
3,200 SHARES, SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
Nuveen Floating Rate Income Opportunity 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 loans, primarily
secured senior loans. As part of the 80% requirement, the Fund also may invest
in unsecured senior loans and secured and unsecured subordinated loans. The Fund
will invest at least 65% of its Managed Assets in adjustable rate senior loans
that are secured by specific collateral.
Adjustable rate loans are made to U.S. or non-U.S. corporations,
partnerships and other business entities that operate in various industries and
geographical regions. Such adjustable rate 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 adjustable rate 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. The Fund's subadviser also believes that including subordinated loans
in the portfolio may offer the opportunity to enhance the income and return
potential of the Fund.
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 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 59 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 25.
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
WACHOVIA SECURITIES
, 2004
The Fund is offering 3,200, 3,200 and 3,200 shares of Series M, Series TH
and Series F FundPreferred shares, respectively. The shares are referred to in
this prospectus as "FundPreferred shares." The FundPreferred shares have a
liquidation preference of $25,000 per share, plus any accumulated, but unpaid
dividends, if any. 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 TH and Series F, respectively.
The initial rate period is from the date of issuance through , 2004,
, 2004 and , 2004 for FundPreferred shares Series M, Series
TH 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.
---------------------
Prospectus Summary.......................................... 1
Financial Highlights........................................ 11
The Fund.................................................... 12
Use of Proceeds............................................. 12
Capitalization.............................................. 13
Portfolio Composition....................................... 13
The Fund's Investments...................................... 14
Use of Leverage............................................. 22
Hedging Transactions........................................ 22
Risk Factors................................................ 25
Management of the Fund...................................... 33
Description of FundPreferred Shares......................... 35
The Auction................................................. 49
Description of Borrowings................................... 51
Description of Common Shares................................ 52
Certain Provisions in the Declaration of Trust.............. 52
Repurchase of Fund Shares; Conversion to Open-End Fund...... 53
Federal Income Tax Matters.................................. 54
Custodian, Transfer Agent, Auction Agent, Dividend
Disbursing Agent and Redemption Agent..................... 56
Underwriting................................................ 57
Legal Opinions.............................................. 58
Available Information....................................... 58
Table of Contents for the Statement of Additional
Information............................................... 59
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") to
understand the offering fully. 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 Opportunity Fund
(the "Fund") is a recently organized,
diversified, closed-end management investment
company. The Fund's common shares, $0.01 par
value, are traded on the New York Stock
Exchange (the "Exchange") under the symbol
"JRO." See "Description of Common Shares." As
of September 14, 2004, the Fund had 28,360,100
common shares outstanding and net assets
applicable to common shares of $406,348,294.
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 loans, primarily secured
senior loans. As part of the 80% requirement,
the Fund also may invest in unsecured senior
loans (together with secured senior loans
referred to herein as "Senior Loans") and
secured and unsecured subordinated loans.
Adjustable rate Senior Loans and adjustable
rate subordinated loans are sometimes
collectively referred to in this prospectus as
"Adjustable Rate Loans."
Adjustable Rate 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 Adjustable Rate 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 Adjustable Rate 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." Adjustable Rate
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, which may
include middle-market companies. As used in the
prospectus, "middle-market" generally refers to
companies with annual revenues of approximately
$500 million or below and subordinated loans to
middle markets companies are generally referred
to as "mezzanine loans." It is anticipated that
the proceeds of the Adjustable Rate 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.
1
The Fund may invest up to 20% of its Managed
Assets in the following adjustable or fixed
rate securities: (i) other debt securities such
as investment and non-investment grade debt
securities, fixed rate Senior Loans or
subordinated loans, convertible securities and
structured notes (other than structured notes
that are designed to provide returns and risks
that emulate those of Adjustable Rate Loans,
which may be treated as an investment in
Adjustable Rate 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
(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 an Issuer (as defined
below) 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 15% of the
Fund's Managed Assets may be invested in
Adjustable Rate 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 -- Portfolio Composition and Other
Information" and "Risk Factors -- General Risks
of the Fund -- Issuer Level Risks -- Below
Investment Grade Risk."
The Fund's net assets, including assets
attributable to any FundPreferred shares that
may be outstanding and the principal amount of
any Borrowings (defined below), are called
"Managed Assets." Borrowers under Adjustable
Rate Loans and issuers of other securities in
which the Fund may invest are sometimes
collectively referred to herein as "Issuers."
Nuveen Institutional Advisory Corp. ("NIAC"),
the Fund's adviser, will be responsible for
determining the Fund's overall investment
strategy and its implementation, including the
use of leverage and hedging. Symphony Asset
Management, LLC ("Symphony") will be the Fund's
subadviser responsible for managing the Fund's
Managed Assets.
2
Under normal circumstances:
- The Fund will invest at least 65% of its
Managed Assets in Senior Loans that are
secured by specific collateral.
- Initially, the Fund does not intend to invest
more than 10% of its Managed Assets in
adjustable rate subordinated loans.
- The Fund expects to maintain an average
duration of one year or less for its
portfolio investments in Adjustable Rate
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 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 Adjustable Rate
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 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 Adjustable Rate
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
generally follows a 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
3
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 a more
complete discussion of the Fund's portfolio
composition, see "The Fund's Investments."
Portfolio Composition......... Based upon current market conditions, the Fund
anticipates that substantially all of the net
proceeds will be invested according to the
Fund's investment plan described in the
paragraph below within 12 months following the
completion of the initial public offering of
common shares, depending on the availability of
appropriate investment opportunities consistent
with the Fund's investment objective and other
market conditions. Until such time as the Fund
is fully invested according to its investment
plan described below, the Fund expects that its
portfolio will consist primarily of secured
Senior Loans and high yield debt instruments of
companies with large market capitalizations
because the Fund anticipates that it will be
able to invest in such Senior Loans and high
yield debt instruments more rapidly than it can
invest in middle-market Adjustable Rate Loans.
The Fund expects that this initial invest-up
period will occur within 3-4 months following
the completion of the initial public offering
of common shares.
Within 12 months following the completion of
the initial public offering of common shares,
the Fund's current investment plan anticipates
a target portfolio allocation in the following
approximate amounts: (i) 75% of its Managed
Assets will be invested in Senior Loans of
companies with large market capitalizations,
(ii) 10% of its Managed Assets will be invested
in secured Senior Loans, subordinated loans and
other debt instruments issued by middle-market
companies, and (iii) 15% of its Managed Assets
will be invested in other debt instruments of
companies with large market capitalizations and
cash.
Investment Adviser and
Subadviser.................... NIAC, the Fund's investment adviser, will be
responsible for determining the Fund's overall
investment strategy and its implementation,
including the use of leverage and hedging.
4
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 $102
billion of assets under management as of June
30, 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
billion) as of June 30, 2004.
Symphony, a registered investment adviser, is
an indirect wholly owned subsidiary of Nuveen
Investments, Inc. Founded in 1994, Symphony had
approximately $4.2 billion in assets under
management as of June 30, 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."
Effective August 1, 2004, NIAC will receive an
annual fee, payable monthly, in the maximum
amount of 0.85% of the Fund's average total
daily Managed Assets. This maximum fee is equal
to the sum of a "fund-level fee" and a
"complex-level fee." The fund-level fee is a
maximum of 0.65% of the Fund's average total
daily Managed Assets, with lower fee levels for
fund-level assets that exceed $500 million. The
complex-level fee is a maximum of 0.20% of the
daily Managed Assets of all Nuveen-branded
closed-end and open-end registered investment
companies organized in the United States, with
lower fee levels for complex-level assets that
exceed $55 billion. Based on current
complex-level assets as of August 31, 2004, the
complex-level fee would be approximately 0.195%
of Managed Assets (assuming Fund Managed Assets
of $500 million or less). From the commencement
of Fund operations to July 31, 2004 (the first
five days of the Fund's operations), NIAC
received an annual fee (that included only a
fund-level component), payable monthly, in a
maximum amount equal to 0.85% of the Fund's
average daily managed assets, with lower fee
levels for assets that exceed $500 million. As
previously defined, Managed Assets include
assets attributable to any FundPreferred shares
that may be outstanding and the principal
amount of any Borrowings. 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 0.30% of
average daily Managed Assets of the Fund for
the first five full years of the Fund's
operations (through July 31, 2009), and in a
declining amount for an additional three years
(through July 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
5
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 Adjustable Rate Loans and other
adjustable rate securities in which the Fund
may invest 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 Adjustable
Rate Loans and such other adjustable rate
securities 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 3,200, 3,200 and 3,200
shares of FundPreferred shares Series M, Series
TH 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;
6
- 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 their prior claim against the
income of the Fund and against the net assets
of the Fund in liquidation; and
- 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
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
TH Thursday
F Friday
---------------------------------------------
* All dates are 2004.
7
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."
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
TH Friday
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."
8
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
Payment....................... If the Fund issues any Borrowings that
constitute senior securities representing
indebtedness (as defined in the Investment
Company Act of 1940, as amended (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 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 September 14, 2004, and after
giving effect to the issuance of the
FundPreferred shares offered hereby
($240,000,000) and the deduction of sales loads
and estimated offering expenses for such
FundPreferred shares ($5,170,000), 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."
9
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."
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. Similarly, dividends
will generally not qualify for the dividends
received deduction available to corporate
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."
10
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 July 27, 2004 until July 31, 2004. Since the Fund commenced
operations on July 27, 2004, the table covers less than one week of operations,
during which a substantial portion of the Fund's assets were held in cash
pending investment in Adjustable Rate Loans and other securities 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.
JULY 27, 2004 --
JULY 31, 2004
----------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Common share net asset value, beginning of period......... $ 14.33
--------
Net investment income.................................. --
Net gains on securities (realized and unrealized)...... --
--------
Total from investment operations..................... --
Offering costs............................................ (.03)
--------
Common share net asset value, end of period............... $ 14.30
========
Per share market value, end of period..................... $ 15.01
Total return on common share net asset value(a)........... (.21)%
Total investment return on market value(a)................ .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period (in
thousands)............................................. $383,212
Ratio of expenses to average net assets applicable to
common shares before reimbursement..................... 1.28%*
Ratio of net investment income to average net assets
applicable to common shares before reimbursement....... (.01)%*
Ratio of expenses to average net assets applicable to
common shares after reimbursement...................... .98%*
Ratio of net investment income to average net assets
applicable to common shares after reimbursement........ .29%*
Portfolio turnover rate................................... --%
---------------
* 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.
11
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 April 27, 2004, pursuant to the Declaration,
which is governed by the laws of The Commonwealth of Massachusetts. On July 30,
2004, the Fund issued an aggregate of 26,800,000 common shares of beneficial
interest, par value $0.01 per share, pursuant to the initial public offering
thereof. On August 20, 2004 and September 14, 2004, the Fund issued an
additional 1,000,000 and 553,100 shares, respectively, pursuant to the
underwriters exercise of the over-allotment option. The Fund's common shares are
listed on the Exchange under the symbol "JRO." 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 September 14, 2004.
AMOUNT
HELD BY THE
AMOUNT FUND OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ---------- ----------- -----------
Common............................................. unlimited 0 28,360,100
FundPreferred Shares............................... unlimited 0 0
Series M......................................... 3,200 0 0
Series TH........................................ 3,200 0 0
Series F......................................... 3,200 0 0
USE OF PROCEEDS
The net proceeds of the offering of FundPreferred shares will be
approximately $234,830,000 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
secured Senior Loans and high yield debt instruments of companies with large
market capitalizations within approximately four to six weeks after the
completion of the offering. See "The Fund's Investments -- Portfolio Composition
and Other Information -- Portfolio Compensation." 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.
12
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
September 14, 2004, and as adjusted to give effect to 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 9,600 shares issued, as adjusted),
respectively*.......................................... $ -- $240,000,000
============ ============
COMMON SHAREHOLDERS' EQUITY:
Common shares, $.01 par value per share; unlimited shares
authorized, 28,360,180 shares outstanding*............. $ 283,601 $ 283,601
Paid-in surplus**......................................... 405,124,239 399,954,239
Undistributed net investment income....................... 629,803 629,803
Accumulated net realized gain from investment
transactions........................................... 1,421 1,421
Net unrealized appreciation of investments................ 309,230 309,230
------------ ------------
Net assets applicable to common shares.................... $406,348,294 $401,178,294
============ ============
------------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted, paid-in surplus reflects a reduction for the sales load and
estimated offering costs of the FundPreferred shares' issuance ($5,170,000).
PORTFOLIO COMPOSITION
As of September 14, 2004, 40.83% of the market value of the Fund's
portfolio was invested in Adjustable Rate Loans and other securities that meet
the Fund's investment objective and policies and 59.17% of the market value of
the Fund's portfolio was invested in short-term investments.
13
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
Adjustable Rate 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
generally follows a 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 Adjustable Rate Loans, primarily secured Senior Loans. As part
of the 80% requirement, the Fund also may invest in unsecured Senior Loans and
secured and unsecured subordinated loans. The Fund will invest at least 65% of
its Managed Assets in Senior Loans that are secured by specific collateral.
Initially, the Fund does not intend to invest more than 10% of its Managed
Assets in adjustable rate subordinated loans. Investment in adjustable rate
instruments such as Adjustable Rate 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 the following
adjustable or fixed rate securities: (i) other debt securities such as
investment and non-investment grade debt securities, fixed rate Senior Loans or
subordinated loans, convertible securities and structured notes, (other than
structured notes that are designed to provide returns and risks that emulate
those of Adjustable Rate Loans, which may be treated as an investment in
Adjustable Rate 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 an Issuer 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 Adjustable Rate 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 15% of the Fund's Managed
Assets may be invested in Adjustable Rate 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
14
repay principal, and are commonly referred to as "junk bonds." See Appendix B in
the SAI for a description of security ratings.
The Fund's policy under normal circumstances of investing at least 80% of
its Managed Assets in Adjustable Rate Loans is not considered to be fundamental
by the Fund and can be changed without a vote of the Fund's 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 Adjustable
Rate 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 initial 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
15
Transactions" below. This effort may involve making adjustments to investment
policies in an attempt to minimize costs and mitigate risks.
SYMPHONY INVESTMENT PHILOSOPHY AND PROCESS
Investment Philosophy. Symphony believes that managing risk, particularly
for volatile assets such as Adjustable Rate 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 Adjustable Rate Loans and other
securities for potential purchase, Symphony combines quantitative screening and
fundamental and relative value analysis. Symphony evaluates 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 will be 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
16
experience of Symphony, the average life of Senior Loans in recent years has
been approximately two years because of prepayments.
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 -- Security Level
Risks -- Senior Loan 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
"-- Other Investments -- Warrants and Equity Securities."
Adjustable Rate Subordinated Loans. The subordinated loans in which the
Fund may invest are typically privately-negotiated investments that rank
subordinate in priority of payment to senior debt, such as Senior Loans, and are
often unsecured. However, such subordinated loans rank senior to common and
preferred equity in a Borrower's capital structure. Subordinated loans may have
elements of both debt and equity instruments, offering fixed or adjustable rates
of return in the form of interest payments associated with senior debt, while
providing lenders an opportunity to participate in the capital appreciation of a
Borrower, if any, through an equity interest. This equity interest may take the
form of warrants or direct equity investments which will be in conjunction with
the subordinated loans. Due to their higher risk profile and often less
restrictive covenants as compared to Senior Loans, subordinated loans generally
earn a higher return than secured Senior Loans. The warrants associated with
subordinated loans are typically detachable, which allows lenders the
opportunity to receive repayment of their principal on an agreed amortization
schedule while retaining their equity interest in the Borrower. Subordinated
loans also may include a "put" feature, which permits the holder to sell its
equity interest back to the Borrower at a price determined through an agreed
formula.
The Fund expects to invest in subordinated loans that are primarily
unsecured and that provide for relatively high, adjustable rates of interest,
providing the Fund with significant current interest income. The subordinated
loans in which the Fund may invest may have interest-only payments in the early
years, with amortization of principal deferred to the later years of the
subordinated loans. In some cases, the Fund may acquire subordinated loans that,
by their terms, convert into equity or additional debt securities or defer
payments of interest for the first few years after issuance. Also, in some cases
the subordinated loans in which the Fund may invest will be collateralized by a
subordinated lien on some or all of the assets of the Borrower. Typically,
subordinated loans in which the Fund may invest will have maturities of four to
eight years.
The subordinated loan industry is highly specialized and the Fund will rely
on Symphony and its employees' expertise in sourcing, evaluating, structuring,
documenting and monitoring such investments by the Fund.
17
Certain Structured Notes. If the Fund invests in structured notes (as
defined below) that are designed to provide returns and risks that emulate those
of Adjustable Rate Loans, the Fund may treat the value of (or, if applicable,
the notional amount of) such investment as an investment in Adjustable Rate
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 Adjustable Rate Loans.
The Fund acting as Original Lender, Sole Lender and/or Agent. The Fund, in
connection with its investments in senior and subordinated loans, particularly
those made to middle-market companies, may act as one of the group of lenders
originating a loan ("Originating Lender"), may purchase the entire amount of a
particular loan ("Sole Lender"), and may act as Agent in the negotiation of the
terms of a loan and in the formation of a group of investors in a Borrower's
loan.
The Fund as Originating Lender or Sole Lender. When the Fund acts as an
Originating Lender or Sole Lender it will generally participate in structuring
the loan, and may share in an origination fee paid by the Borrower. When the
Fund is an Originating Lender or Sole Lender it will generally have a direct
contractual relationship with the Borrower, and may enforce compliance by the
Borrower with the terms of the loan agreement. As Sole Lender the Fund generally
also would have full voting and consent rights under the applicable loan
agreement.
The Fund as Agent. Acting in the capacity of an Agent with respect to a
loan may subject the Fund to certain risks in addition to those associated with
the Fund's role as a lender. In consideration of such risks, the Fund will
invest no more than 20% of its total assets in Senior Loans in which it acts as
an Agent or co-Agent and the size of any such individual Senior Loan will not
exceed 5% of the Fund's total assets. See "Risk Factors -- General Risks of the
Fund -- Security Level Risks -- Senior Loan Agent Risk."
The Fund's ability to receive fee income may also be constrained by certain
requirements for qualifying as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). The Fund intends to comply with
those requirements and may limit its investments in loans in which it acts as
Originating Lender, Sole Lender or Agent in order to do so.
Other Investments. The Fund may invest in fixed or floating rate debt
instruments and other securities as described below:
Other Corporate Debt Instruments. Corporate debt instruments 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 debt instruments in which the Fund may
invest may be "perpetual" in that they have no maturity date and some may be
convertible into equity securities of the Issuer or its affiliates. The Fund may
invest in debt instruments of any quality and such debt instruments may be
secured or unsecured. In addition, certain debt instruments in which the Fund
may invest may be subordinated to the payment of an Issuer's senior debt.
Derivatives; Structured Notes. The Fund may utilize derivatives, structured
notes and similar instruments (referred to collectively as "structured notes")
for investment purposes and also for hedging purposes. Structured notes are
privately negotiated debt obligations, swap agreements or economically
equivalent instruments where the principal and/or interest to be received by the
investor 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.
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,
18
(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 (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 an Issuer or its affiliates as part of a package of
investments in the Issuer or its affiliates issued in connection with an
Adjustable Rate Loan or other debt instrument of the Issuer. 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 Adjustable Rate Loans or other debt instruments.
The value of warrants and equity securities may be affected more rapidly, and to
a greater extent, by company-specific developments and general market
conditions. These risks may increase fluctuations in the Fund's net asset value.
The Fund may possess material non-public information about an Issuer as a result
of its ownership of an Adjustable Rate Loan or other debt instrument of such
Issuer. 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 an Issuer 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 mortgage-related and other
asset-backed securities, and sovereign debt securities, each of which are
discussed in more detail in the SAI.
Portfolio Composition. Based upon current market conditions, the Fund
anticipates that substantially all of the net proceeds will be invested
according to the Fund's investment plan described in the paragraph below within
12 months following the completion of the initial public offering of common
shares, depending on the availability of appropriate investment opportunities
consistent with the Fund's investment objective and other market conditions.
Until such time as the Fund is fully invested according to its investment plan
described below, the Fund expects that its portfolio will consist primarily of
secured Senior Loans and high yield debt instruments of companies with large
market capitalizations because the Fund anticipates that it will be able to
invest in such Senior Loans and high yield debt instruments more rapidly than it
can invest in middle-market Adjustable Rate Loans. The Fund expects that this
initial invest-up period will occur within 3-4 months following the completion
of the initial public offering of common shares.
Within 12 months following the completion of the initial public offering of
common shares, the Fund's current investment plan anticipates a target portfolio
allocation in the following approximate amounts: (i) 75%
19
of its Managed Assets will be invested in Senior Loans of companies with large
market capitalizations, (ii) 10% of its Managed Assets will be invested in
secured Senior Loans, subordinated loans and other debt instruments issued by
middle-market companies, and (iii) 15% of its Managed Assets will be invested in
other debt instruments of companies with large market capitalizations and cash.
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 Adjustable Rate 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.
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 the
required distributions to its 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," "Hedging Transactions,"
"Risk Factors -- General Risks of the Fund -- Counterparty Risk," "Federal
Income Tax Matters -- Federal Income Tax Treatment of the Fund" and "Other
Investment Policies and Techniques" 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
20
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
privately negotiated subordinated loans to middle-market companies in which the
Fund may invest are likely to be illiquid. 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
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. As described in the section entitled "Risk Factors -- Risks of
Investing in FundPreferred Shares -- Leverage Risk," the net asset value and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated
21
by unleveraged shares. The Fund will treat its investments in such investment
companies as investments in Adjustable Rate 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 Adjustable Rate 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 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, if and when distributed to shareholders, will
be taxable as ordinary income.
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 Borrowings, including the issuance of commercial paper or notes. 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 Adjustable Rate Loans and other adjustable rate securities in which
the Fund may invest 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 Adjustable Rate Loans and such other adjustable rate
securities 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.
22
Portfolio Hedging Transactions. 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. 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, 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 -- 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
23
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.
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.
24
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" in the
SAI for further information on hedging transactions.
Interest Rate Transactions. The Fund expects that the Fund's portfolio
investments in Adjustable Rate 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.
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,
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 payable 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
25
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 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 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 Borrowings,
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
26
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.
GENERAL RISKS OF THE FUND
Limited Operating History. The Fund is a recently organized, diversified,
closed-end management investment company with a limited operating 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.
Issuer Level Risks
Issuer Credit Risk. Adjustable Rate Loans and other debt instruments in
which the Fund may invest 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 or
subordinated loan, if secured. The collateral securing an Adjustable Rate Loan
may lose all or substantially all of its value in the event of bankruptcy of a
Borrower. Some Adjustable Rate Loans are subject to the risk that a court,
pursuant to fraudulent conveyance or other similar laws, could subordinate such
Adjustable Rate Loans to presently existing or future indebtedness of the
Borrower or take other action detrimental to the holders of Adjustable Rate
Loans, including, in certain circumstances, invalidating such Adjustable Rate
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 Issuers, Symphony may consider, and
may rely in part, on analyses performed by others. Issuers may have outstanding
debt obligations that are rated below investment grade by a NRSRO. Many of the
Adjustable Rate Loans acquired by 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. In addition, Symphony believes there are attractive investment
opportunities in the subordinated loan segment, which it believes create the
potential for attractive risk-adjusted returns.
27
Symphony does not view ratings as the determinative factor in its investment
decisions and relies more upon its credit analysis abilities.
The Fund may make investments in securities issued by middle-market
companies. Investment in middle-market companies involve a number of risks,
including:
- Middle-market companies may have limited financial resources and may be
unable to meet their obligations under their debt securities that the
Fund holds, which may be accompanied by a deterioration in the value of
any collateral and a reduction in the likelihood of the Fund realizing
any guarantees it may have obtained in connection with its investment;
- Middle-market companies typically have shorter operating histories,
narrower product lines and smaller market shares than larger businesses,
which tend to render middle-market companies more vulnerable to
competitors' actions and market conditions, as well as to general
economic downturns;
- Middle-market companies are more likely to depend on the management
talents and efforts of a small group of persons; therefore, the death,
disability, resignation or termination of one or more of these persons
could have a material adverse impact on an Issuer and, in turn, on the
Fund; and
- Middle-market companies have less predictable operating results, may from
time to time be parties to litigation, may be engaged in rapidly changing
businesses with products subject to a substantial risk of obsolescence,
and may require substantial additional capital to support their
operations, finance expansion or maintain their competitive position.
Below Investment Grade Risk. The Fund may purchase Adjustable Rate 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 15% 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 and most subordinated 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 Adjustable Rate 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
28
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 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.
Security Level Risks
Subordinated Loans and Other Subordinated Debt Instruments. Issuers of
subordinated loans and other debt instruments in which the Fund may invest
usually will have, or may be permitted to incur, other debt that ranks equally
with, or senior to, the subordinated loans or other debt instruments. By their
terms, such debt instruments may provide that the holders are entitled to
receive payment of interest or principal on or before the dates on which the
Fund is entitled to receive payments in respect of subordinated loans or other
debt instruments in which it invests. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of an Issuer, holders of
debt instruments ranking senior to the subordinated loan or other debt
instrument in which the Fund invests would typically be entitled to receive
payment in full before the Fund receives any distribution in respect of its
investment. After repaying such senior creditors, such Issuer may not have any
remaining assets to use for repaying its obligation to the Fund. In the case of
debt ranking equally with subordinated loans or other debt instruments in which
the Fund invests, the Fund would have to share on an equal basis any
distributions with other creditors holding such debt in the event of an
insolvency, liquidation, dissolution, reorganization or bankruptcy of the
relevant Issuer. In addition, the Fund will likely not be in a position to
control any Issuer by investing in its debt securities. As a result, the Fund
will be subject to the risk that an Issuer in which it invests may make business
decisions with which the Fund disagrees and the management of such Issuer, as
representatives of the holders of their common equity, may take risks or
otherwise act in ways that do not serve our interests as debt investors.
Risks from Unsecured Adjustable Rate Loans or Insufficient Collateral
Securing Adjustable Rate Loans. Some of the Adjustable Rate Loans in which the
Fund may invest will be unsecured, thereby increasing the risk of loss to the
Fund in the event of Borrower default. Although the Fund will invest primarily
in Adjustable Rate Loans that are secured by specific collateral, including,
under normal circumstances, at least 65% of the Fund's Managed Assets to be
invested in secured Senior Loans, there can be no assurance the liquidation of
such collateral would satisfy a Borrower's obligation to the Fund in the event
of Borrower default or that such collateral could be readily liquidated under
such circumstances. In the event of bankruptcy of a Borrower, the Fund could
also experience delays or limitations with respect to its ability to realize the
benefits of any collateral securing an Adjustable Rate Loan.
Interest Rate Risk. Interest rate risk is the risk that fixed rate
securities will decline in value because of changes in market interest rates.
When interest rates rise, the value of a fund invested in fixed rate obligations
can be expected to decline. Conversely, when interest rates decline, the value
of a fund invested in fixed rate obligations can be expected to rise. The Fund's
investments in such fixed rate securities means that the net asset value of the
Fund and market price of the common shares will tend to decline if market
interest rates
29
rise. Market interest rates in the U.S. and in certain other countries in which
the Fund may invest are near historically low levels. The Advisers expect the
Fund's policy of investing at least 80% of its Managed Assets in Adjustable Rate
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. However, because interest rates on most Adjustable Rate 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.
Risks in Loan Valuation. The Fund uses an independent pricing service to
value most Adjustable Rate 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. The Fund currently expects that the independent pricing service will be
unable to provide a market or fair value for most of the privately negotiated
subordinated loans issued by middle-market companies in which the Fund may
invest. The Fund will determine a fair value of such loans on a daily basis. A
security that is fair valued may be valued at a price higher or lower than the
price that may be received by the Fund if it desired to sell such security 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.
Senior Loan 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.
Senior Loan 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 Borrower. 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, Issuers 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. Adjustable Rate 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.
30
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. The
privately negotiated subordinated loans to middle-market companies in which the
Fund may invest are likely to be illiquid. 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.
Other Risks Associated with Adjustable Rate Loans. Many Adjustable Rate
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 Adjustable
Rate 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 Adjustable Rate Loans or Adjustable
Rate 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 Adjustable Rate
Loans and some Adjustable Rate 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 material decline in the Fund's net asset
value. During periods of limited supply and liquidity of Adjustable Rate Loans,
the Fund's yield may be lower. 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 Adjustable Rate Loans and
other securities or market conditions that reduce liquidity) can reduce the
value of Adjustable Rate Loans and other debt obligations, impairing the Fund's
net asset value.
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.
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 Adjustable Rate Loans for investment may be adversely affected.
Further, such legislation or regulation could depress the market value of
Adjustable Rate 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 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
31
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" in the Fund's SAI.
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 and securities of Issuers with smaller market
capitalizations tend to be more volatile than higher rated securities and
securities of Issuers with larger market capitalizations so that these events
and any actions resulting from them may have a greater impact on the prices and
volatility of lower rated securities and securities of Issuers with smaller
market capitalizations than on higher rated securities and securities of Issuers
with larger market capitalizations.
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 Fund's shares
and distributions thereon 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 Adjustable Rate 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.
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
32
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."
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 will be 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
$102 billion of assets under management as of June 30, 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 $4.2
billion in assets under management as of June 30, 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.
33
INVESTMENT MANAGEMENT AGREEMENT(1)
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, based on the sum of a
fund-level fee and a complex-level fee, as described below.
Fund-Level Fee. The fund-level fee shall be applied according to the
following schedule:
FUND-LEVEL
FUND-LEVEL AVERAGE DAILY MANAGED ASSETS FEE RATE
--------------------------------------- ----------
Up to $500 million.......................................... 0.6500%
$500 million to $1 billion.................................. 0.6250%
$1 billion to $1.5 billion.................................. 0.6000%
$1.5 billion to $2 billion.................................. 0.5750%
$2 billion and over......................................... 0.5500%
---------------
(1) From the commencement of Fund operations to July 31, 2004 (the first five
days of the Fund's operations), NIAC received an annual fee, payable
monthly, in a maximum amount equal to 0.85% of the Fund's average daily
Managed Assets.
Complex-Level Fee. The complex-level fee shall be applied according to the
following schedule:
EFFECTIVE
TOTAL COMPLEX- COMPLEX-LEVEL COMPLEX-LEVEL
COMPLEX-LEVEL DAILY MANAGED ASSETS(2) LEVEL ASSETS MARGINAL RATE FEE RATE
------------------------------------- ------------------- ------------- -----------------
First $55 billion..................... $55 billion 0.2000% 0.2000%
Next $1 billion....................... $56 billion 0.1800% 0.1996%
Next $1 billion....................... $57 billion 0.1600% 0.1989%
Next $3 billion....................... $60 billion 0.1425% 0.1961%
Next $3 billion....................... $63 billion 0.1325% 0.1931%
Next $3 billion....................... $66 billion 0.1250% 0.1900%
Next $5 billion....................... $71 billion 0.1200% 0.1851%
Next $5 billion....................... $76 billion 0.1175% 0.1806%
Next $15 billion...................... $91 billion 0.1150% 0.1698%
---------------
(2) With respect to complex-level Managed Assets over $91 billion, both the Fund
(via its Board of Trustees) and NIAC intend that the parties will meet,
prior to the time when complex-level Managed Assets reach that level, to
consider and negotiate the fee rate or rates that will apply to such assets.
The parties agree that, in the unlikely event that complex-level Managed
Assets reach $91 billion prior to the parties reaching an agreement as to
the complex-level fee rate or rates to be applied to Managed Assets in
excess of $91 billion, the complex-level fee rate for such complex-level
Managed Assets shall be 0.1400% until such time as the parties agree to a
different rate or rates. Complex-level Managed Assets are the aggregate
Managed Assets of all Nuveen-branded closed-end and open-end registered
investment companies organized in the United States. Complex-level Managed
Assets were approximately $61 billion as of August 31, 2004.
34
Pursuant to an investment sub-advisory 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.
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
(AS A PERCENTAGE OF
YEAR ENDING JULY 31, MANAGED ASSETS)
-------------------- ---------------------
2004(1)..................................................... 0.30%
2005........................................................ 0.30%
2006........................................................ 0.30%
2007........................................................ 0.30%
2008........................................................ 0.30%
2009........................................................ 0.30%
2010........................................................ 0.22%
2011........................................................ 0.14%
2012........................................................ 0.07%
------------
(1) From the commencement of operations.
The Advisers have not agreed to reimburse the Fund for any portion of its
fees and expenses beyond July 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, 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
FundPreferred shares as follows: 3,200, 3,200 and 3,200 FundPreferred Shares
Series M, Series TH and Series F,
35
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 Massachusetts law and the
Declaration of Trust, 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 Default
Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be
36
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.
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 TH 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 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% 125bps
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.
37
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 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
38
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 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).
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
39
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. Each year,
the Fund will 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 -- Federal Income Tax
Treatment of Holders of FundPreferred Shares."
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
40
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) 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
41
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.
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
42
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.
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
43
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 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 either:
(a) 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); or
(b) if the average Discount Factor of the Fund's aggregate Eligible
Assets is less than 200%, the FundPreferred Shares Basic Maintenance amount
means the asset coverage, as determined in accordance
44
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".
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
September 14, 2004, assuming 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 $5,170,000, the 1940 Act FundPreferred Shares
Asset Coverage would be:
Value of Fund assets less liabilities
not representing senior securities $641,178,294
------------------------------------------------------------ = ------------ = 267%
Senior securities representing indebtedness plus $240,000,000
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.
45
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 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,
46
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 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 a ny 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
47
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, 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.
48
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 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
49
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.
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.
50
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.
A Broker-Dealer may submit orders in auctions for its own account. Any
Broker-Dealer submitting an order for its own account in any auction will have
an advantage over other bidders in that it would have knowledge of other orders
placed through it in that auction (but it would not have knowledge of orders
submitted by other Broker-Dealers, if any). As a result of the Broker-Dealer
bidding, the auction clearing rate may be higher or lower than the rate that
would have prevailed if the Broker-Dealer had not bid. A Broker-Dealer may also
bid in order to prevent what would otherwise be a failed auction or an auction
clearing at the All Hold Rate or a rate that the Broker-Dealer believes does not
reflect the market for such securities at the time of the auction. A
Broker-Dealer may also encourage additional or revised investor bidding in order
to prevent the auction clearing at the All Hold Rate.
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. 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 Borrowings, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any 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
51
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 holders of FundPreferred shares, 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.
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
52
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 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 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, 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 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
53
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, possibly with retroactive effect. 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 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, during each calendar year the
Fund must distribute, or be deemed to have distributed, 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
54
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 and the receipt of qualified dividend income, if any,
such dividends generally will be taxable to holders at ordinary income tax
rates. 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 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 resulting from the sale and such holder's
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
55
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 provided the Fund
receives certain certifications from such non-U.S. shareholder, such lower rates
as may be prescribed by an 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.
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.
56
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 TH SERIES F
------------ -------- --------- --------
Citigroup Global Markets Inc. ...........................
Nuveen Investments, LLC..................................
Wachovia Capital Markets, LLC............................
----- ----- -----
Total.................................................. 3,200 3,200 3,200
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
.
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 Shares".
57
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.
58
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objective........................................ S-1
Investment Restrictions..................................... S-1
Investment Policies and Techniques.......................... S-3
Overall Fund Management..................................... S-5
Symphony Investment Philosophy and Process.................. S-5
Portfolio Composition....................................... S-6
Other Investment Policies and Techniques.................... S-16
Management of the Fund...................................... S-32
Investment Advisers......................................... S-39
Portfolio Transactions and Brokerage........................ S-43
Net Asset Value............................................. S-44
Additional Information Concerning Auctions For FundPreferred
Shares.................................................... S-45
Certain Provisions in the Declaration of Trust.............. S-46
Repurchase of Fund Shares; Conversion to Open-End Fund...... S-48
Federal Income Tax Matters.................................. S-49
Experts..................................................... S-55
Custodian, Transfer Agent, Auction Agent, Dividend
Disbursing Agent and Redemption Agent..................... S-55
Additional Information...................................... S-55
Report of Registered Public Accounting Firm................. F-1
Financial Statements........................................ F-2
Appendix A -- Statement of Preferences...................... A-1
Appendix B -- Ratings of Investments........................ B-1
59
$240,000,000
NUVEEN FLOATING RATE INCOME OPPORTUNITY FUND
FUNDPREFERRED(TM) SHARES
3,200 SHARES, SERIES M
3,200 SHARES, SERIES TH
3,200 SHARES, SERIES F
---------------
PROSPECTUS
, 2004
---------------
CITIGROUP
NUVEEN INVESTMENTS, LLC
WACHOVIA SECURITIES
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 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 OPPORTUNITY FUND
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Floating Rate Income Opportunity Fund (the "Fund") (formerly
known as Nuveen Floating Rate Income Fund 2 through May 17, 2004) is a recently
organized, diversified, closed-end management investment company.
This Statement of Additional Information relating to preferred 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.
TABLE OF CONTENTS
PAGE
Investment Objective ..................................................................... S-1
Investment Restrictions .................................................................. S-1
Investment Policies and Techniques ....................................................... S-3
Overall Fund Management .................................................................. S-5
Symphony Investment Philosophy and Process ............................................... S-5
Portfolio Composition .................................................................... S-6
Other Investment Policies and Techniques ................................................. S-16
Management of the Fund ................................................................... S-32
Investment Advisers ...................................................................... S-39
Portfolio Transactions and Brokerage ..................................................... S-43
Net Asset Value .......................................................................... S-44
Additional Information Concerning Auctions For FundPreferred Shares ...................... S-45
Certain Provisions in the Declaration of Trust ........................................... S-46
Repurchase of Fund Shares; Conversion to Open-End Fund ................................... S-48
Federal Income Tax Matters ............................................................... S-49
Experts .................................................................................. S-55
Custodian, Transfer Agent, Auction Agent, Dividend Disbursing Agent and Redemption Agent.. S-55
Additional Information ................................................................... S-55
Report of Registered Public Accounting Firm............................................... F-1
Financial Statements ..................................................................... F-2
Appendix A - Statement of Preferences ................................................... A-1
Appendix B - Ratings of Investments ..................................................... B-1
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 Adjustable Rate 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
generally follows a 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 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 Adjustable Rate 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 guaranteed by the United States Government or by
its agencies or instrumentalities, and provided further that for purposes of
this
S-1
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 Adjustable Rate 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 Adjustable Rate 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.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its total assets in the aggregate in shares of other investment
companies and only up to 5% of its total assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
S-2
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. As
described in the Prospectus in the section entitled "Risk Factors," the net
asset value and market value of leveraged shares will be more volatile and the
yield to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.
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.
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 Adjustable Rate 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
generally follows a 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
S-3
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 Loans, primarily secured Senior Loans. As
part of the 80% requirement, the Fund also may invest in unsecured Senior Loans
and secured and unsecured subordinated loans. The Fund will invest at least 65%
of its Managed Assets in Senior Loans that are secured by specific collateral.
Initially, the Fund does not intend to invest more than 10% of its Managed
Assets in adjustable rate subordinated loans.
Adjustable Rate 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 Adjustable Rate 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. Adjustable
Rate 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, which may include middle-market companies. As used herein,
"middle market" generally refers to companies with annual revenues of
approximately $500 million or below. It is anticipated that the proceeds of the
Adjustable Rate 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 the following
adjustable or fixed rate securities: (i) other debt securities such as
investment and non-investment grade debt securities, fixed rate Senior Loans or
subordinated loans, convertible securities and structured notes (other than
structured notes that are designed to provide returns and risks that emulate
those of Adjustable Rate Loans, which may be treated as an investment in
Adjustable Rate 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
or acquire warrants and equity securities issued by an issuer 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 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 Adjustable Rate 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 15% of the Fund's Managed Assets may be
invested in Adjustable Rate 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:
o The Fund expects to maintain an average duration of one year or
less for its portfolio investments in Adjustable Rate Loans and
other debt instruments. See "The Fund's Investments--Investment
Objectives and Policies" in the Fund's Prospectus for a
description of duration.
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o The Fund will not invest in inverse floating rate securities.
o 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 Adjustable Rate 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.
o 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.
o 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.
o 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 will oversee 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 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" in
the Fund's Prospectus. This effort may involve making adjustments to investment
policies in an attempt to minimize costs and mitigate risks.
SYMPHONY INVESTMENT PHILOSOPHY AND PROCESS
Investment Philosophy. Symphony believes that managing risk,
particularly for volatile assets such as Adjustable Rate 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
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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 Adjustable Rate Loans and other
securities for potential purchase, Symphony combines quantitative screening and
fundamental and relative value analysis. Symphony evaluates 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 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
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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 relevant terms of a loan agreement or in connection with actions with
respect to the collateral underlying 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
S-7
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.
Adjustable Rate Subordinated Loans. The subordinated loans in which the
Fund may invest are typically privately-negotiated investments that rank
subordinate in priority of payment to senior debt, such as Senior Loans, and are
often unsecured. However, such subordinated loans rank senior to common and
preferred equity in a Borrower's capital structure. Subordinated loans may have
elements of both debt and equity instruments, offering fixed or adjustable rates
of return in the form of interest payments associated with senior debt, while
providing lenders an opportunity to participate in the capital appreciation of a
Borrower, if any, through an equity interest. This equity interest may take the
form of warrants or direct equity investments which will be in conjunction with
the subordinated loans. Due to their higher risk profile and often less
restrictive covenants as compared to Senior Loans, subordinated loans generally
earn a higher return than secured Senior Loans. The warrants associated with
subordinated loans are typically detachable, which allows lenders the
opportunity to receive repayment of their principal on an agreed amortization
schedule while retaining their equity interest in the Borrower. Subordinated
loans also may include a "put" feature, which permits the holder to sell its
equity interest back to the Borrower at a price determined through an agreed
formula. Symphony believes that subordinated loans offer an attractive
investment opportunity based upon their historic returns and performance during
economic downturns.
The Fund expects to invest in subordinated loans that are primarily
unsecured and that provide for relatively high, adjustable rates of interest,
providing the Fund with significant current interest income. The subordinated
loans in which the Fund may invest may have interest-only payments in the early
years, with amortization of principal deferred to the later years of the
subordinated loans. In some cases, the Fund may acquire subordinated loans that,
by their terms, convert into equity or additional debt securities or defer
payments of interest for the first few years after issuance. Also, in some cases
the subordinated loans in which the Fund may invest will be collateralized by a
subordinated lien on some or all of the assets of the Borrower. Typically,
subordinated loans in which the Fund may invest will have maturities of four to
eight years.
The subordinated loan industry is highly specialized and the Fund will
rely on Symphony and its employees' expertise in sourcing, evaluating,
structuring, documenting and monitoring such investments by the Fund.
Certain Structured Notes. If the Fund invests in structured notes (as
defined below) that are designed to provide returns and risks that emulate those
of Adjustable Rate Loans, the Fund may treat the value of (or, if applicable,
the notional amount of) such investment as an investment in Adjustable Rate
S-8
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 Adjustable Rate Loans.
The Fund acting as Original Lender, Sole Lender and/or Agent. The Fund,
in connection with its investments in senior and subordinated loans,
particularly those made to middle-market companies, may act as one of the group
of lenders originating a loan ("Originating Lender"), may purchase the entire
amount of a particular loan ("Sole Lender"), and may act as Agent in the
negotiation of the terms of a loan and in the formation of a group of investors
in a Borrower's loan.
The Fund as Originating Lender or Sole Lender. When the Fund acts as an
Originating Lender or Sole Lender it will generally participate in structuring
the loan, and may share in an origination fee paid by the Borrower. When the
Fund is an Originating Lender or Sole Lender it will generally have a direct
contractual relationship with the Borrower, may enforce compliance by the
Borrower with the terms of the loan agreement. As Sole Lender the Fund generally
also would have full voting and consent rights under the applicable loan
agreement.
The Fund as Agent. Acting in the capacity of an Agent with respect to a
loan may subject the Fund to certain risks in addition to those associated with
the Fund's role as a lender. In consideration of such risks, the Fund will
invest no more than 20% of its total assets in Senior Loans in which it acts as
an Agent or co-Agent and the size of any such individual Senior Loan will not
exceed 5% of the Fund's total assets. See "Risk Factors - General Risks of the
Fund - Security Level Risks - Senior Loan Agent Risk" in the Fund's Prospectus.
The Fund's ability to receive fee income may also be constrained by
certain requirements for qualifying as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to
comply with those requirements and may limit its investments in loans in which
it acts as Originating Lender, Sole Lender or Agent in order to do so.
Other Investments. The Fund may invest in fixed or floating rate debt
instruments and other securities as described below:
Other Corporate Debt Instruments. Corporate debt instruments 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 debt instruments are "perpetual" in that
they have no maturity date and some may be convertible into equity securities of
the issuer or its affiliates. The Fund may invest in debt instruments of any
quality and such debt instruments may be secured or unsecured. In addition,
certain debt instruments in which the Fund may invest may be subordinated to the
payment of an issuer's senior debt.
Derivatives; Structured Notes. The Fund may use derivatives, structured
notes and similar instruments (referred to collectively as "structured notes")
for investment purposes and also for hedging purposes. Structured notes are
privately negotiated debt obligations, swap agreements 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.
S-9
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 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
S-10
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.
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.
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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 deductions based on its nonconvertible cost of debt which
generally will result in deductions in excess of the actual cash payments made
on the 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
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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 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 (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 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.
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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.
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
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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. Adjustable Rate 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.
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 an issuer or its affiliates as part of a package of
investments in the issuer or its affiliates issued in connection with an
Adjustable Rate Loan or other debt instrument 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 Adjustable Rate Loans or other debt instruments.
The value of warrants and equity securities may be affected more rapidly, and to
a greater extent, by company-specific developments and general market
conditions. These risks may increase fluctuations in the Fund's net asset value.
The Fund may possess material non-public information about an issuer as a result
of its ownership of an Adjustable Rate Loan or other debt instrument of such
issuer. 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 an issuer when it would otherwise be
advantageous to do so.
Portfolio Composition. Based upon current market conditions, the Fund
anticipates that substantially all of the net proceeds will be invested
according to the Fund's investment plan described in the paragraph below within
12 months following the completion of the initial public offering of common
shares, depending on the availability of appropriate investment opportunities
consistent with the Fund's investment objective and other market conditions.
Until such time as the Fund is fully invested according to its investment plan
described below, the Fund expects that its portfolio will consist primarily of
secured Senior Loans and high yield debt instruments of companies with large
market capitalizations because the Fund anticipates that it will be able to
invest in such Senior Loans and high yield debt instruments more rapidly than it
can invest in middle-market Adjustable Rate Loans. The Fund expects that this
initial invest-up period will occur within 3-4 months following the completion
of the initial public offering of common shares.
Within 12 months following the completion of the initial public
offering of common shares, the Fund's current investment plan anticipates a
target portfolio allocation in the following approximate amounts: (i) 75% of its
Managed Assets will be invested in Senior Loans of companies with large market
capitalizations, (ii) 10% of its
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Managed Assets will be invested in secured Senior Loans, subordinated loans and
other debt instruments issued by middle-market companies, and (iii) 15% of its
Managed Assets will be invested in other debt instruments of companies with
large market capitalizations and cash.
The Fund expects that its portfolio will initially consist primarily of
secured Senior Loans and high yield debt instruments of companies with large
market capitalizations because the Advisers anticipate that the Fund will be
able to invest in such Senior Loans and high yield debt instruments more rapidly
than it can invest in middle market Adjustable Rate Loans. The Fund expects that
this initial invest-up period will occur within 3-4 months following the
completion of the initial public offering of common shares.
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.
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
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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:
o 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.
o 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 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
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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.
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,
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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 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
shareholders even though investment considerations might otherwise make it
undesirable for the Fund to sell securities at such time. Under many market
conditions, investments in zero coupon bonds 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 15-45 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 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.
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.
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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--General Risks of the Fund--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 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
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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.
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
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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.
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
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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
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.
Risk Factors 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,
S-23
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.
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.
S-24
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" 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 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.
S-25
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 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
S-26
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 privately negotiated
subordinated loans to middle-market companies in which the Fund may invest are
likely to be illiquid. 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 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
S-27
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 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,
S-28
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. 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. As described in the section entitled "Risk Factors," the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares. The Fund will treat its investments in such investment companies as
investments in Adjustable Rate 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
Adjustable Rate 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. 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
S-29
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 for federal income tax purposes.
INTEREST RATE TRANSACTIONS
The Fund expects that the Fund's portfolio investments in Adjustable
Rate Loans and other adjustable rate debt instruments in which the Fund may
invest 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 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 Adjustable Rate Loans and other adjustable rate debt
instruments in which the Fund may invest 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 Adjustable Rate Loans and other
adjustable rate debt instruments 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
S-30
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 the
Fund's net earnings. If, on the other hand, short-term interest rates are higher
than the fixed rate of payment on the interest rate swap, the swap will enhance
the Fund's net earnings. Buying interest rate caps could enhance the performance
of the Common Shares by providing a maximum leverage expense. Buying interest
rate caps could also decrease the net earnings of the Fund 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 Adjustable Rate 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 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 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.
S-31
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 7. 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 PORTFOLIOS
THE FUND AND IN FUND
YEAR FIRST PRINCIPAL OCCUPATIONS, INCLUDING COMPLEX
ELECTED OR OTHER DIRECTORSHIPS HELD, DURING OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED PAST FIVE YEARS TRUSTEE
---------------------------- --------- ------------------ ------------------------------------ ------------
TRUSTEE WHO IS AN "INTERESTED PERSON" OF THE FUND:
-------------------------------------------------
Timothy R. Schwertfeger* 03/28/49 Chairman of the Chairman and Director (since 1996) 145
333 West Wacker Drive Board and Trustee, of Nuveen Investments, Inc., Nuveen
Chicago, IL 60606 2004 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).
TRUSTEES WHO ARE NOT "INTERESTED PERSONS" OF THE FUND:
-----------------------------------------------------
Robert P. Bremner 8/22/40 Trustee, 2004 Private Investor and Management 145
333 West Wacker Drive Consultant.
Chicago, IL 60606
Lawrence H. Brown 7/29/34 Trustee, 2004 Retired (since 1989) as Senior Vice 145
333 West Wacker Drive President of The Northern Trust
Chicago, IL 60606 Company; Director, Community
Advisory Board for Highland Park and
Highwood, United Way of the North
Shore (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 PORTFOLIOS
THE FUND AND IN FUND
YEAR FIRST PRINCIPAL OCCUPATIONS, INCLUDING COMPLEX
ELECTED OR OTHER DIRECTORSHIPS HELD, DURING OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED PAST FIVE YEARS TRUSTEE
---------------------------- --------- ------------------ ------------------------------------ ------------
Jack B. Evans 10/22/48 Trustee, 2004 President, The Hall-Perrine 145
333 West Wacker Drive Foundation, a private philanthropic
Chicago, IL 60606 corporation (since 1996); Director
and Vice Chairman, United Fire &
Casualty Group; Faculty Member,
University of Iowa; Director, Gazette
Companies, Coe College and Iowa
College Foundation; formerly, Director,
Alliant Energy; Director, Federal
Reserve Bank of Chicago; formerly,
President and Chief Operating Officer,
SCI Financial Group, Inc., a regional
financial services firm.
William C. Hunter 3/16/48 Trustee, 2004 Dean and Distinguished Professor of 145
333 West Wacker Drive Finance, School of Business at the
Chicago, IL 60606 University of Connecticut (since
2003); 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).
William J. Schneider 9/24/44 Trustee, 2004 Senior Partner and Chief Operating 145
333 West Wacker Drive Officer, Miller-Valentine Group,
Chicago, IL 60606 Vice President, Miller-Valentine
Realty, a construction company; Chair,
Miami Valley Hospital; Chairman of the
Board, Dayton Philharmonic Orchestra;
Board Member, formerly, 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 145
333 West Wacker Drive Dorothy Donnelley Foundation (since
Chicago, IL 60606 1994); prior thereto, Executive
Director, Great Lakes Protection
Fund (from 1990 to 1994).
S-33
POSITIONS AND NUMBER OF
OFFICES WITH PORTFOLIOS
THE FUND AND IN FUND
YEAR FIRST PRINCIPAL OCCUPATIONS, INCLUDING COMPLEX
ELECTED OR OTHER DIRECTORSHIPS HELD, DURING OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED PAST FIVE YEARS OFFICER
---------------------------- --------- ------------------ ------------------------------------ ------------
OFFICERS OF THE FUND:
--------------------
Gifford R. Zimmerman 9/9/56 Chief Managing Director (since 2002), 145
333 West Wacker Drive Administrative Assistant Secretary and Associate
Chicago, IL 60606 Officer, 2004 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 Nuveen
Institutional Advisory Corp.;
Managing Director (since 2002);
Assistant Secretary and Associate
General Counsel, formerly, Vice
President (since 2000), of Nuveen
Asset Management, Inc.; Managing
Director (since 2004), Assistant
Secretary (since 1994) 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 2003);
Chartered Financial Analyst.
Michael T. Atkinson 2/3/66 Vice President Vice President (since 2002), 145
333 West Wacker Drive and Assistant formerly Assistant Vice President
Chicago, IL 60606 Secretary, 2004 (since 2000), previously, Associate
of Nuveen Investments, LLC.
Peter H. D'Arrigo 11/28/67 Vice President Vice President of Nuveen 145
333 West Wacker Drive and Treasurer, Investments, LLC (since 1999), prior
Chicago, IL 60606 2004 thereto, Assistant 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
S-34
POSITIONS AND NUMBER OF
OFFICES WITH PORTFOLIOS
THE FUND AND IN FUND
YEAR FIRST PRINCIPAL OCCUPATIONS, INCLUDING COMPLEX
ELECTED OR OTHER DIRECTORSHIPS HELD, DURING OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED PAST FIVE YEARS OFFICER
---------------------------- --------- ------------------ ------------------------------------ ------------
Management Company, LLC.
(since 2002); Vice President and
Treasurer of Nuveen Rittenhouse
Asset Management, Inc. (since May,
2003); Chartered Financial Analyst.
Jessica R. Droeger 9/24/64 Vice President Vice President (since 2002) and 145
333 West Wacker Drive and Secretary, Assistant General Counsel (since
Chicago, IL 60606 2004 1998); formerly, 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, Managing Director, formerly, Vice 145
333 West Wacker Drive 2004 President of Nuveen Investments,
Chicago, IL 60606 LLC; Managing Director (since 2004)
formerly, Vice President (since
1998) of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President, Managing Director (since 2002) of 145
333 West Wacker Drive 2004 Nuveen Investments, LLC; Managing
Chicago, IL 60606 Director (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 Vice President (since 1993) and 145
333 West Wacker Drive and Controller, Funds Controller (since 1998) of
Chicago, IL 60606 2004 Nuveen Investments, LLC; formerly,
Vice President and Funds Controller
(1998-2004) of Nuveen Investments,
Inc.; Certified Public Accountant.
David J. Lamb 3/22/63 Vice President, Vice President (since 2000) of 145
333 West Wacker Drive 2004 Nuveen Investments, LLC, previously
Chicago, IL 60606 Assistant Vice President (since
1999); prior thereto,
S-35
POSITIONS AND NUMBER OF
OFFICES WITH PORTFOLIOS
THE FUND AND IN FUND
YEAR FIRST PRINCIPAL OCCUPATIONS, INCLUDING COMPLEX
ELECTED OR OTHER DIRECTORSHIPS HELD, DURING OVERSEEN BY
NAME AND ADDRESS BIRTHDATE APPOINTED PAST FIVE YEARS OFFICER
---------------------------- --------- ------------------ ------------------------------------ ------------
Associate of Nuveen Investments,
LLC; Certified Public Accountant.
Tina M. Lazar 8/27/61 Vice President, Vice President (since 1999), 145
333 West Wacker Drive 2004 previously Assistant Vice President
Chicago, IL 60606 (since 1993) of Nuveen Investments,
LLC.
Larry W. Martin 7/27/51 Vice President Vice President, Assistant Secretary 145
333 West Wacker Drive and Assistant and Assistant General Counsel of
Chicago, IL 60606 Secretary, 2003 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, Managing Director (since 2002) of 145
333 W. Wacker Drive 2004 Nuveen Investments, LLC; Managing
Chicago, IL 60606 Director (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 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, Judith M. Stockdale 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
S-36
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, Jack B. Evans, Chair and
William J. Schneider.
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, William J.
Schneider and Judith M. Stockdale.
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 and Jack B.
Evans.
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 William J. Schneider, Chair,
Lawrence H. Brown, William C. Hunter and Judith M. Stockdale.
The trustees are also trustees of 6 Nuveen open-end funds and 16
closed-end funds managed by NIAC and 30 open-end and 93 closed-end funds managed
by Nuveen Advisory Corp. ("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.
At the next annual meeting of shareholders, 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 FundPreferred Shares--Voting Rights" in the
Fund's Prospectus. The following table sets forth the dollar range of equity
securities beneficially owned by each trustee as of December 31, 2003:
S-37
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
IN ALL REGISTERED
INVESTMENT COMPANIES
OVERSEEN BY TRUSTEE IN
DOLLAR RANGE OF EQUITY FAMILY OF INVESTMENT
NAME OF TRUSTEE SECURITIES IN THE FUND 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
William S. Schneider .. $0 Over $100,000
Judith M. Stockdale ... $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.
ESTIMATED
AGGREGATE TOTAL COMPENSATION AMOUNT OF TOTAL
COMPENSATION FROM FROM FUND AND FUND COMPENSATION THAT
NAME OF TRUSTEE FUND* COMPLEX** HAS BEEN DEFERRED
----------------------- ----------------- ------------------ -----------------
Timothy R. Schwertfeger $ 0 $ 0 $ 0
Robert P. Bremner ..... 1,416 99,200 11,438
Lawrence H. Brown ..... 1,333 100,750 0
Jack B. Evans ......... 1,457 70,583 14,211
William C. Hunter*** .. 1,065 0 0
William S. Schneider .. 1,344 98,750 76,066
Judith M. Stockdale ... 1,065 94,000 18,204
----------
* 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.
*** Trustee Hunter was appointed to the Board of Trustees of the Nuveen funds
in 2004.
The Fund has no employees. Its officers are compensated by Nuveen
Investments, Inc. or its affiliates.
S-38
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 billion) as of
June 30, 2004. Founded in 1898, Nuveen Investments, Inc. and its affiliates had
approximately $102 billion in assets under management as of June 30, 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 located in St. Paul, Minnesota, and
is 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,
S-39
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 $34.2
billion in assets under management as of June 30, 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 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, based on the sum of a fund-level fee and a
complex-level fee, as described below.
Fund-level Fee. The fund-level fee shall be applied according to the
following schedule:
FUND-LEVEL AVERAGE DAILY MANAGED ASSETS FUND-LEVEL FEE RATE
--------------------------------------- -------------------
Up to $500 million .................... 0.6500%
$500 million to $1 billion............. 0.6250%
$1 billion to $1.5 billion............. 0.6000%
$1.5 billion to $2 billion............. 0.5750%
$2 billion and over.................... 0.5500%
From the commencement of the Fund's operations to July 31, 2004 (the
first five days of the Fund's operations), NIAC received an annual fee, payable
monthly, in a maximum amount equal to 0.85% of the Fund's average daily Managed
Assets.
Complex-Level Fee. The complex-level fee shall be applied according to
the following schedule:
EFFECTIVE
TOTAL COMPLEX- COMPLEX-LEVEL COMPLEX-LEVEL
COMPLEX-LEVEL DAILY MANAGED ASSETS(1) LEVEL ASSETS MARGINAL RATE FEE RATE
------------------------------------- ------------ ------------- --------
First $55 billion.................... $55 billion 0.2000% 0.2000%
Next $1 billion...................... $56 billion 0.1800% 0.1996%
Next $1 billion...................... $57 billion 0.1600% 0.1989%
Next $3 billion...................... $60 billion 0.1425% 0.1961%
Next $3 billion...................... $63 billion 0.1325% 0.1931%
Next $3 billion...................... $66 billion 0.1250% 0.1900%
Next $5 billion...................... $71 billion 0.1200% 0.1851%
Next $5 billion...................... $76 billion 0.1175% 0.1806%
Next $15 billion..................... $91 billion 0.1150% 0.1698%
With respect to complex-level Managed Assets over $91 billion, both the Fund
(via its Board of Trustees) and NIAC intend that the parties will meet, prior to
the time when complex-level Managed Assets reach that level, to consider and
negotiate the fee rate or rates that will apply to such assets. The parties
agree that, in the unlikely event that complex-level Managed Assets reach $91
billion prior to the parties reaching an agreement as to the complex-level fee
rate or rates to be applied to Managed Assets in excess of $91 billion, the
complex-level fee rate for such complex-level Managed Assets shall be 0.1400%
until such time as the parties agree to a different rate or rates. Complex-level
Managed Assets are the aggregate Managed Assets of all Nuveen-branded closed-end
and open-end registered investment companies organized in the United States.
Complex-level Managed Assets were approximately $61 billion as of August 31,
2004.
Pursuant to investment sub-advisory 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:
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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.
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 PERCENTAGE REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF ENDING (AS A PERCENTAGE OF
JULY 31, MANAGED ASSETS) JULY 31, MANAGED ASSETS)
----------- -------------------- ----------- --------------------
2004(1).... 0.30% 2009 ...... 0.30%
2005 ...... 0.30% 2010 ...... 0.22%
2006 ...... 0.30% 2011 ...... 0.14%
2007 ...... 0.30% 2012 ...... 0.07%
2008 ...... 0.30%
----------
(1) From the commencement of operations.
The Advisers have not agreed to reimburse the fund for any portion of
its fees and expenses beyond July 31, 2012.
Unless earlier terminated as described below, the Fund's investment
management agreement with NIAC and the Fund's investment sub-advisory 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 sub-advisory 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
S-41
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 2004, including information
regarding NIAC, its affiliates and its personnel, operations and financial
condition. In evaluating the investment sub-advisory agreement, the independent
trustees reviewed materials furnished by Symphony in May 2004, including
information regarding Symphony, its respective affiliates and personnel,
operations and financial condition. 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 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.
In its review of the costs and profitability to the Advisers in
providing the services, the Board has been cognizant of the benefits derived
from economies of scale as the Funds' assets grow. Accordingly, to help ensure
that shareholders share in these benefits, the Board approved at the May 2004
meeting a complex-wide fee arrangement, pursuant to which advisory fees would be
reduced as assets in the Nuveen Fund complex reached certain levels. In
evaluating the complex-wide fee arrangement, the Board considered, among other
things, the cost savings to shareholders, the amount of fee reductions at
various asset levels, both absolutely and in comparison to the arrangements of
other investment company complexes, the cost savings (and increased
profitability) of the Adviser as asset levels grow, and the funds covered by the
arrangement. The Board also considered the impact, if any, the complex-wide fee
arrangement may have on the level of services provided.
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.
S-42
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 during the most recent
twelve-month period ended June 30 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, with
respect to the securities for which it is responsible, 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 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;
S-43
(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
all liabilities (including accrued expenses and dividends declared but unpaid),
by the total number of shares outstanding.
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 Fund uses an independent pricing service to value most Adjustable
Rate 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 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. The Fund currently expects that the independent pricing
service will be unable to provide a market based price for most of the privately
negotiated subordinated loans issued by middle-market companies in which the
Fund may invest. The pricing services, with input from Symphony and the Adviser,
will estimate the fair value for such subordinated loans, subject to the
supervision of Symphony and the Adviser. The Fund may engage an independent
appraiser to periodically provide an independent determination of the value of
such loans. 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 value procedures.
An independent pricing service typically will value Adjustable Rate
Loans at the mean of the highest bona fide bid and lowest bona fide ask prices
when current quotations are readily available. Adjustable Rate Loans for which
current quotations will not be readily available are valued at a fair value as
determined by the pricing service provider using a wide range of market data and
other information and analysis, including credit considerations considered
relevant by the pricing service provider to determine valuations. The procedures
of any independent pricing service and its valuations will be reviewed by the
officers of the Fund under the general supervision of the Board of Trustees. If
the Fund believes that a value provided by a pricing service provider does not
represent a fair value as a result of information specific to that Adjustable
Rate Loan or Borrower thereunder or its affiliates, which the Fund believes that
the pricing agent may not be aware, the Fund may in its discretion value the
Adjustable Rate Loan subject to procedures approved by the Board of Trustees and
reviewed on a periodic basis, and the Fund will utilize that price instead of
the price as determined by the pricing service provider. In addition to such
information the Fund will consider, among other factors, (i) the
creditworthiness of the Borrower and (ii) the current interest rate, the period
until the next interest rate reset and maturity of such Adjustable Rate Loan
interests in determining a fair value of a Adjustable Rate Loan. If the
independent pricing service does not provide a value for a Adjustable Rate Loan
or if no pricing service provider is then acting, a value will be determined by
the Fund in the manner described above.
Non-loan holdings (other than debt securities, including short term
obligations) may be valued on the basis of prices furnished by one or more
pricing services that determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the average of the last quoted bid price
and asked price for those securities for which the over-the-counter market is
the primary market or for listed securities in which there were no sales during
the day.
Debt securities for which the over-the-counter market is the primary
market are normally valued on the basis of prices furnished by one or more
pricing services at the mean between the latest available bid and asked prices.
Over-the-counter options are valued at the mean between the bid and asked prices
provided by dealers. Financial futures contracts listed on commodity exchanges
and exchange-traded options are valued at closing settlement prices. Short-term
obligations having remaining maturities of less than 60 days are valued at
amortized cost, which approximates value, unless the Board of Trustees
determines that under particular circumstances such method does not result in
fair value. Debt securities (other than short-term obligations) may be valued on
the basis of valuations furnished by a pricing service that determines
valuations based upon market transactions for normal, institutional-size trading
units of such securities. Securities for which there is no such quotation or
valuation and all other assets are valued at fair value as determined in good
faith by or at the direction of the Fund's Board of Trustees.
S-44
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.
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
S-45
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 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.
S-46
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 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.
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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.
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
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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 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--General Risks of the Fund--Concentration Risk" and "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 who are
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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 Code, the applicable
Treasury Regulations promulgated thereunder, judicial authority and current
administrative rulings, as in effect on the date of this Statement of Additional
Information, 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 Internal Revenue Code of 1986, as
amended (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
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
S-50
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 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 under the Code in order to qualify for tax
treatment as a regulated investment company, and thus 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 disqualification as a regulated investment company
under the Code. 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 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 relevant
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.
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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.
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.
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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 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
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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.
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 for such shares 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
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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.
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 provided the Fund
receives certain certifications from such non-U.S. shareholder, such lower rates
as may be prescribed by an applicable treaty.
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 July 6, 2004, appearing in
this Statement of Additional Information have been audited by Ernst & Young,
LLP, an independent registered public accounting firm, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. 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
S-55
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-56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholder of
Nuveen Floating Rate Income Opportunity Fund
We have audited the accompanying statement of assets and liabilities of Nuveen
Floating Rate Income Opportunity Fund (the "Fund") as of July 6, 2004 and the
related statement of operations for the period from April 27, 2004 (date of
organization) through July 6, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Fund at July 6, 2004, and
the results of its operations for the period from April 27, 2004 (date of
organization) through July 6, 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
July 7, 2004
F-1
NUVEEN FLOATING RATE INCOME OPPORTUNITY FUND
FINANCIAL STATEMENTS
Nuveen Floating Rate Income Opportunity Fund
Statement of Assets and Liabilities
July 6, 2004
Assets:
Cash.............................................................. $ 100,275
Offering costs.................................................... 1,050,000
Receivable from Adviser........................................... 11,500
----------
Total assets................................................... 1,161,775
----------
Liabilities:
Accrued offering costs............................................ 1,050,000
Payable for organization costs.................................... 11,500
----------
Total liabilities.............................................. 1,061,500
----------
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 OPPORTUNITY FUND
Statement of Operations
Period from April 27, 2004 (date of organization) through July 6, 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 April 27, 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 and subordinated 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 of .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")).
A complex-wide fee schedule for all funds managed by the Adviser and its
affiliates, including the Fund, will go into effect on August 1, 2004. This
complex-wide fee schedule is expected to marginally decrease the rate at
which management fees are to be paid by the Fund. Under no circumstances
will the complex-wide fee schedule result in an increase in the rate at which
management fees would be paid by the Fund if the complex-wide fee schedule
were not implemented.
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 .30% of average daily
Managed Assets for the first five full years of the Fund's operations, .22% in
year 6, .14% in year 7 and .07% in year 8. The Adviser has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond July 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 July 31, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Repurchase agreements, at value (cost $384,010,275) $384,010,275
Interest receivable 26,667
------------------------------------------------------------------------------------------------------------------------------------
Total assets 384,036,942
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses:
Management fees 41
Organization and offering costs 815,500
Other 8,966
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 824,507
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $383,212,435
====================================================================================================================================
Common shares outstanding 26,807,000
====================================================================================================================================
Net asset value per Common share outstanding (net assets applicable
to Common shares, divided by Common shares outstanding) $ 14.30
====================================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
------------------------------------------------------------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 268,070
Paid-in surplus 382,938,205
Undistributed net investment income 6,160
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $383,212,435
====================================================================================================================================
Authorized shares:
Common Unlimited
FundPreferred Unlimited
====================================================================================================================================
See accompanying notes to financial statements.
F-4
Statement of
OPERATIONS for the Period July 27, 2004 (commencement of operations)
through July 31, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest $26,667
------------------------------------------------------------------------------------------------------------------------------------
Total investment income 26,667
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 17,837
Shareholders' servicing agent fees and expenses 25
Custodian's fees and expenses 837
Trustees' fees and expenses 107
Professional fees 5,000
Shareholders' reports - printing and mailing expenses 2,617
Investor relations expense 280
Other expenses 99
------------------------------------------------------------------------------------------------------------------------------------
Total expenses before expense reimbursement 26,802
Expense reimbursement (6,295)
------------------------------------------------------------------------------------------------------------------------------------
Net expenses 20,507
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 6,160
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares from operations $ 6,160
====================================================================================================================================
See accompanying notes to financial statements.
F-5
Statement of
CHANGES IN NET ASSETS for the Period July 27, 2004 (commencement of operations)
through July 31, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 6,160
------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares from operations 6,160
------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 383,106,000
------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares 383,112,160
Net assets applicable to Common shares at the beginning of period 100,275
------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares at the end of period $ 383,212,435
============================================================================================================
Undistributed net investment income at the end of period $ 6,160
============================================================================================================
See accompanying notes to financial statements.
F-6
Statement of
CASH FLOWS for the Period July 27, 2004 (commencement of operations)
through July 31, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHARES FROM OPERATIONS $ 6,160
Adjustments to Reconcile the Net Increase in Net Assets Applicable to Common Shares from Operations
to Net Cash Used in Operating Activities:
Short-term investment securities, net (384,010,275)
Increase in interest receivable (26,667)
Increase in management fees payable 41
Increase in other liabilities 8,966
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (384,021,775)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common shares 383,106,000
Organization and offering costs payable 815,500
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 383,921,500
------------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (100,275)
Cash at the beginning of period 100,275
------------------------------------------------------------------------------------------------------------------------------------
CASH AT THE END OF PERIOD $ --
====================================================================================================================================
See accompanying notes to financial statements.
F-7
Notes to FINANCIAL STATEMENTS (Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Nuveen Floating Rate Income Opportunity 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 "JRO". The Fund was organized
as a Massachusetts business trust on April 27, 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. Since the Fund commenced
operations on July 27, 2004, the information presented in the financial
statements may not provide a meaningful picture of the Fund's operating
performance.
The Fund seeks to provide a high level of current income by investing primarily
in senior and subordinated loans whose interest rates float or adjust
periodically based on a benchmark interest rate index.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with U.S.
generally accepted accounting principles.
Investment Valuation
The prices of senior loans and securities, other than subordinated loans issued
by middle market companies, are generally provided by one or more independent
pricing services approved by the Fund's Board of Trustees. The Fund currently
expects that the independent pricing services will be unable to provide a market
based price for most of the privately negotiated subordinated loans issued by
middle market companies. The pricing services, with input from Symphony Asset
Management, LLC ("Symphony"), an indirect wholly owned subsidiary of Nuveen, and
the Adviser, will estimate the fair value for such subordinated loans, subject
to the supervision of Symphony and the Adviser. The Fund may engage an
independent appraiser to periodically provide an independent determination of
the value of such loans. The pricing services typically value exchange-listed
securities at the last sale price on that day; and value senior loans 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 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 investments 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 and subordinated 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 senior and subordinated loans,
determined as described above, may differ significantly from the value that
would have been determined had there been an active market for that loan.
Investment Transactions
Investment transactions are recorded on a trade date basis. Trade date for
senior and subordinated loans purchased in the "primary market" is considered
the date on which the loan allocations are determined. Trade date for senior and
subordinated loans purchased in the "secondary market" is the date on which the
transaction is entered into. 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 July 31, 2004, the
Fund had no outstanding when-issued and delayed delivery purchase commitments.
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 will also includes paydown gains and losses on senior and
subordinated loans. Fee income will consist primarily of amendment fees.
Amendment fees are earned as compensation for evaluating and accepting changes
to the original loan agreement and are recognized when received.
Income Taxes
The Fund intends to distribute all income and capital gains to shareholders and
to otherwise comply with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies. Therefore, no federal
income tax provision is required. Net realized capital gains and ordinary income
distributions made by the Fund are subject to federal taxation.
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, if any.
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 U.S. generally accepted accounting
principles.
Select Aggregate Market Index
The Fund intends to invest in Select Aggregate Market Indexes ("SAMI") 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 short-term high-grade investments
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 the counterparty 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 the counterparty a fixed-rate
interest payment based on the notional amount of the contract. In exchange for
the interest payment, the Fund protects the counterparty 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 will be recorded on an accrual basis and
included in the Statement of Operations. The Fund is required to provide
collateral to the counterparty based on a percentage of 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 will be 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 the counterparty to meet its interest payment obligations.
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 $804,000 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 July 27, 2004 (commencement of operations)
through July 31, 2004, no such credit was recorded.
Indemnifications
Under the Fund's organizational documents, its Officers and Trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, in the normal course of business, the Fund
enters into contracts that provide general indemnifications to other parties.
The Fund's maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of 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 26,800,000 Common shares during the period July 27, 2004
(commencement of operations) through July 31, 2004.
3. INVESTMENT TRANSACTIONS
The Fund did not have any purchases or sales of investments, other than
investments in repurchase agreements during the period July 27, 2004
(commencement of operations) through July 31, 2004.
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 July 31, 2004, the cost of the repurchase agreements owned was $384,010,275.
5. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Fund's investment management agreement with the Adviser, the Fund paid
through July 31, 2004, an annual management fee of .8500%, payable monthly,
which was 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).
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, 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. The Board of
Trustees has adopted a deferred compensation plan for independent Trustees that
enables Trustees to elect to defer receipt of all or a portion of the annual
compensation they are entitled to receive from certain Nuveen advised Funds.
Under the plan, deferred amounts are treated as though equal dollar amounts had
been invested in shares of select Nuveen advised Funds.
As approved by the Board of Trustees, a complex-wide management fee schedule for
all funds managed by the Adviser and its affiliates went into effect on August
1, 2004. The implementation of the complex-wide management fee schedule resulted
in an immediate marginal decrease in the management fee rates (approximately
..005% as of August 31, 2004) paid by the funds. As the assets in the Nuveen Fund
complex grow, the management fee rates to be paid by the funds will decrease
further. Under no circumstances will the complex-wide management fee schedule
result in an increase in the rates at which management fees would be paid by the
funds if the complex-wide management fee schedule were not implemented. The
complex-wide management fee rate for each fund in the Nuveen complex is made up
of two components: a complex-level fee and a fund-level fee.
The complex-level fee component for each fund in the Nuveen complex is as
follows:
Complex-level
Complex-level Assets(1) Fee Rate
For the first $55 billion .2000%
For the next $1 billion .1800
For the next $1 billion .1600
For the next $3 billion .1425
For the next $3 billion .1325
For the next $3 billion .1250
For the next $5 billion .1200
For the next $5 billion .1175
For the next $15 billion .1150
For Managed Assets over $91 billion(2) .1400
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets (which includes assets
attributable to all types of leverage used by the Nuveen Funds) of certain of
the funds managed by the Adviser or by its affiliates.
(2) With respect to the complex-wide Managed Assets over $91 billion, the
funds (via their Board of Directors/Trustees) and the Adviser intend that
the parties will meet, prior to the time when complex-wide Managed Assets
reach that level, to consider and negotiate the fee rate or rates that will
apply to such assets. The parties agree that, in the unlikely event that
complex-wide Managed Assets reach $91 billion prior to the parties reaching
an agreement as to the complex-level fee rate or rates to be applied to
Managed Assets in excess of $91 billion, the complex-level fee rate for such
complex-wide Managed Assets shall be .1400% until such time as the parties
agree to a different rate or rates.
The fund-level fee component is based upon the average daily Managed Assets of
the Fund as follows:
Average Daily Managed Assets Fund-level Fee Rate
For the first $500 million .6500%
For the next $500 million .6250
For the next $500 million .6000
For the next $500 million .5750
For Managed Assets over $2 billion .5500
For the first eight years of the Fund's operations, the Adviser has 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
JULY 31, JULY 31,
2004* .30% 2009 .30%
2005 .30 2010 .22
2006 .30 2011 .14
2007 .30 2012 .07
2008 .30
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond July 31, 2012.
F-10
Notes to FINANCIAL STATEMENTS (Unaudited) (continued)
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 July 31, 2004, there were no unfunded senior loan commitments.
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 July 31, 2004, there were
no such outstanding participation commitments.
9. SUBSEQUENT EVENTS
On August 20, 2004, the Fund issued an additional 1,000,000 Common Shares in
connection with a partial exercise by the underwriters of their over allotment
option.
On September 14, 2004, the Fund issued an additional 553,100 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 $.0760 per share from
its net investment income which will be paid on October 1, 2004, to shareholders
of record on September 17, 2004.
NUVEEN FLOATING RATE INCOME OPPORTUNITY FUND (JRO)
Portfolio of Investments (Unaudited) July 31, 2004
PRINCIPAL MARKET
AMOUNT (000) DESCRIPTION (1) VALUE
--------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 100.2%
$ 10 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $10,276, $ 10,275
collateralized by $10,000 U.S. Treasury Bonds, 6.250%, due 8/15/23, value $11,438
48,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $48,005,000, 48,000,000
collateralized by $46,160,000 U.S. Treasury Notes, 4.875%, due 2/15/12, value $48,960,527
48,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $48,005,000, 48,000,000
collateralized by $49,770,000 U.S. Treasury Notes, 3.250%, due 1/15/09, value $48,961,238
24,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $24,002,500, 24,000,000
collateralized by $23,795,000 U.S. Treasury Notes, 6.000%, due 8/15/04, value $24,483,270
24,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $24,002,500, 24,000,000
collateralized by $19,475,000 U.S. Treasury Bonds, 7.500%, due 11/15/16, value $24,484,126
24,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $24,002,500, 24,000,000
collateralized by $24,330,000 U.S. Treasury Notes, 0.000%, due 9/30/04, value $24,482,063
48,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $48,005,000, 48,000,000
collateralized by $48,360,000 U.S. Treasury Notes, 3.875%, due 5/15/09, value $48,964,500
72,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $72,007,500, 72,000,000
collateralized by $73,260,000 U.S. Treasury Notes, 2.375%, due 8/15/06, value $73,443,150
96,000 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $96,010,000, 96,000,000
collateralized by $95,540,000 U.S. Treasury Notes, 5.875%, due 11/15/04, value $97,928,500
------------------------------------------------------------------------------------------------------------------------------
$ 384,010 Total Repurchase Agreements (cost $384,010,275) 384,010,275
------------- ---------------------------------------------------------------------------------------------------------
Other Assets less Liabilities - (0.2%) (797,840)
---------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 383,212,435
=========================================================================================================
(1) All percentages shown in the Portfolio of Investments
are based on net assets applicable to Common Shares.
See accompanying notes to financial statements.
F-11
Nuveen Floating Rate Income Opportunity Fund (JRO)
PORTFOLIO OF INVESTMENTS (Unaudited) August 31, 2004
RATINGS*
PRINCIPAL ------------ STATED MARKET
AMOUNT (000) DESCRIPTION(1) MOODY'S S&P MATURITY** VALUE
--------------------------------------------------------------------------------------------------------------------------------
VARIABLE RATE SENIOR LOAN INTERESTS(2) - 39.9%
AUTO COMPONENTS - 1.2%
$ 5,231 Federal-Mogul Corporation, Revolver (a) (DD1) NR NR 2/05/05 $ 4,676,106
--------------------------------------------------------------------------------------------------------------------------------
BEVERAGES - 1.5%
5,914 Dr. Pepper/Seven UP Bottling Group, Inc., Term Loan B
(DD1) B1 NR 12/19/10 6,010,341
--------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 2.8%
6,000 Huntsman International LLC, Term Loan (DD,settling 9/03/04) B1 B 12/31/10 6,090,000
5,000 Rockwood Specialties Group, Inc., Term Loan (DD1) B1 B+ 7/30/12 5,041,518
--------------------------------------------------------------------------------------------------------------------------------
11,131,518
--------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 2.3%
4,000 Allied Waste North America, Inc., Term Loan B (DD) Ba2 BB 01/15/10 4,066,154
5,000 Allied Waste North America, Inc., Term Loan C (DD) Ba2 BB 01/15/10 5,082,813
--------------------------------------------------------------------------------------------------------------------------------
9,148,967
--------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 1.8%
7,000 Panamsat Corp, Term Loan B (DD) Ba3 BB+ 8/20/11 7,013,783
--------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION/ENGINEERING - 0.6%
1,431 Anthony Crane Rental, L.P., Revolver (a) (DD) NR NR 07/22/04 1,144,769
1,569 Anthony Crane Rental, L.P., Term Loan (a) (DD) NR NR 07/23/04 1,255,231
--------------------------------------------------------------------------------------------------------------------------------
2,400,000
--------------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING - 2.0%
8,000 R.H. Donnelley Inc., Term Loan (DD) Ba3 NR 6/30/11 8,100,500
--------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 4.2%
10,000 Mission Energy Holdings International, Inc., Term Loan B (DD) B3 NR 12/11/06 10,525,000
5,924 Reliant Resources, Inc., Term Loan B (DD1) NR NR 03/31/07 5,931,311
--------------------------------------------------------------------------------------------------------------------------------
16,456,311
--------------------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS - 2.5%
10,000 Nortek, Term Loan (DD) B1 B+ 8/27/11 10,111,250
--------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 2.8%
11,000 The Jean Coutu Group (PJC) Inc., Term Loan B (DD1) B1 BB 7/30/11 11,107,498
--------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT/SUPPLIES - 0.4%
1,657 Kinetic Concepts, Inc., Term Loan B-1 (DD) B1 BB- 08/11/10 1,679,446
--------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS/SERVICES - 3.8%
9,500 Alderwoods Group, Inc., Term Loan B (DD) B1 BB- 9/29/08 9,614,299
5,500 IASIS Healthcare LLC, Term Loan (DD) B1 B+ 06/22/11 5,574,767
--------------------------------------------------------------------------------------------------------------------------------
15,189,066
--------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.4%
4,500 Venetian (Las Vegas Sands), Term Loan B (DD) B1 B+ 6/15/11 4,561,875
F-12
HOTELS, RESTAURANTS & LEISURE (continued)
5,200 Wyndham International, Inc., Term Loan I (DD) NR NR 06/30/06 5,094,916
--------------------------------------------------------------------------------------------------------------------------------
9,656,791
--------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 2.2%
8,732 Sealy Mattress Company, Term Loan (Tranche C) B2 B+ 08/06/12 8,832,200
--------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 1.0%
4,000 Prestige Brands, Inc., Term Loan B (DD) B1 B 04/06/11 4,013,334
--------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 1.8%
7,000 Conseco, Inc., Term Loan B3 BB- 06/22/10 7,106,460
--------------------------------------------------------------------------------------------------------------------------------
MARINE - 1.2%
2,750 American Commercial Lines, Term Loan B (a)(DD) NR NR 6/30/06 2,715,625
2,250 American Commercial Lines, Term Loan C (a)(DD) NR NR 6/30/07 2,221,873
--------------------------------------------------------------------------------------------------------------------------------
4,937,498
--------------------------------------------------------------------------------------------------------------------------------
MEDIA - 5.4%
6,000 Century Cable Holdings, LLC, Revolver (a)(DD) NR NR 10/25/10 5,790,000
10,000 Loews Cineplex Entertainment Corporation, Term Loan B (DD) B1 B 07/31/11 10,086,460
1,000 Rainbow Media Holdings LLC, Term Loan, (DD1) Ba2 BB+ 03/31/12 1,013,000
4,000 Regal Cinemas Corporation, Term Loan B, (DD) Ba3 BB- 11/10/10 4,050,000
--------------------------------------------------------------------------------------------------------------------------------
20,939,460
--------------------------------------------------------------------------------------------------------------------------------
Total Variable Rate Senior Loan Interests
(cost $160,051,313) 158,510,529
------------------------------------------------------------------------------------------------------------------
INTEREST BEARING SECURITIES - 6.8%
COMMUNICATIONS EQUIPMENT - 3.1%
5,000 Qwest Corporation, 6.125% Ba3 BB- 11/15/05 5,100,000
8,000 Qwest Corporation, 6.625% Ba3 BB- 09/15/05 8,210,000
--------------------------------------------------------------------------------------------------------------------------------
13,310,000
--------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.0%
815 MGM Grand, Bond, 7.250% Ba1 BB+ 10/15/06 870,013
2,000 Park Place Entertainment, 7.875% Ba2 BB- 12/15/05 2,112,500
4,440 Park Place Entertainment, 8.500% Ba1 BB+ 11/15/06 4,884,000
--------------------------------------------------------------------------------------------------------------------------------
7,866,513
--------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 1.5%
5,620 Tesoro Petroleum Corporation, 8.000% Ba2 BBB- 04/15/08 6,069,600
--------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Securities (cost $25,875,000) 27,246,113
------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 83.4%
$ 67,631 State Street Bank, 1.480%, dated 8/31/04, due 9/01/04, repurchase price $67,634,277, $ 67,631,497
collateralized by $69,165,000 U.S. Treasury Bonds, 0.000%, due 11/04/04, value $68,992,087
96,000 State Street Bank, 1.480%, dated 8/31/04, due 9/01/04, repurchase price $96,003,947, 96,000,000
collateralized by $92,380,000 U.S. Treasury Notes, 5.750%, due 11/15/05, value $97,922,800
72,000 State Street Bank, 1.480%, dated 8/31/04, due 9/01/04, repurchase price $72,002,960, 72,000,000
collateralized by $71,580,000 U.S. Treasury Notes, 5.875%, due 11/15/04, value $73,440,507
72,000 State Street Bank, 1.480%, dated 8/31/04, due 9/01/04, repurchase price $72,002,960, 72,000,000
collateralized by $73,725,000 U.S. Treasury Bonds, 0.000%, due 11/26/04, value $73,448,531
24,000 State Street Bank, 1.480%, dated 8/31/04, due 9/01/04, repurchase price $24,000,987, 24,000,000
collateralized by $24,600,000 U.S. Treasury Bond, 0.000%, due 12/16/04, value $24,484,675
--------------------------------------------------------------------------------------------------------------------------------
$333,631 Total Repurchase Agreements (cost $331,631,497) 331,631,497
--------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $517,557,810) -- 130.1% 517,388,139
------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities -- (30.1%) (119,731,640)
------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares -- 100% $ 397,656,499
------------------------------------------------------------------------------------------------------------------
(1) All percentages shown in the Portfolio of Investments are based on
net assets applicable to Common shares.
(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 may be considered 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 August 31, 2004, this issue was under the
protection of the federal bankruptcy court.
(DD) Position purchased on a when-issued or delayed delivery basis.
(DD1) Portions of position purchased on a when-issued or delayed delivery
basis.
NR Not rated.
See accompanying notes to financial statements.
F-13
APPENDIX A -
STATEMENT OF PREFERENCES
NUVEEN FLOATING RATE INCOME OPPORTUNITY FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES
OF FUNDPREFERRED SHARES
Nuveen Floating Rate Income Opportunity 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 9,600 preferred shares of beneficial
interest ("Preferred Shares"), $.01 par value, classified as FundPreferred
shares ("FundPreferred shares"), and further classified as Series M,
Series TH 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 3,200 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 TH: A series of 3,200 Preferred Shares, liquidation preference
$25,000 per share, is designated "Series TH FundPreferred shares"
("FundPreferred shares Series TH"). The initial Dividend Period for
FundPreferred shares Series TH shall be the period from and including the Date
of Original Issue thereof to but excluding ______, 200_. Each share of
FundPreferred shares Series TH 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 TH 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 TH shall constitute a separate series
of Preferred Shares of the Fund.
Series F: A series of 3,200 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
A-1
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
TH 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 17 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 TH, and Series F, is 3,200, 3,200 and
3,200 shares, respectively. No fractional shares of FundPreferred
shares, Series M, Series TH 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.
A-2
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 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
A-3
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 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
A-4
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 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
A-5
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 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
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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
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
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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 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.
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(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 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:
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(i) a notice stating (A) that the Fund has determined to
designate the next succeeding Dividend Period as a Special Dividend
Period, specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not
to exercise its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent or is unable to
make the confirmation provided in clause (v) of Paragraph (a) of this Section 4
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Fund shall be deemed to
have delivered a notice to the Auction Agent with respect to such Dividend
Period to the effect set forth in clause (ii) above, thereby resulting in a
Standard Dividend Period.
5. Restrictions on Transfer. 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
A-10
additional Trustees, together with the two Trustees that such holders are in any
event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend Payment
Date accumulated dividends (whether or not earned or declared) on
Preferred Shares equal to at least two full years' dividends shall be
due and unpaid; or
(ii) if at any time holders of any Preferred Shares are
entitled under the 1940 Act to elect a majority of the Trustees of the
Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Shares,
including 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
A-11
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 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.
A-12
(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 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
A-13
(i) redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
7. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the
affairs of the Fund, whether voluntary or involuntary, the holders of 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
A-14
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.
(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 Rating Agency Certificate (as defined below) on a timely
basis, submitting the requisite Rating Agency
A-15
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.
A-16
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 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
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:
A-17
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 the
FundPreferred Basic Maintenance Amount.
(f) "Applicable Spread" means the spread determined based on
the higher of the credit rating assigned to the series of FundNotes 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.
A-18
(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.
(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 TH and Series F FundPreferred shares, __________, 2004.
(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.
A-19
(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
S & P Eligible Assets (if Moody's or S & P 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.
(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 TH and
Series F" means the shares of Series M, Series TH and Series F of
the FundPreferred shares or any other shares of Preferred Shares hereinafter
designated as shares of Series M, Series TH 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 its 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
A-20
representative of a single transaction in such market at such time by reference
to the principal London offices of leading banks in the London interbank market;
provided, however, that if 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 than 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 that 168 days, such rate shall be the five-month LIBOR rate;
(vii) 168 or more but fewer 189 days, such rate shall be the six-month LIBOR
rate; (viii) 189 or more but fewer than 217 days, such rate shall be the
seven-month LIBOR rate; (ix) 217 or more but fewer than 252 days, such rate
shall be the eight-month LIBOR rate; (x) 252 or more but fewer than 287 days,
such rate shall be the nine-month LIBOR rate; (xi) 287 or more but fewer than
315 days, such rate shall be the ten-month LIBOR rate; (xii) 315 or more but
fewer than 343 days, such rate shall be the eleven-month LIBOR rate; and (xiii)
343 or more 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 market value of the assets of
the Fund as computed in accordance with the Fund's pricing procedures adopted by
the Board of the Fund in connection with valuing the Fund's assets.
(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 Investor Services, 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.
A-21
(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 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.
A-22
(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 Moody's (if Moody's is
then rating FundPreferred shares), S & P (if S & P is then rating FundPreferred
shares) and any Other Rating Agency.
(kkk) "Rating Agency Guidelines" mean Moody's Guidelines
(if Moody's is then rating FundPreferred shares), S & P Guidelines (if
S & P 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.
(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.
A-23
(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 TH 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.
(zzz) "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.
(aaaa) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(bbbb) "Submitted Hold Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(cccc) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(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
A-24
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 TH 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
(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.
A-25
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) (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) 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.
A-26
(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:
(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
A-27
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;
(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.
A-28
(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
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
shares of such series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling such Existing Holders to continue to hold the
shares of such series that are subject to such Submitted Bids;
and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of
A-29
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, 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
A-30
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 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.
A-31
(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 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 OPPORTUNITY 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
OPPORTUNITY 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.
B-1
AA
An obligation rated 'AA' differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, AND C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as
having significant speculative characteristics. 'BB' indicates the least degree
of speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
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.
B-2
D
An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-). The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
C
The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p
The letter 'p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
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
B-3
legal investments impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance companies,
and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule -- the larger the final maturity
relative to other maturities, the more likely it will be
treated as a note; and
o Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3
Speculative capacity to pay principal and interest.
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,
B-4
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.
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
B-5
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.
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.
B-6
#(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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
B-7
o Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o 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.
B-8
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.
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, CC, C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.
DDD, DD, AND D DEFAULT
The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated 'DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D' are generally undergoing a
formal reorganization or liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
'D' have a poor prospect 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.
B-9
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.
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-10
$240,000,000
Nuveen Floating Rate Income Opportunity Fund
FundPreferred Shares
-----------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------------------------
____________, 2004
PART C--OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Statement of Assets and Liabilities, July 6, 2004 (audited)
Statement of Operations from April 27, 2004 (date of organization)
through July 6, 2004 (audited)
Statement of Assets and Liabilities, July 31, 2004 (unaudited)
Statement of Operations from July 27, 2004 (commencement of operations)
through July 31, 2004 (unaudited)
Statement of Changes in Net Assets from July 27, 2004 (commencement
of operations) through July 31, 2004 (unaudited)
Statement of Cash Flows from July 27, 2004 (commencement of operations)
through July 31, 2004 (unaudited)
Portfolio of Investments July 31, 2004 (unaudited)
Portfolio of Investments August 31, 2004 (unaudited)
2. Exhibits:
a.1 Declaration of Trust dated April 27, 2004. Filed on
May 5, 2004 as exhibit a.1 to Registrant's
registration statement on Form N-2 (File No.
333-115200) and incorporated herein by reference.*
a.2 Amended and Restated Declaration of Trust dated May
17, 2004. Filed on June 9, 2004 as exhibit a.2 to
Registrant's registrant statement on Form N-2 (File
No. 33-115200) and incorporated herein by reference.*
b. By-laws of Registrant. Filed on May 5, 2004 as
Exhibit b to Registrant's registration statement on
Form N-2 (File No. 333-115200) and incorporated
herein by reference.*
c. None.
d.1 Form of Share Certificate.
d.2 Rating Agency Guidelines.
e. Terms and Conditions of the Dividend Reinvestment
Plan. Filed on July 27, 2004 as exhibit e to
Registrant's registration statement on Form N-2 (File
No. 333-115200) and incorporated herein by
reference.*
f. None.
g.1 Investment Management Agreement between Registrant
and Nuveen Institutional Advisory Corp. dated June
22, 2004. Filed on July 27, 2004 as exhibit g.1 to
Registrant's registration statement on Form N-2 (File
No. 333-115200) and incorporated herein by
reference.*
g.2 Amendment to Investment Management Agreement dated
July 31, 2004.
g.3 Investment Sub-Advisory Agreement between Nuveen
Institutional Advisory Corp. and Symphony Asset
Management, LLC dated June 22, 2004. Filed on July
27, 2004 as exhibit g.2 to Registrant's registration
statement on Form N-2 (File No. 333-115200) and
incorporated herein by reference.*
h.1 Form of Underwriting Agreement.
h.2 Form of Master Selected Dealer Agreement.
h.3 Form of Nuveen Master Selected Dealer Agreement.
h.4 Form of Master Agreement Among Underwriters.
i. Nuveen Open-End and Closed-End Funds Deferred
Compensation Plan for Independent Directors and
Trustees. Filed on July 27, 2004 as exhibit i to
Registrant's registration statement on Form N-2 (File
No. 333-115200) and incorporated herein by
reference.*
Part C-1
j. Master Custodian Agreement between Registrant and
State Street Bank and Trust Company dated August 19,
2002. Filed on July 27, 2004 as exhibit j to
Registrant's registration statement on Form N-2 (File
No. 333-115200) 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 July 27, 2004
as Exhibit k.1 to Registrant's registration statement
on Form N-2 (File No. 333-115200) and incorporated
herein by reference.*
k.2 Expense Reimbursement Agreement between Registrant
and Nuveen Institutional Advisory Corp.
dated June 22, 2004. Filed on July 27, 2004 as
exhibit k.2 to Registrant's registration statement on
Form N-2 (File No. 333-115200) 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 July 6, 2004. Filed on July 27,
2004 as exhibit p to Registrant's registration
statement on Form N-2 (File No. 333-115200) and
incorporated herein by reference.*
q. None.
r.1 Code of Ethics of Nuveen Exchange-Traded Funds and
Nuveen Institutional Advisory Corp. Filed on June 25,
2004 as Exhibit r.1 to Registrant's registration
statement on Form N-2 (File No. 333-115200) and
incorporated herein by reference.*
r.2 Code of Ethics of Symphony Asset Management, LLC.
Filed on June 25, 2004 as Exhibit r.2 to Registrant's
registration statement on Form N-2 (File No.
333-115200) and incorporated herein by reference.*
s. Powers of Attorney. Filed on July 27, 2004 as
exhibit s to Registrant's registration statement on
Form N-2 (File No. 333-115200) and incorporated
herein by reference.*
----------
* Previously filed.
ITEM 25: MARKETING ARRANGEMENTS
Sections 3, 5 and 6(n) of the Form of Underwriting Agreement filed as
Exhibit h.1 to this Registration Statement.
Part C-2
See the Introductory Paragraph and Sections 2 and 3(d) of the Form of
Master Selected Dealer Agreement 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 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 Master Agreement Among
Underwriters filed as Exhibit h.4 to this Registration Statement.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees............... $ 30,408
Printing and engraving expenses....................... 50,000
Legal Fees............................................ 100,000
Accounting fees....................................... 6,500
Rating agency fees.................................... 168,000
Miscellaneous expenses................................ 15,092
-------------
Total.............................................. $ 370,000
=============
------------------
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At July 26, 2004
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
Part C-3
(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 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
Part C-4
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 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.
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 Portfolio, 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 Floating Rate Income 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.
Part C-5
OTHER BUSINESS PROFESSION, VOCATION OR
NAME AND POSITION WITH NIAC EMPLOYMENT DURING PAST TWO YEARS
--------------------------- ---------------------------------------
Alan G. Berkshire, Senior Vice President Senior Vice President, Secretary and General Counsel of
and Secretary........................................... 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.
Mary E. Keefe, Managing Director and Chief Managing Director and Chief Compliance Officer (since June 2004)
Compliance Officer...................................... of Nuveen Investments, Inc., Nuveen Investments, LLC, Nuveen
Investments Advisers Inc., Nuveen Asset Management Inc., Nuveen
Institutional Advisory Corp., Nuveen Investments Institutional
Services Group LLC and Rittenhouse Asset Management, Inc.; Head
of Global Compliance (January 2004 - May 2004) Citadel
Investment Group; Director, Midwest Regional Office (1994 -
2003) United States Securities and Exchange Commission.
Margaret E. Wilson, Senior Vice President, Finance...... Senior Vice President, Finance of Nuveen Investments,
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 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 NIAC EMPLOYMENT DURING PAST TWO YEARS
--------------------------- ---------------------------------------
Jeffrey L. Skelton Manager/Member, NetNet Ventures, LLC
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
Director of Business
Development; Vice President
Praveen K. Gottipalli Portfolio Manager and Manager/Member, NetNet Ventures,
Director of Investments; LLC
Vice President
Gunther M. Stein Portfolio Manager, Symphony Asset Management LLC;
Director of Fixed Income Strategies Portfolio Manager, Nuveen Senior Loan Asset Management
LLC; Vice President, Nuveen Institutional Advisory Corp.
Part C-6
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, Suite 2975, 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.
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.
Part C-7
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 16th day of
September, 2004.
NUVEEN FLOATING RATE INCOME
OPPORTUNITY 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 September 16, 2004
------------------------------------ (Principal Financial and Accounting
Stephen D. Foy Officer)
/s/ Gifford R. Zimmerman Chief Administrative Officer September 16, 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
September 16, 2004
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Jack B. Evans* Trustee
William C. Hunter* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* 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 Registrant's Registration Statement on Form N-2
(File No. 333-115200) on July 27, 2004 and are incorporated herein by
reference.
INDEX TO EXHIBITS
a.1 Declaration of Trust dated April 27, 2004.*
a.2 Amended and Restated Declaration of Trust dated May 17, 2004.*
b. By-laws of Registrant.*
c. None.
d.1 Form of Share Certificate.
d.2 Rating Agency 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 June 22, 2004.*
g.2 Amendment to Investment Management Agreement dated July 31, 2004.
g.3 Investment Sub-Advisory Agreement between Nuveen Institutional
Advisory Corp. and Symphony Asset Management, LLC
dated June 22, 2004.*
h.1 Form of Underwriting Agreement.
h.2 Form of Master Selected Dealer Agreement.
h.3 Form of Nuveen Master Selected Dealer Agreement.
h.4 Form of 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 June 22, 2004.*
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 July 6, 2004.*
q. None.
r.1 Code of Ethics of Nuveen Exchange-Traded Funds and Nuveen
Institutional Advisory Corp.*
r.2 Code of Ethics of Symphony Asset Management, LLC.*
s. Powers of Attorney.*
----------
* Previously filed.