As filed with the Securities and Exchange Commission on December 8, 2003
1933 Act File No. 333-
1940 Act File No. 811-08743
________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM N-2
[X] REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ____
[ ] Post-Effective Amendment No. ____
(Check appropriate box or boxes)
________________
VAN KAMPEN SENIOR INCOME TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555
(Address of Principal Executive Offices)
Telephone Number: (630) 684-6000
(Area Code and Telephone Number)
A. Thomas Smith III, Esq.
Managing Director and General Counsel
Van Kampen Investments Inc.
1221 Avenue of the Americas
New York, New York 10020
(212) 762-5260
(Name and Address of Agent for Service)
________________
Copies to:
Wayne W. Whalen, Esq. Cynthia G. Cobden, Esq.
Charles B. Taylor, Esq. Simpson Thacher & Bartlett LLP
Skadden, Arps, Slate, Meagher & 425 Lexington Avenue
Flom (Illinois) New York, New York 10017
333 West Wacker Drive (212) 455-2000
Chicago, Illinois 60606
(312) 407-0700
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.
If any securities being registered on this form will be 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. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933:
Proposed Proposed
Maximum Maximum
Title of Amount Offering Aggregate Amount of
Securities Being Being Price Offering Registration
Registered Registered Per Unit Price Fee
------------------------ ----------- ---------- ----------- ------------
Shares of Auction Rate 40 $25,000 $1,000,000 $80.90
Cumulative Preferred
Shares, par value $0.01
per share
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities Exchange Commission,
acting pursuant to Section 8(a) of the Securities Act of 1933, as amended, may
determine.
_______________________________________________________________________________
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
________________________________________________________________________________
SUBJECT TO COMPLETION, DATED DECEMBER , 2003
PRELIMINARY PROSPECTUS
$[ ]
VAN KAMPEN SENIOR INCOME TRUST
Auction Rate Cumulative Preferred Shares
[ ] Shares, Series M
[ ] Shares, Series T
[ ] Shares, Series W
[ ] Shares, Series TH
[ ] Shares, Series F
Liquidation Preference $25,000 Per Share
________________
Van Kampen Senior Income Trust (the "Fund") is a non-diversified,
closed-end management investment company. The Fund's investment objective is
to provide a high level of current income, consistent with preservation of
capital. The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to corporations, partnerships and other entities
("Borrowers") which operate in a variety of industries and geographical
regions. The Fund's investment adviser is Van Kampen Investment Advisory Corp.
("Advisory Corp." or the "Adviser").
The Fund is offering [ ] Series M, [ ] Series T, [ ] Series W, [ ]
Series TH and [ ] Series F Auction Rate Cumulative Preferred Shares
(collectively, the "Preferred Shares"). The minimum purchase amount for
Preferred Shares is $25,000.
An investment in the Preferred Shares may not be appropriate for all
investors and there is no assurance that the Fund will achieve its investment
objective. See risk factors of the Fund described in the section "Investment
Objective, Policies and Risks" beginning on page [ ] of this Prospectus.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved of these securities or
determined that this Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
_____________________
Per Share Total
----------------- --------------
Public Offering Price (1) $25,000 $
Sales Load $ $
Proceeds to Fund (2) $ $
_____________________
(1) The public offering price per share will be increased by the
amount of dividends, if any, that have accumulated from the
date the Preferred Shares are first issued.
(2) Not including offering expenses incurred by the Fund, estimated to
be $ [ ].
The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to an
investor's broker-dealer, in book-entry form through The Depository Trust
Company, on or about January , 2004.
_____________________
Citigroup
________, 2004
Senior Loans in which the Fund invests generally pay interest at
rates which are periodically redetermined by reference to a base lending rate
plus a premium. These base lending rates are generally the Prime Rate offered
by one or more major United States banks, the London Inter-Bank Offered Rate,
the Certificate of Deposit rate or other base lending rates used by commercial
lenders. Senior Loans generally hold the most senior position in the capital
structure of the Borrowers and generally are secured with specific collateral,
which may include guarantees, although the Fund may also invest in Senior
Loans that are not secured by any collateral. The terms of Senior Loans
typically include various restrictive covenants which are designed to limit
certain activities of the Borrowers. It is anticipated that the proceeds of
the Senior Loans in which the Fund acquires interests will be used primarily
to finance leveraged buyouts, recapitalizations, mergers, acquisitions and
stock repurchases and, to a lesser extent, to finance internal growth and for
other corporate purposes of Borrowers.
Senior Loans in which the Fund invests generally have a claim on the
assets of an issuer senior to that of subordinated debt, preferred stock and
common stock of such issuer. Senior Loans in which the Fund may invest
generally are not registered with the Securities and Exchange Commission or
listed on any national securities exchange, and there is no express limitation
on the percentage of the Fund's assets that may be invested in illiquid
securities.
Investors in Preferred Shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Series M Preferred Shares for the
initial dividend period from and including the date of issue to but excluding
________, 2004 will be ___%. The dividend rate on the Series T Preferred
Shares for the initial dividend period from and including the date of issue to
but excluding ________, 2004 will be ___%. The dividend rate on the Series W
Preferred Shares for the initial dividend period from and including the date
of issue to but excluding ________, 2004 will be ___%. The dividend rate on
the Series TH Preferred Shares for the initial dividend period from and
including the date of issue to but excluding ________, 2004 will be ___%. The
dividend rate on the Series F Preferred Shares for the initial dividend period
from and including the date of issue to but excluding ________, 2004 will be
___%. For each subsequent dividend period, the auction agent will determine
the dividend rate for a particular period by an auction conducted on the
business day prior to that period. Preferred Shares are not listed on an
exchange. Investors in Preferred Shares may participate in auctions through
broker-dealers that have entered into an agreement with the auction agent and
the Fund in accordance with the procedures specified herein. Broker-dealers
are not required to maintain a secondary market in Preferred Shares, and there
can be no assurance that a secondary market will develop, or if it does develop
a secondary market may not provide you with liquidity. The Fund may redeem
Preferred Shares as described under "Description of Preferred Shares."
The Preferred Shares will be senior to shares of the Fund's
outstanding common shares, par value $0.01 per share. The Fund's common shares
are traded on the New York Stock Exchange ("NYSE") under the symbol "VVR." It
is a condition of closing this offering that the Preferred Shares be offered
with a rating of "Aaa" from Moody's Investors Service, Inc. ("Moody's") and
"AAA" from Fitch Ratings ("Fitch").
This Prospectus sets forth concisely the information that prospective
investors should know before investing in Preferred Shares, including
information about risks. Investors should read this Prospectus before
investing and keep the Prospectus for future reference. The Fund's Statement
of Additional Information ("SAI") dated _____, 2003, contains additional
information about the Fund and is incorporated by reference into this
Prospectus. You may obtain a copy of the SAI without charge by calling
(800)341-2929 or by writing to the Fund at 1 Parkview Plaza, PO Box 5555,
Oakbrook Terrace, Illinois 60181-5555. A table of contents to the SAI is
located at page [ ] of this Prospectus. The SAI has been filed with the SEC
and is available along with other Fund-related materials at the SEC's internet
web site (http://www.sec.gov).
The Preferred 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 into this Prospectus. The Fund has not, and the Underwriters have
not, authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information you should not rely on
it. The Fund is not, and the Underwriters are not, making an offer of these
securities in any state where the offer is not permitted. The Fund's business,
financial condition, results of operation and prospects may have changed since
the date of this prospectus
TABLE OF CONTENTS
Page
Prospectus Summary...........................................................
Financial Highlights.........................................................
Senior Securities............................................................
The Fund.....................................................................
Use of Proceeds..............................................................
Capitalization...............................................................
Portfolio Composition........................................................
Investment Objective and Investment Policies.................................
Use of Leverage..............................................................
Other Investment Practices...................................................
Risk Factors.................................................................
Description of Commercial Paper Arrangements.................................
Net Asset Value..............................................................
Description of Preferred Shares..............................................
Rating Agency Guidelines.....................................................
Management of the Fund.......................................................
Custodian and Auction Agent, Transfer Agent,
Dividend Paying Agent and Registrar..........................................
Federal Taxation.............................................................
Description of Capital Structure.............................................
Underwriting.................................................................
Legal Matters................................................................
Experts......................................................................
Further Information..........................................................
Table of Contents for the Statement of Additional Information................
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the more detailed information included elsewhere in this Prospectus the
Statement of Additional Information and the Fund's Certificate of Vote (the
"Certificate") attached as Appendix B to the SAI.
The Fund................ Van Kampen Senior Income Trust is a non-diversified,
closed-end management investment company. The Fund
was organized as a Massachusetts business trust on
April 8, 1998, and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
The Fund commenced investment operations on June
23, 1998 upon the closing of an initial public
offering of its common shares of beneficial
interest, par value $0.01 per share ("Common
Shares"). The Fund's Common Shares are traded on
the NYSE under the symbol "VVR." As of December __,
2003, the Fund had total assets of approximately
$[ ] billion and net assets of approximately $[ ]
billion.
The Offering............. The Fund is offering [ ] Series M Preferred Shares,
[ ] Series T Preferred Shares, [ ] Series W
Preferred Shares, [ ] Series TH Preferred Shares
and Series F Preferred Shares, each series with a
par value of $0.01 at a purchase price of $25,000
per share plus dividends, if any, that have
accumulated from the commencement date of the
dividend period during which the Fund first issues
the shares. The Fund is offering the Preferred
Shares through a group of underwriters led by
Citigroup Global Markets Inc.
The Preferred Shares of the Fund will entitle their
holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods
for such shares. In general, except as described
under "Description of Preferred Shares - Dividends
and Dividend Periods," the dividend period for each
series will be seven days. The auction agent will
determine the dividend rate for a particular
dividend period by an auction conducted on the
business day immediately prior to the start of that
dividend period. See Description of Preferred
Shares - Summary of Auction Procedures."
Preferred Shares are not listed on an exchange.
Investors and potential investors in Preferred
Shares may participate in auctions for the
Preferred Shares through broker-dealers that have
entered into an agreement with the auction agent
and the Fund. Generally, investors in Preferred
Shares will not receive certificates representing
ownership of their shares. The securities
depository (The Depository Trust Company or any
successor) or its nominee for the account of the
investor's broker-dealer will maintain record
ownership of the Preferred Shares in book-entry
form. An investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of Preferred Shares.
The Fund will not issue Preferred Shares unless
such shares have a rating of "Aaa" from Moody's and
"AAA" from Fitch. A rating is not a financial
guarantee and can change. The Fund may at some
future time seek to have the Preferred Shares rated
by another rating agency. See "Description of
Preferred Shares."
Investment Objective The Fund's investment objective is to provide a
and Policies............. high level of current income, consistent with
preservation of capital. The Fund seeks to achieve
its objective by investing primarily in a
professionally managed portfolio of interests in
Senior Loans to Borrowers which operate in a
variety of industries and geographical regions
(including domestic and foreign entities). Senior
Loans in which the Fund invests generally pay
interest at rates which are periodically
redetermined by reference to a base lending rate
plus a premium. These base lending rates are
generally the prime rate offered by one or more
major United States banks ("Prime Rate"), the
London Inter-Bank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or other base
lending rates used by commercial lenders. The value
of the Fund's portfolio may be affected by changes
in the credit quality of Borrowers with respect to
Senior Loan interests in which the Fund invests. No
assurance can be given that the Fund will achieve
its investment objective.
Senior Loans generally hold the most senior
position in the capital structure of the Borrowers
and generally are secured with specific collateral,
which may include guarantees, although the Fund may
also invest in Senior Loans that are not secured by
any collateral. The terms of Senior Loans typically
include various restrictive covenants which are
designed to limit certain activities of the
Borrowers. Senior Loans generally are arranged
through private negotiations between a Borrower and
several financial institutions ("Lenders")
represented in each case by one or more such
Lenders acting as agent ("Agent") of the several
Lenders. On behalf of the several Lenders, the
Agent will be primarily responsible for negotiating
the loan agreement ("Loan Agreement") that
establishes the relative terms and conditions of
the Senior Loan and rights of the Borrower and the
several Lenders. The Fund may invest in
participations ("Participations") in Senior Loans,
may purchase assignments ("Assignments") of
portions of Senior Loans from third parties and may
act as one of the group of Lenders originating a
Senior Loan (an "Original Lender"). The Fund will
purchase an Assignment or act as Original Lender
with respect to a syndicated Senior Loan,
initially, only where the Agent with respect to the
Senior Loan at the time of investment has
outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or
Baa or P-3 or higher by Moody's) or determined by
the Adviser to be of comparable quality.
In normal market conditions, at least 80% of the
Fund's total assets are invested in Senior Loans
(either as an Original Lender or as a purchaser of
an Assignment or Participation) of domestic
borrowers or foreign borrowers (so long as Senior
Loans to such foreign borrowers are U.S. dollar
denominated and payments of interest and repayments
of principal pursuant to such Senior Loans are
required to be made in U.S. dollars). It is
anticipated that the proceeds of the Senior Loans
in which the Fund acquires interests will be used
primarily to finance leveraged buyouts,
recapitalizations, mergers, acquisitions and stock
repurchases and, to a lesser extent, to finance
internal growth and for other corporate purposes of
Borrowers. Senior Loans generally have the most
senior position in a Borrower's capital structure,
although some Senior Loans may hold an equal
ranking with other senior securities of the
Borrower. Senior Loans generally are secured by
specific collateral, which may include guarantees.
The Fund may invest up to 20% of its total assets
in interests in Senior Loans which are not secured
by any collateral. The Fund may also acquire
warrants, equity securities and, in limited
circumstances, junior debt securities in connection
with its investments in Senior Loans. Such equity
securities and junior debt securities will not be
treated by the Fund as Senior Loans. Investment in
Senior Loans which are not secured by specific
collateral and in warrants, equity securities and
junior debt securities entails certain risks in
addition to those associated with investment in
collateralized Senior Loans.
The Fund is not subject to any restrictions with
respect to the maturity of Senior Loans held in its
portfolio. The Fund's assets invested in Senior
Loans generally consist of Senior Loans with stated
maturities of between three and ten years,
inclusive, and with rates of interest which are
redetermined either daily, monthly, quarterly or
semi-annually; provided, however, that the Fund may
invest up to 5% of its total assets in Senior Loans
which permit the Borrower to select an interest
rate redetermination period of up to one year.
Investment in Senior Loans with longer interest
rate redetermination periods may increase
fluctuations in the value of the Fund's portfolio
as a result of changes in interest rates. The
Senior Loans in the Fund's portfolio will at all
times have a dollar-weighted average time until
next interest rate redetermination of 90 days or
less. Because of prepayment provisions, the actual
remaining maturity of Senior Loans may vary
substantially from the stated maturity of such
loans. The Fund estimates that the actual maturity
of Senior Loans in the portfolio generally are
approximately 18-24 months.
Senior Loans historically have not been rated by
nationally recognized statistical rating
organizations. The Fund invests in Senior Loans,
the Borrowers with respect to which may have
outstanding debt securities which are rated below
investment grade by a nationally recognized
statistical rating organization or are unrated but
of comparable quality to such securities. Debt
securities rated below investment grade, or unrated
but of comparable quality, commonly are referred to
as "junk bonds." The Fund invests only in those
Senior Loans with respect to which the Borrower, in
the opinion of the Adviser, demonstrates one or
more of the following characteristics: sufficient
cash flow to service debt; adequate liquidity;
successful operating history; strong competitive
position; experienced management; and, with respect
to collateralized Senior Loans, adequate collateral
coverage of the Senior Loan. In addition, the
Adviser may consider, and may rely in part, on
analyses performed by Lenders other than the Fund.
During normal market conditions, the Fund may
invest up to 20% of its total assets in (i) high
quality, short-term debt securities with remaining
maturities of one year or less and (ii) warrants,
equity securities and, in limited circumstances,
junior debt securities acquired in connection with
the Fund's investments in Senior Loans. If the
Adviser determines that market conditions
temporarily warrant a defensive investment policy,
the Fund may, subject to its ability to liquidate
its relatively illiquid portfolio of Senior Loans,
invest up to 100% of its assets in cash and such
high quality, short-term securities. The Fund may
also lend its portfolio securities to other parties
and may enter into repurchase and reverse
repurchase agreements for securities, subject to
certain restrictions. For further discussion of the
Fund's investment objective and policies and its
investment practices and the associated
considerations, see "Investment Objective, Policies
and Risks."
Use of
Leverage................. The Fund uses financial leverage for investment
purposes. Including the proceeds of the offering of
the Preferred Shares, it is currently anticipated
that the amount of leverage will represent
approximately [ ]% (and in no event will it exceed
50%) of the Fund's total assets. In addition to
issuing Preferred Shares, the Fund borrows money
through a commercial paper program. It is currently
anticipated that the amount of leverage represented
by the commercial paper program will be
approximately [ ]% of the Fund's total assets. See
"Investment Objective, Policies and Risks--Use of
Leverage." The Fund's obligations under the
commercial paper program are senior to the
Preferred Shares. Payments to holders of Preferred
Shares in liquidation or otherwise will be subject
to the prior payment of all outstanding
indebtedness, including the Fund's obligations
under the commercial paper program. There can be no
assurance that the commercial paper will remain
outstanding or that the Fund will continue such
borrowing.
The issuance of Preferred Shares and the use of
borrowing for investment purposes are forms of
financial leverage, and as such pose certain risks.
The Fund generally will not utilize financial
leverage if it anticipates that it would result in
a lower return to common shareholders over time.
Use of financial leverage creates an opportunity
for increased income for common shareholders but,
at the same time, creates the possibility for
greater loss (including the likelihood of greater
volatility of net asset value and market price of
the shares and of dividends), and, under certain
circumstances, the Fund's use of financial leverage
may impair the ability of the Fund to maintain its
qualification, for federal income tax purposes, as
a regulated investment company. There can be no
assurance that a leveraging strategy will be
successful during any period in which it is
employed. The fees paid to the Adviser and
Administrator are calculated on the basis of the
Fund's managed assets, thus those fees will be
higher when leverage is utilized.
Principal Investment
Risks.................... Risk is inherent in all investing. The primary risks
of investing in Preferred Shares are:
o the Fund will not be permitted to declare
dividends or other distributions with respect to
the Preferred Shares or redeem the Preferred
Shares unless the Fund meets certain asset
coverage requirements and is not in default
under the terms of any senior indebtedness;
o in extraordinary circumstances, the Fund may not
earn sufficient income from its investments to
pay dividends;
o senior indebtedness of the Fund may also
constitute a substantial lien and burden on the
Preferred Shares by reason of its prior claim
against the income of the Fund and against the
net assets of the Fund in liquidation;
o if a Preferred Share auction fails, investors
may not be able to sell any or all of the
Preferred Shares;
o because of the nature of the market for
Preferred Shares, investors may receive less
than the price paid for the share if sold
outside of the auction, especially when market
interest rates are rising;
o investors could receive less than the price paid
for the Preferred Shares if such shares are sold
outside of the auction, especially when market
interest rates are rising; although
broker-dealers may maintain a secondary market in
the Preferred Shares, they are not obligated to
do so and no secondary market may develop or
exist at any time;
o a rating agency could downgrade Preferred
Shares, which could affect liquidity; and
o the Fund may be forced to redeem the Preferred
Shares to meet regulatory or rating agency
requirements or may voluntarily redeem the
Preferred Shares in certain circumstances.
The primary risks of investing in the Fund are:
o borrowers under Senior Loans may default on
obligations to pay principal or interest when
due, collateral (if any) underlying Senior Loans
may be insufficient to cover defaulted payments
or lenders may have difficulty liquidating the
collateral securing the Senior Loans or
enforcing their rights under the terms of the
Senior Loans, and the Fund's investment
objective may not be realized;
o Senior Loans generally have less liquidity and a
more limited secondary market than many other
types of investments, and the Fund may be
limited in its ability to sell portfolio
holdings at carrying value to generate cash
flows, realize gains or avoid losses;
o if long term rates rise, the value of the Fund's
investment portfolio may decline, interest rates
are at historical lows and it is likely that
they will rise;
o the Fund's use of financial leverage will result
in greater volatility in the net asset value,
market value and distributions on the common
shares; and
o in extraordinary circumstances the Fund may not
earn sufficient income from its investments to
pay interest on the Fund's indebtedness or
dividends;
o to the extent the Fund invests in non-U.S.
issuers, the Fund may be subject to special
risks; and
o to the extent the Fund invests a relatively high
percentage of its assets in obligation of a
limited number of issuers, the Fund may be more
susceptible than a widely-diversified company to
any single corporate, economic, political or
regulatory occurrence.
For further discussion of the risks of investing in
the Preferred Shares and the Fund, see "Investment
Objective, Policies and Risks."
Investment Adviser Van Kampen Investment Advisory Corp. is the Fund's
and Administrator...... investment adviser (the "Adviser"). The Adviser is
a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen
Investments is the Fund's administrator. Van Kampen
Investments is a diversified asset management
company that administers more than three million
retail investor accounts, has extensive
capabilities for managing institutional portfolios
and has more than $[ ] billion under management or
supervision as of December __, 2003. Van Kampen
Investments has more than 50 open-end funds, more
than 30 closed-end funds and more than 2,700 unit
investment trusts that are distributed by
authorized dealers nationwide.
The Fund pays the Adviser a monthly fee (accrued
daily and paid monthly) computed based upon an
annual rate of 0.85% applied to the average daily
managed assets of the Fund (which for purposes of
determining such fee, shall mean the average daily
gross asset value of the Fund, minus the sum of
accrued liabilities other than the aggregate amount
of any borrowings undertaken by the Fund). The Fund
pays the Administrator a monthly fee (accrued daily
and paid monthly) computed based upon an annual
rate of 0.20% applied to the average daily managed
assets of the Fund (as defined). Because leverage
will increase the amount of the Fund's total
assets, the Fund will pay a greater amount of
advisory and administrative fees when leverage is
utilized.
Dividends and The table below shows the dividend rates for the
Dividend Periods....... initial rate periods of the Preferred Shares
offered in this Prospectus. For subsequent dividend
periods, Preferred Shares will pay dividends based
on a rate set at auctions, normally held every 7
days. In most instances dividends are also payable
every 7 days, on the first business day following
the end of the rate period. See "Description of
Preferred Shares."
The table below also shows the date from which
dividends on the Preferred Shares will accumulate
at the initial rate, the dividend payment date for
the initial dividend period and the day on which
dividends will normally be paid. If the day on
which dividends otherwise would be paid is not a
business day, then dividends will be paid on the
first business day that falls after that day.
Finally, the table below shows the number of days
of the initial dividend periods for the Preferred
Shares. Subsequent rate periods generally will be 7
days. The dividend payment date for special rate
periods of more than 7 days will be set out in the
notice designating a special rate period. See
"Description of Preferred Shares--Designation of
Special Rate Periods."
Dividend
Payment Number of
Date of Date for Subsequent Days of
Initial Accumulation Initial Dividend Initial
Preferred Dividend of Initital Dividend Payment Dividend
Shares Rates Rate Period Day Period
Series M
Series T
Series W
Series Th
Series F
Asset Maintenance....... The Fund's Certificate of Vote (the "Certificate"),
attached as Appendix B to the SAI, establishes and
fixes the rights and preferences of the Preferred
Shares. The Certificate provides that the Fund must
maintain:
o asset coverage of the Preferred Shares as required
by the rating agency or agencies rating the
Preferred Shares, and
o asset coverage of the Preferred Shares as required
by the 1940 Act (which currently requires asset
coverage of at least 200%).
Based on the Fund's assets and liabilities as of
December __, 2003, the asset coverage of the
Preferred Shares as measured pursuant to the 1940
Act would be approximately [ ]% if the Fund were to
issue all Preferred Shares offered in this
Prospectus.
In addition, under the commercial paper program,
the Fund may not permit the Fund's asset coverage
ratio (as defined separately by related credit
agreements) to fall below 300% at any time without
causing an event of default under the credit
agreements.
Redemption............. Although the Fund ordinarily does not expect to
redeem Preferred Shares, it may be required to redeem
shares if, for example, the Fund does not correct a
failure to meet an asset coverage ratio required by
law or a rating agency guideline in a timely manner.
The Fund may also voluntarily redeem Preferred
Shares. See "Description of Preferred
Shares--Redemption."
Liquidation The liquidation preference (that is, the amount the
Preference............... Fund must pay to holders of Preferred Shares if the
Fund is liquidated) for Preferred Shares will be
$25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or declared.
See "Description of Preferred Shares--Liquidation."
Voting Rights............ The 1940 Act requires that the holders of Preferred
Shares, and the holders of any other series of
preferred shares of the Fund, voting as a separate
class, have the right to:
o elect at least two Trustees at all times, and
o elect a majority of the Trustees at any time when
dividends on any series of the Preferred Shares,
or any other series of preferred shares of the
Fund, are unpaid for two full years and will
continue to be so represented until all dividends
in arrears shall have been paid or otherwise
provided for.
The holders of common shares and Preferred Shares,
voting together as a single class will elect the
remaining Trustees. The holders of Preferred
Shares, and the holders of any other series of
preferred shares of the Fund, will vote as a
separate class or series on other matters as
required under the Fund's Agreement and Declaration
of Trust, as amended (the "Declaration of Trust"),
the Certificate, the 1940 Act and Massachusetts
law. Each common share, each Preferred Share, and
each share of any other series of preferred shares
of the Fund is entitled to one vote per share. See
"Description of Preferred Shares--Voting Rights."
Secondary Market
Trading.................. Preferred Shares are not listed on an exchange.
Instead, you may buy or sell Preferred Shares at an
auction that is normally held every 7 days 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. Broker-dealers may,
but are not obligated to, maintain a secondary
market in Preferred Shares outside of auctions.
There can be no assurance that a secondary market
will develop or, if it does develop, that it will
provide owners with liquidity of investment.
Preferred Shares may be transferred outside of
auctions only to a broker-dealer or such other
persons who may be permitted by the Fund.
Federal Income
Taxes.................... The distributions with respect to Preferred
Shares (other than distributions in redemption of
Preferred Shares subject to Section 302(b) of the
Internal Revenue Code of 1986, as amended (the
"Code")) will constitute dividends to the extent of
the Fund's current or accumulated earnings and
profits, as calculated for federal income tax
purposes. Such dividends generally will be taxable
as ordinary income to holders. Because the Fund's
portfolio income will consist principally of
interest income, corporate investors in the
Preferred Shares generally will not be entitled to
the dividends received deduction and individual
investors generally will not be entitled to the
reduced rates of taxation available for qualified
dividend income. Distributions to holders of net
capital gain that are designated by the Fund as
capital gain dividends will be treated as long-term
capital gains in the hands of holders. The Internal
Revenue Service 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 distributions of net
capital gain made with respect to Preferred Shares
as capital gain dividends in proportion to the
Preferred Shares' share of total dividends paid
during the year.
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial information for a
single common share of beneficial interest of the Fund outstanding throughout
the periods presented. The financial highlights have been audited by the
Fund's independent accountants, whose report, along with the Fund's most
recent financial statements are included in the Fund's SAI.
[Insert 7/31/03 Financial Highlights]
SENIOR SECURITIES
--------------------------------------------------------------------------------------------------------
| | Amount of debt | Average daily | Asset coverage| verage daily | Average |
| | outstanding at | balance of debt | per $1,000 of | balance of | amount of |
| Fiscal | end of year | outstanding | indebtedness | shares | debt per |
| Year ended | | during year | | outstanding | share during |
| | | | | during year| year |
|--------------------| ---------------|------------------|---------------|--------------|---------------|
| July 31, 2000... | | | | |
|--------------------| ---------------|------------------|---------------|--------------|---------------|
| July 31, 2001... | | | | | |
|--------------------| ---------------|------------------|---------------|--------------|---------------|
| July 31, 2002... | | | | | |
|--------------------| ---------------|------------------|---------------|--------------|---------------|
| July 31, 2003... | | | | | |
--------------------------------------------------------------------------------------------------------
THE FUND
The Fund is a non-diversified, closed-end management investment
company. The Fund was organized as a Massachusetts business trust on April 8,
1998, and is registered under the 1940 Act. The Fund commenced investment
operations on June 23, 1998 upon the closing of an initial public offering of
its common shares of beneficial interest. As of December __, 2003, the Fund
had total assets of approximately $__ billion and net assets of approximately
$__ billion. On December __, 2003, the Fund had outstanding [ ] common shares.
The Fund's principal office is located at 1 Parkview Plaza, PO Box 5555,
Oakbrook Terrace, Illinois 60181-5555, and its telephone number is
(630)684-6000.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $[ ] after
payment of offering expenses and the sales load. The Fund will use all of the
net proceeds of the offering to (i) pay down amounts borrowed by the Fund
under its commercial paper program by approximately $[ ] million and (ii)
invest the remaining proceeds in accordance with the Fund's investment
objective and policies as soon as practicable, but in no event, under normal
market conditions, later than three months after the receipt thereof. Pending
such investment, the proceeds may be invested in high-quality, short-term
securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of [ ], 2003, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby and repayments of the commercial paper program
(including estimated offering expenses and sales load of $[ ]).
As of , 2003
Actual As Adjusted
Shareholders' Equity
Preferred Shares, par value $0.01 per share.......................
(no shares issued; _______ shares issued, as
adjusted, at $25,000 per share liquidation preference)
Common Shares, par value $0.01 per share,.........................
[______] shares outstanding
Capital in excess of par value.......................................
Undistributed net investment income..................................
Net accumulated realized gain (loss) from investment transactions....
Net unrealized depreciation of investments...........................
Net assets applicable to Common Shares...............................
PORTFOLIO COMPOSITION
Portfolio Characteristics
------------------------------------------------------------------------------
| Net assets | |
| ---------------------------------------------------------|----------------|
| Total assets | |
| ----------------------------------------------------------|----------------|
| Assets invested in Senior Loans and other loans | |
| ----------------------------------------------------------|----------------|
| Average amount outstanding per loan | |
| ----------------------------------------------------------|----------------|
| Total number of industries | |
| ----------------------------------------------------------|----------------|
| Average loan amount per industry | |
| ----------------------------------------------------------|----------------|
| Portfolio turnover (six months ended December 31, 2000) | |
| ----------------------------------------------------------|----------------|
| Weighted average days to next interest rate reset | |
| ----------------------------------------------------------|----------------|
| Average loan maturity | |
| ----------------------------------------------------------|----------------|
| Average age of loans held in the portfolio | |
| ----------------------------------------------------------|----------------|
| Assets invested in other debt obligations | |
------------------------------------------------------------------------------
Top 10 Senior Loan Industries As A Percentage Of Assets On [ ], 2003
[TO COME]
Top 10 Senior Loans As A Percentage Of Assets On [ ], 2003
[TO COME]
Securities Ratings
The table below reflects the ratings of Senior Loans only,
representing approximately [ ]% of the Fund's total assets, as of [ ], 2003.
NUMBER OF VALUE PERCENTAGE OF
S&P* MOODY's* ISSUES (IN THOUSANDS) TOTAL ASSETS
---- -------- ------ -------------- ------------
AAA Aaa
AA Aa1, Aa
A A1
BBB Baa1
BB Ba1
NR+ NR+
Cash
Total
100.0%
__________________________
* Ratings: Using the higher of S&P's or Moody's ratings. S&P rating
categories may be modified further by a plus (+) or minus (-) in AA, A,
BBB, BB, B and C ratings. Moody's rating categories may be modified
further by a 1, 2, or 3 in Aa, A, Baa, Ba and B ratings.
+ Senior Loans that are not rated by S&P or Moody's. Such Senior Loans may
be rated by nationally recognized statistical rating organizations other
than S&P or Moody's, or may not be rated by any such organization. With
respect to the percentage of the Fund's assets invested in such Senior
Loans, the Adviser believes that these are of comparable quality to
rated Senior Loans in which the Fund may invest. This determination is
based on the Adviser's own internal evaluation and does not necessarily
reflect how such Senior Loans would be rated by S&P or Moody's if either
were to rate the securities.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
Investment Objective
The Fund's investment objective is to provide a high level of current
income, consistent with preservation of capital.
Investment Policies
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of Senior Loans to Borrowers which operate in
a variety of industries and geographical regions (including domestic and
foreign entities). Although the Fund's net asset value per common share
("NAV") will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize fluctuations in the Fund's
NAV as a result of changes in interest rates. Senior Loans in which the Fund
invests generally pay interest at rates which are periodically redetermined by
reference to a base lending rate plus a premium. These base lending rates are
generally the Prime Rate, LIBOR, a CD rate or other base lending rates used by
commercial lenders. The Fund's NAV may be affected by changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the Fund
invests. Fluctuations in NAV may be magnified as a result of the Fund's use of
leverage. In addition, the Fund's use of leverage may affect the Fund's
ability to make distributions. An investment in the Fund may not be
appropriate for all investors and is not intended to be a complete investment
program. No assurance can be given that the Fund will achieve its investment
objective.
Senior Loans generally are arranged through private negotiations
between a Borrower and Lenders represented in each case by one or more such
Lenders acting as Agent of the several Lenders. On behalf of the several
Lenders, the Agent, which is frequently the commercial bank or other entity
that originates the Senior Loan and the person that invites other parties to
join the lending syndicate, will be primarily responsible for negotiating the
Loan Agreement(s) that establish the relative terms, conditions and rights of
the Borrower and the several Lenders. In larger transactions it is common to
have several Agents; however, generally only one such Agent has primary
responsibility for documentation and administration of the Senior Loan. Agents
are typically paid a fee or fees by the Borrower for their services.
The Fund may invest in Participations in Senior Loans, may purchase
Assignments of portions of Senior Loans from third parties and may act as one
of the group of Original Lenders. In normal market conditions, at least 80% of
the Fund's total assets are invested in Senior Loans (either as an Original
Lender or as a purchaser of an Assignment or Participation) of domestic
borrowers or foreign borrowers (so long as Senior Loans to foreign borrowers
are U.S. dollar denominated and payments of interest and repayments of
principal pursuant to such Senior Loans are required to be made in U.S.
dollars).
It is anticipated that the proceeds of the Senior Loans in which the
Fund will acquire interests primarily will be used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases, and, to
a lesser extent, to finance internal growth and for other corporate purposes
of Borrowers. The Fund currently does not intend to acquire interests in
Senior Loans the proceeds of which would be used primarily to finance
construction or real estate development projects. Senior Loans have the most
senior position in a Borrower's capital structure, although some Senior Loans
may hold an equal ranking with other senior securities of the Borrower. The
capital structure of a Borrower may include Senior Loans, senior and junior
subordinated debt (which may include "junk bonds"), preferred stock and common
stock issued by the Borrower, typically in descending order of seniority with
respect to claims on the Borrower's assets. Senior Loans generally are secured
by specific collateral, which may include guarantees. The Fund may invest up
to 20% of its total assets in Senior Loans which are not secured by any
collateral. Senior Loans that are not secured by specific collateral pose a
greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants, equity securities and junior debt securities issued by a Borrower or
its affiliates as part of a package of investments in the Borrower or its
affiliates. Warrants, equity securities and junior debt securities will not be
treated as Senior Loans and thus assets invested in such securities will not
count toward the 80% of the Fund's total assets that normally will be invested
in Senior Loans. The Fund will acquire such interests in warrants, equity
securities and junior debt securities only as an incident to the intended
purchase of interests in Senior Loans. In order to borrow money pursuant to
collateralized Senior Loans, a Borrower will frequently, for the term of the
Senior Loan, pledge as collateral assets, including but not limited to,
trademarks, accounts receivable, inventory, buildings, real estate, franchises
and common and preferred stock in its subsidiaries. In addition, in the case
of some Senior Loans, there may be additional collateral pledged in the form
of guarantees or other credit support by and/or securities of affiliates of
the Borrowers. In certain instances, a collateralized Senior Loan may be
secured only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that may not be readily liquidated, and there is no
assurance that the liquidation of such assets would satisfy fully a Borrower's
obligations under a Senior Loan.
Loan Agreements may include various restrictive covenants designed to
limit the activities of the Borrower in an effort to protect the right of the
Lenders to receive timely payments of interest on and repayment of principal
of the Senior Loans. Restrictive covenants may include mandatory prepayment
provisions arising from excess cash flows and typically include restrictions
on dividend payments, specific mandatory minimum financial ratios, limits on
total debt and other financial tests. Breach of such covenants, if not waived
by the Lenders, is generally an event of default under the applicable Loan
Agreement and may give the Lenders the right to accelerate principal and
interest payments. The Adviser will consider the terms of such restrictive
covenants in deciding whether to invest in Senior Loans for the Fund's
portfolio. When the Fund holds a Participation in a Senior Loan it may not
have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver
of a restrictive covenant may have interests different from those of the Fund
and such Lenders may not consider the interests of the Fund in connection with
their votes.
Senior Loans in which the Fund invests generally pay interest at
rates which are periodically redetermined by reference to a base lending rate
plus a premium. These base lending rates generally are the Prime Rate, LIBOR,
the CD rate or other base lending rates used by commercial lenders. The Prime
Rate quoted by a major U.S. bank is generally the interest rate at which such
bank is willing to lend U.S. dollars to its most creditworthy borrowers
although it may not be the bank's lowest available rate. LIBOR, as provided
for in Loan Agreements, is generally an average of the interest rates quoted
by several designated banks as the rates at which such banks would offer to
pay interest to major financial institutional depositors in the London
interbank market on U.S. dollar denominated deposits for a specified period of
time. The CD rate, as provided for in Loan Agreements, is generally the
average rate paid on large certificates of deposit traded in the secondary
market.
The Fund may invest in the Senior Loans of non-U.S. issuers.
Investment in the Senior Loans of non-U.S. issuers involves special risks,
including that non-U.S. issuers may be subject to less rigorous accounting and
reporting requirements than U.S. issuers, less rigorous regulatory
requirements, differing legal systems and laws relating to creditors' rights,
the potential inability to enforce legal judgments, foreclose on collateral,
possible restrictions on expatriation and repatriation of capital and the
potential for political, social and economic adversity.
The Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. [The Fund's assets invested in
Senior Loans generally consist of Senior Loans with stated maturities of
between three and ten years, inclusive, and with rates of interest which are
redetermined either daily, monthly, quarterly or semi-annually; provided,
however, that the Fund may invest up to 5% of its total assets in Senior Loans
which permit the Borrower to select an interest rate redetermination period of
up to one year.] Investment in Senior Loans with longer interest rate
redetermination periods may increase fluctuations in the Fund's NAV as a
result of changes in interest rates. The Senior Loans in the Fund's portfolio
will at all times have a dollar-weighted average time until the next interest
rate redetermination of 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
amount of time required to pass before the Fund will realize the effects of
changing short-term market interest rates on its portfolio will vary with the
dollar-weighted average time until the next interest rate redetermination on
the Senior Loans in the Fund's portfolio. The Fund may utilize certain
investment practices to, among other things, shorten the effective interest
rate redetermination period of Senior Loans in its portfolio. In such event,
the Fund will consider such shortened period to be the interest rate
redetermination period of the Senior Loan; provided, however, that the Fund
will not invest in Senior Loans which permit the Borrower to select an
interest rate redetermination period in excess of one year. Because most
Senior Loans in the Fund's portfolio will be subject to mandatory and/or
optional prepayment and there may be significant economic incentives for a
Borrower to prepay its loans, prepayments of Senior Loans in the Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Fund's
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Fund's portfolio. [As a result
of expected prepayments from time to time of Senior Loans in the Fund's
portfolio, the Fund estimates that the actual maturity of the Senior Loans
held in its portfolio generally are approximately 18-24 months.]
When interest rates decline, the value of a portfolio invested in
fixed-rate obligations can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in fixed-rate obligations can be
expected to decline. Although the Fund's NAV will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in NAV as a result of changes in
interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate less than a portfolio of fixed-rate, longer term
obligations as a result of interest rate changes. However, changes in
prevailing interest rates can be expected to cause some fluctuation in the
Fund's NAV. In addition to changes in interest rates, changes in the credit
quality of Borrowers will also affect the Fund's NAV. Further, a serious
deterioration in the credit quality of a Borrower could cause a prolonged or
permanent decrease in the Fund's NAV. Fluctuations in NAV may be magnified as
a result of the Fund's use of leverage.
The Fund may purchase and retain in its portfolio a Senior Loan
interest the Borrower with respect to which has filed for protection under the
federal bankruptcy laws or has had an involuntary bankruptcy petition filed
against it by its creditors. The values of such Senior Loan interests, if any,
will reflect, among other things, the Adviser's assessment of the likelihood
that the Fund ultimately will receive full repayment of the principal amount
of such Senior Loan interests, the likely duration, if any, of a lapse in the
scheduled repayment of principal and prevailing interest rates. 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 interest.
Depending upon, among other things, the Adviser's evaluation of the potential
value of such securities in relation to the price that could be obtained by
the Fund at any given time upon sale thereof, the Fund may determine to hold
such securities in its portfolio. Any equity securities and junior debt
securities held by the Fund will not be treated as Senior Loans and thus will
not count toward the 80% of the Fund's total assets that normally will be
invested in Senior Loans.
Senior Loans historically have not been rated by nationally
recognized statistical rating organizations. Because of the senior capital
structure position of Senior Loans and the collateralized or guaranteed nature
of most Senior Loans, the Fund and the Adviser believe that ratings of other
securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The
Fund may invest a substantial portion of its assets in Senior Loans, the
Borrowers with respect to which have outstanding debt securities which are
rated below investment grade by a nationally recognized statistical rating
organization or are unrated but of comparable quality to such securities. Debt
securities rated below investment grade or unrated but of comparable quality
commonly are referred to as "junk bonds." The Fund will invest only in those
Senior Loans with respect to which the Borrower, in the opinion of the
Adviser, demonstrates one or more of the following characteristics: sufficient
cash flow to service debt; adequate liquidity; successful operating history;
strong competitive position; experienced management; and, with respect to
collateralized Senior Loans, collateral coverage that equals or exceeds the
outstanding principal amount of the Senior Loan. In addition, the Adviser will
consider, and may rely in part, on the analyses performed by the Agent and
other Lenders, including such persons' determinations with respect to
collateral securing a Senior Loan.
The Fund may invest up to 100% of its assets in Participations. The
selling Lenders and other persons interpositioned between such Lenders and the
Fund with respect to such Participations will likely conduct their principal
business activities in the banking, finance and financial services industries.
Although, as discussed below, the Fund has taken measures which it believes
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries.
Persons engaged in such industries may be more susceptible than are persons
engaged in some other industry to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary
policy, governmental regulations concerning such industries and concerning
capital raising activities generally and fluctuations in the financial markets
generally.
Participations by the Fund in a Lender's portion of a Senior Loan
typically will result in the Fund having a contractual relationship only with
such Lender, not with the Borrower. As a result, the Fund may have the right
to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt
by such Lender of such payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any
rights with respect to any funds acquired by other Lenders through set-off
against the Borrower and the Fund may not directly benefit from the collateral
supporting the Senior Loan in which it has purchased the Participation. As a
result, the Fund may assume the credit risk of both the Borrower and the
Lender selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of such
Lender. The Fund has taken the following measures in an effort to minimize
such risks. The Fund will only acquire Participations if the Lender selling
the Participation, and any other persons interpositioned between the Fund and
the Lender, (i) at the time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or higher by S&P or Baa or P-3
or higher by Moody's or determined by the Adviser to be of comparable quality
and (ii) has entered into an agreement which provides for the holding of
assets in safekeeping for, or the prompt disbursement of assets to, the Fund.
Long-term debt rated BBB by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa by Moody's is regarded
by Moody's as a medium grade obligation, i.e., it is neither highly protected
nor poorly secured. Commercial paper rated A-3 by S&P indicates that S&P
believes such obligations exhibit adequate protection parameters but that
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 and issues of commercial paper rated P-3 by Moody's are considered
by Moody's to have an acceptable ability for repayment of short-term debt
obligations but the effect of industry characteristics and market compositions
may be more pronounced. The Fund ordinarily will purchase a Participation only
if, at the time of such purchase, the Fund believes that the party from whom
it is purchasing such Participation is retaining an interest in the underlying
Senior Loan. In the event that the Fund does not so believe, it will only
purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the 1940 Act, as qualified to serve as a custodian for a registered investment
company and (ii) has been approved as a custodian by the Board of Trustees of
the Fund (a "Designated Custodian").
The Fund may also purchase Assignments from Lenders. The purchaser of
an Assignment typically succeeds to all the rights and obligations under the
Loan Agreement of the assigning Lender and becomes a Lender under the Loan
Agreement with the same rights and obligations as the assigning Lender.
Assignments 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.
When the Fund is an Original Lender originating a Senior Loan it may
share in a fee paid to the Original Lenders. The Fund will never act as the
Agent or principal negotiator or administrator of a Senior Loan. When the Fund
is a Lender, it will have a direct contractual relationship with the Borrower,
may enforce compliance by the Borrower with the terms of the Loan Agreement
and may have rights with respect to any funds acquired by other Lenders
through set-off. Lenders also have full voting and consent rights under the
applicable Loan Agreement. Action subject to Lender vote or consent generally
requires the vote or consent of the holders of some specified percentage of
the outstanding principal amount of the Senior Loan. Certain decisions, such
as reducing the amount or increasing the time for payment of interest on or
repayment of principal of a Senior Loan, or releasing collateral therefor,
frequently require the unanimous vote or consent of all Lenders affected.
The Fund will purchase an Assignment or act as a Lender with respect
to a syndicated Senior Loan only where the Agent with respect to such Senior
Loan at the time of investment has outstanding debt or deposit obligations
rated investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. Further,
the Fund will not purchase interests in Senior Loans unless such Agent, Lender
or interpositioned person has entered into an agreement which provides for the
holding of assets in safekeeping for, or the prompt disbursement of assets to,
the Fund.
Loan Agreements typically provide for the termination of the Agent's
agency status in the event that it fails to act as required under the relevant
Loan Agreement, becomes insolvent, enters Federal Deposit Insurance
Corporation ("FDIC") receivership, or if not FDIC insured, enters into
bankruptcy. Should such an Agent, Lender or assignor with respect to an
Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the
Fund should not be included in such person's estate. If, however, any such
amount were included in such person's estate, the Fund would incur certain
costs and delays in realizing payment or could suffer a loss of principal or
interest. In such event, the Fund could experience a decrease in NAV.
The Fund may be required to pay and may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are
paid to Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment
penalties when a Borrower prepays all or part of a Senior Loan. The Fund will
receive these fees directly from the Borrower if the Fund is an Original
Lender, or, in the case of commitment fees and prepayment penalties, if the
Fund acquires an interest in a Senior Loan by way of Assignment. Whether or
not the Fund receives a facility fee from the Lender in the case of an
Assignment, or any fees in the case of a Participation, depends upon
negotiations between the Fund and the Lender selling such interests. When the
Fund is an assignee, it may be required to pay a fee, or forgo a portion of
interest and any fees payable to it, to the Lender selling the Assignment.
Occasionally, the assignor will pay a fee to the assignee based on the portion
of the principal amount of the Senior Loan which is being assigned. A Lender
selling a Participation to the Fund may deduct a portion of the interest and
any fees payable to the Fund as an administrative fee prior to payment thereof
to the Fund. The Fund may be required to pay over or pass along to a purchaser
of an interest in a Senior Loan from the Fund a portion of any fees that the
Fund would otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a Borrower may be required
in certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment
penalty. Because the interest rates on Senior Loans are periodically
redetermined at relatively short intervals, the Fund and the Adviser believe
that the prepayment of, and subsequent reinvestment by the Fund in, Senior
Loans will not have a materially adverse impact on the yield on the Fund's
portfolio and may have a beneficial impact on income due to receipt of
prepayment penalties, if any, and any facility fees earned in connection with
reinvestment.
A Lender may have certain obligations pursuant to a Loan Agreement,
which may include the obligation to make additional loans in certain
circumstances. The Fund currently intends to reserve against such contingent
obligations by segregating a sufficient amount of cash, liquid securities and
liquid Senior Loans as a reserve against such commitments. The Fund will not
purchase interests in Senior Loans that would require the Fund to make any
such additional loans if such additional loan commitments in the aggregate
would exceed 20% of the Fund's total assets or would cause the Fund to fail to
meet the diversification requirements set forth under the heading "Investment
Restrictions" in the SAI.
During normal market conditions, the Fund may invest up to 20% of its
total assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and junior debt securities acquired in connection with the Fund's
investments in Senior Loans. Such high quality, short-term securities may
include commercial paper rated at least in the top two rating categories of
either S&P or Moody's, or unrated commercial paper considered by the Adviser
to be of similar quality, interests in short-term loans of Borrowers having
short-term debt obligations rated or a short-term credit rating at least in
such top two rating categories or having no such rating but determined by the
Adviser to be of comparable quality, certificates of deposit and bankers'
acceptances and securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Such high quality, short-term securities may
pay interest at rates which are periodically redetermined or may pay interest
at fixed rates. If the Adviser determines that market conditions temporarily
warrant a defensive investment policy, the Fund may invest, subject to its
ability to liquidate its relatively illiquid portfolio of Senior Loans, up to
100% of its assets in cash and such high quality, short-term debt securities.
The Fund will acquire such warrants, equity and junior debt securities only as
an incident to the purchase or intended purchase of interests in
collateralized Senior Loans. Although the Fund generally will acquire
interests in warrants, equity and junior debt securities only when the Adviser
believes that the relative value being given by the Fund in exchange for such
interests is substantially outweighed by the potential value of such
instruments, investment in warrants, equity and junior debt securities entail
certain risks in addition to those associated with investments in Senior
Loans. Warrants and equity securities have a subordinate claim on a Borrower's
assets as compared with debt securities and junior debt securities have a
subordinate claim on such assets as compared with Senior Loans. As such, the
values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile
than those of Senior Loans.
The Fund also may invest up to 5% of its total assets in structured
notes with rates of return determined by reference to the total rate of return
on one or more loans referenced in such notes. The rate of return on the
structured note may be determined by applying a multiplier to the rate of
total return on the referenced loan or loans. Application of a multiplier is
comparable to the use of financial leverage, a speculative technique. Leverage
magnifies the potential for gain and the risk of loss; as a result, a
relatively small decline in the value of a referenced note could result in a
relatively large loss in the value of a structured note. Structured notes will
be treated as Senior Loans for purposes of the Fund's policy of normally
investing at least 80% of its assets in Senior Loans.
Use of Leverage
The Fund uses financial leverage for investment purposes. The Fund
has authority to do so through borrowings, including the issuance of debt
securities, or the issuance of preferred shares or through the use of certain
other transactions which have the effect of financial leverage.
Including the proceeds of the offering of the Preferred Shares, it is
currently anticipated that the amount of leverage will represent approximately
[ ]% (and in no event will it exceed 50%) of the Fund's total assets. In
addition to issuing Preferred Shares, the Fund borrows money through a
commercial paper program. It is currently anticipated that the amount of
leverage represented by the commercial paper program will be approximately [
]% of the Fund's total assets. The Fund's obligations under the commercial
paper program are senior to the Preferred Shares. Payments to holders of
Preferred Shares in liquidation or otherwise will be subject to the prior
payment of all outstanding indebtedness, including the Fund's obligations
under the commercial paper program. There can be no assurance that the
commercial paper will remain outstanding or that the Fund will continue such
borrowing.
The use of financial leverage creates the opportunity for increased
net income and NAV appreciation for the Fund's common shares. The concept of
leveraging is based on the premise that the return on the underlying portfolio
assets (including assets obtained from the leverage) will exceed the costs
related to such leverage. As the differential between the return on the
underlying assets and costs of leverage narrow, the incremental return is
reduced and a decline in the value of portfolio assets may completely offset
the incremental return differential. Leverage creates risks for holders of the
common shares, including the likelihood of greater volatility of NAV and
market price of the common shares, and the risk that fluctuations in interest
rates on borrowings and short-term debt or in the dividend rates on any
preferred shares may affect the return to the holders of the common shares. To
the extent the income or capital growth derived from securities purchased with
funds received from leverage exceeds the cost of leverage, the Fund's return
will be greater than if leverage had not been used. Conversely, if the income
or capital growth from the securities purchased with such funds is not
sufficient to cover the cost of leverage, the return on the Fund will be less
than if leverage had not been used, and therefore the amount available for
distribution to common shareholders as dividends and other distributions will
be reduced. The Fund generally will not utilize financial leverage if it
anticipates that it would result in a lower return to common shareholders over
time. As discussed under "Management of the Fund," the fees paid to the
Adviser and Administrator are calculated on the basis of the Fund's assets
including proceeds from borrowings for leverage and the issuance of preferred
shares, thus those fees will be higher when leverage is utilized.
Capital raised through leverage will be subject to interest costs or
dividend payments which may not exceed the income and appreciation on the
assets purchased. The Fund, among other things, also may be required to
maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest
rate. The issuance of additional classes of preferred shares involves offering
expenses and other costs and may limit the Fund's freedom to pay dividends on
common shares or to engage in other activities. Borrowings and the issuance of
preferred shares having priority over the Fund's common shares create an
opportunity for greater return per common share, but at the same time such
borrowing is a speculative technique in that it will increase the Fund's
exposure to capital risk. Unless the income and appreciation, if any, on
assets acquired with borrowed funds or offering proceeds exceed the cost of
borrowing or issuing additional classes of securities, the use of leverage
will diminish the investment performance of the Fund compared with what it
would have been without leverage.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset coverage and
portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more Rating
Agencies which may issue ratings for the corporate debt securities or
preferred shares issued by the Fund. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Adviser from managing the Fund's portfolio in
accordance with the Fund's investment objectives and policies. See
"Description of Commercial Paper Arrangements" and "Description of Preferred
Shares."
Under the 1940 Act, the Fund is not permitted to incur indebtedness
unless immediately after such incurrence the Fund has an asset coverage of at
least 300% of the aggregate outstanding principal balance of indebtedness
(i.e., such indebtedness may not exceed 33 1/3% of the Fund's total assets).
Additionally, under the 1940 Act, the Fund may not declare any dividend or
other distribution upon any class of its capital shares, or purchase any such
capital shares, unless the aggregate indebtedness of the Fund has, at the time
of the declaration of any such dividend or distribution or at the time of any
such purchase, an asset coverage of at least 300% after deducting the amount
of such dividend, distribution, or purchase price, as the case may be. Under
the 1940 Act, the Fund is not permitted to issue preferred shares unless
immediately after such issuance the net asset value of the Fund's portfolio is
at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the Fund's total assets).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such dividend or other distribution) is at least 200% of such liquidation
value.
The Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount the Fund will borrow or issue, will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on Adviser's ability to predict correctly interest rates and market movements,
and there is no assurance that a leveraging strategy will be successful during
any period in which it is employed.
The amount of outstanding borrowings may vary with prevailing market
or economic conditions.
Other Investment Practices
In connection with the investment objective and policies described
above, the Fund may engage in interest rate and other hedging transactions,
lend portfolio holdings, purchase and sell interests in Senior Loans and other
portfolio debt securities on a "when issued" or "delayed delivery" basis, and
enter into repurchase and reverse repurchase agreements. These investment
practices involve certain special risk considerations. The Adviser may use
some or all of the following investment practices when, in the opinion of the
Adviser, their use is appropriate. Although the Adviser believes that these
investment practices may further the Fund's investment objective, no assurance
can be given that these investment practices will achieve this result.
Interest Rate and Other Hedging Transactions. The Fund may enter into
various interest rate hedging and risk management transactions. Certain of
these interest rate hedging and risk management transactions may be considered
to involve derivative instruments. A derivative is a financial instrument
whose performance is derived at least in part from the performance of an
underlying index, security or asset. The values of certain derivatives can be
affected dramatically by even small market movements, sometimes in ways that
are difficult to predict. There are many different types of derivatives, with
many different uses. The Fund expects to enter into these transactions
primarily to seek to preserve a return on a particular investment or portion
of its portfolio, and may also enter into such transactions to seek to protect
against decreases in the anticipated rate of return on floating or variable
rate financial instruments the Fund owns or anticipates purchasing at a later
date, or for other risk management strategies such as managing the effective
dollar-weighted average duration of the Fund's portfolio. In addition, the
Fund may also engage in hedging transactions to seek to protect the value of
its portfolio against declines in NAV resulting from changes in interest rates
or other market changes. The Fund does not intend to engage in such
transactions to enhance the yield on its portfolio or to increase income
available for distributions. Market conditions will determine whether and in
what circumstances the Fund would employ any of the hedging and risk
management techniques described below. The Fund will not engage in any of the
transactions for speculative purposes and will use them only as a means to
hedge or manage the risks associated with assets held in, or anticipated to be
purchased for, the Fund's portfolio or obligations incurred by the Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Fund's portfolio
securities. The Fund believes that the Adviser possesses the skills necessary
for the successful utilization of hedging and risk management transactions.
The Fund will incur brokerage and other costs in connection with its hedging
transactions.
The Fund may enter into interest rate swaps or purchase or sell
interest rate caps or floors. The Fund will not sell interest rate caps or
floors that it does not own. Interest rate swaps involve the exchange by the
Fund with another party of their respective obligations to pay or receive
interest, e.g., an exchange of an obligation to make floating rate payments
for an obligation to make fixed rate payments. For example, the Fund may seek
to shorten the effective interest rate redetermination period of a Senior Loan
in its portfolio the Borrower to which has selected an interest rate
redetermination period of one year. The Fund could exchange the Borrower's
obligation to make fixed rate payments for one year for an obligation to make
payments that readjust monthly. In such event, the Fund would consider the
interest rate redetermination period of such Senior Loan to be the shorter
period.
The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest at the difference of the index and the
predetermined rate on a notional principal amount (the reference amount with
respect to which interest obligations are determined although no actual
exchange of principal occurs) from the party selling such interest rate cap.
The purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount from the party selling such interest rate
floor. The Fund will not enter into swaps, caps or floors if, on a net basis,
the aggregate notional principal amount with respect to such agreements
exceeds the net assets of the Fund.
In circumstances in which the Adviser anticipates that interest rates
will decline, the Fund might, for example, enter into an interest rate swap as
the floating rate payor or, alternatively, purchase an interest rate floor. In
the case of purchasing an interest rate floor, if interest rates declined
below the floor rate, the Fund would receive payments from its counterparty
which would wholly or partially offset the decrease in the payments it would
receive in respect of the portfolio assets being hedged. In the case where the
Fund purchases such an interest rate swap, if the floating rate payments fell
below the level of the fixed rate payment set in the swap agreement, the
Fund's counterparty would pay the Fund amounts equal to interest computed at
the difference between the fixed and floating rates over the notional
principal amount. Such payments would offset or partially offset the decrease
in the payments the Fund would receive in respect of floating rate portfolio
assets being hedged.
The successful use of swaps, caps and floors to preserve the rate of
return on a portfolio of financial instruments depends on the Adviser's
ability to predict correctly the direction and extent of movements in interest
rates. Although the Fund believes that use of the hedging and risk management
techniques described above will benefit the Fund, if the Adviser's judgment
about the direction or extent of the movement in interest rates is incorrect,
the Fund's overall performance would be worse than if it had not entered into
any such transactions. For example, if the Fund had purchased an interest rate
swap or an interest rate floor to hedge against its expectation that interest
rates would decline but instead interest rates rose, the Fund would lose part
or all of the benefit of the increased payments it would receive as a result
of the rising interest rates because it would have to pay amounts to its
counterparty under the swap agreement or would have paid the purchase price of
the interest rate floor.
Inasmuch as these hedging transactions are entered into for
good-faith risk management purposes, the Adviser and the Fund believe such
obligations do not constitute senior securities. The Fund will usually enter
into interest rate swaps on a net basis, i.e., where the two parties make net
payments with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued and an amount of cash or liquid securities having an
aggregate NAV at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. If the Fund enters into a swap on
other than a net basis, the Fund will maintain in the segregated account the
full amount of the Fund's obligations under each such swap. Accordingly, the
Fund does not treat swaps as senior securities. The Fund may enter into swaps,
caps and floors with member banks of the Federal Reserve System, members of
the NYSE or other entities determined by the Adviser, pursuant to procedures
adopted and reviewed on an ongoing basis by the Board of Trustees, to be
creditworthy. If a default occurs by the other party to such transaction, the
Fund will have contractual remedies pursuant to the agreements related to the
transaction but such remedies may be subject to bankruptcy and insolvency laws
which could affect the Fund's rights as a creditor. The swap market has grown
substantially in recent years with a large number of banks and financial
services firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations and they are less liquid than
swaps. There can be no assurance, however, that the Fund will be able to enter
into interest rate swaps or to purchase interest rate caps or floors at prices
or on terms the Adviser believes are advantageous to the Fund. In addition,
although the terms of interest rate swaps, caps and floors may provide for
termination, there can be no assurance that the Fund will be able to terminate
an interest rate swap or to sell or offset interest rate caps or floors that
it has purchased.
New financial products continue to be developed and the Fund may
invest in any such products as may be developed to the extent consistent with
its investment objective and the regulatory and federal tax requirements
applicable to investment companies.
Lending of Portfolio Holdings. The Fund may seek to increase its
income by lending financial instruments in its portfolio in accordance with
present regulatory policies, including those of the Board of Governors of the
Federal Reserve System and the SEC. Such loans may be made, without limit, to
brokers, dealers, banks or other recognized institutional borrowers of
financial instruments and would be required to be secured continuously by
collateral, including cash, cash equivalents or U.S. Treasury bills maintained
on a current basis at an amount at least equal to the market value of the
financial instruments loaned. The Fund would have the right to call a loan and
obtain the financial instruments loaned at any time on five days' notice. For
the duration of a loan, the Fund would continue to receive the equivalent of
the interest paid by the issuer on the financial instruments loaned and also
may receive compensation from the investment of the collateral.
The Fund would not have the right to vote any financial instruments
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
financial instruments or in anticipation of the giving or withholding of their
consent on a material matter affecting the financial instruments. As with
other extensions of credit, risks of delay in recovery or even loss of rights
in the collateral exist should the borrower of the financial instruments fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. The creditworthiness of firms to which the Fund lends its
portfolio holdings will be monitored on an ongoing basis by the Adviser
pursuant to procedures adopted and reviewed, on an ongoing basis, by the Board
of Trustees of the Fund. No specific limitation exists as to the percentage of
the Fund's assets which the Fund may lend.
"When Issued" and "Delayed Delivery" Transactions. The Fund may also
purchase and sell interests in Senior Loans and other portfolio securities on
a "when issued" and "delayed delivery" basis. No income accrues to the Fund on
such interests or securities in connection with such purchase transactions
prior to the date the Fund actually takes delivery of such interests or
securities. These transactions are subject to market fluctuation; the value of
the interests in Senior Loans and other portfolio debt securities at delivery
may be more or less than their purchase price, and yields generally available
on such interests or securities when delivery occurs may be higher or lower
than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a
price or yield considered to be advantageous. When the Fund is the buyer in
such a transaction, however, it will maintain, in a segregated account with
its custodian, cash or liquid securities having an aggregate value equal to
the amount of such purchase commitments until payment is made. The Fund will
make commitments to purchase such interests or securities on such basis only
with the intention of actually acquiring these interests or securities, but
the Fund may sell such interests or securities prior to the settlement date if
such sale is considered to be advisable. To the extent the Fund engages in
"when issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring interests or securities for the Fund's portfolio
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage. No specific limitation exists as to the
percentage of the Fund's assets which may be used to acquire securities on a
"when issued" or "delayed delivery" basis.
Repurchase Agreements. The Fund may enter into repurchase agreements
(a purchase of, and a simultaneous commitment to resell, a financial
instrument at an agreed upon price on an agreed upon date) only with member
banks of the Federal Reserve System and member firms of the NYSE. When
participating in repurchase agreements, the Fund buys securities from a
vendor, e.g., a bank or brokerage firm, with the agreement that the vendor
will repurchase the securities at a higher price at a later date. Such
transactions afford an opportunity for the Fund to earn a return on available
cash at minimal market risk, although the Fund may be subject to various
delays and risks of loss if the vendor is unable to meet its obligation to
repurchase. Under the 1940 Act, repurchase agreements are deemed to be
collateralized loans of money by the Fund to the seller. In evaluating whether
to enter into a repurchase agreement, the Adviser will consider carefully the
creditworthiness of the vendor. If the member bank or member firm that is the
party to the repurchase agreement petitions for bankruptcy or otherwise
becomes subject to the U.S. Bankruptcy Code, the law regarding the rights of
the Fund is unsettled. The securities underlying a repurchase agreement will
be marked to market every business day so that the value of the collateral is
at least equal to the value of the loan, including the accrued interest
thereon, and the Adviser will monitor the value of the collateral. No specific
limitation exists as to the percentage of the Fund's assets which may be used
to participate in repurchase agreements.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with respect to debt obligations which could otherwise
be sold by the Fund. A reverse repurchase agreement is an instrument under
which the Fund may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser (a commercial bank or a broker or
dealer) to sell the security back to the Fund at an agreed upon price on an
agreed upon date. The Fund will maintain in a segregated account with its
custodian cash or liquid securities in an amount sufficient to cover its
obligations with respect to reverse repurchase agreements. The Fund receives
payment for such securities only upon physical delivery or evidence of book
entry transfer by its custodian. Regulations of the SEC require either that
securities sold by the Fund under a reverse repurchase agreement be segregated
pending repurchase or that the proceeds be segregated on the Fund's books and
records pending repurchase. Reverse repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose
of the underlying securities. An additional risk is that the market value of
securities sold by the Fund under a reverse repurchase agreement could decline
below the price at which the Fund is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Fund and as such
would be subject to the restrictions on borrowing described in the SAI under
"Investment Restrictions." The Fund will not hold more than 5% of the value of
its total assets in reverse repurchase agreements.
Risk Factors
Risk is inherent in all investing. Before investing you should
consider carefully the following risks that you assume when you invest in
Preferred Shares.
Payment and Redemption Restrictions. Under the terms of the credit
agreements governing the commercial paper program, the Fund is not permitted
to declare dividends or other distributions, including dividends and
distributions with respect to Preferred Shares, or purchase or redeem shares,
including Preferred Shares unless (i) at the time thereof the Fund meets the
Credit Agreements Asset Coverage Test (as defined herein) and (ii) there is no
event of default under the credit facility program.
Leverage Risk. The Fund uses financial leverage for investment
purposes by employing leverage instruments (e.g., borrowing, issuing
commercial paper or notes and preferred shares of beneficial interest). The
amount of leverage represented by the commercial paper program as of July 31,
2003 was approximately [ ]% of the Fund's total assets. It is currently
anticipated that, after issuing the Preferred Shares offered in this
Prospectus and paying down a portion of the commercial paper program with the
proceeds, the amount of leverage will represent approximately [ ]% (and in no
event will it exceed 50%) of the Fund's total assets.
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. Borrowed funds pursuant to any credit facility constitute a
substantial lien and burden on the Preferred Shares by reason of their prior
claim against the income of the Fund and against the total assets of the Fund
in liquidation. In the event of a default under the commercial paper program,
the lenders have the right to cause a liquidation of the collateral (i.e.,
sell Senior Loans and other assets of the Fund) and if any such default is not
cured within five days of written notice by the lenders, the lenders can
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. It is anticipated that the Fund may reborrow amounts under the
commercial paper program as investment opportunities in additional Senior
Loans become available.
Because the fees paid to the Adviser and Administrator will be
calculated on the basis of the Fund's managed assets, those fees are higher
when leverage is utilized, giving the Adviser and Administrator an incentive
to utilize leverage.
Auction Risk. You may not be able to sell your Preferred Shares at an
auction if the auction fails, that is, if there are more Preferred Shares
offered for sale than there are buyers for those shares. Also, if you place
hold orders (orders to retain Preferred 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 Preferred 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.
Secondary Market Risk. Preferred Shares will not be listed on a stock
exchange or the Nasdaq Stock market. Broker-dealers may maintain a secondary
trading market in Preferred Shares outside of auctions, but may discontinue
this activity any time. You may transfer Preferred Shares outside of auctions
only to or through a broker-dealer or such other persons who may be permitted
by the Fund. If you try to sell your Preferred 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 rate period (a rate period of
more than 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 Preferred 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. Preferred Shares are not registered on a stock exchange or the NASDAQ
stock market. If you sell your Preferred Shares to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially
when market interest rates have risen since the last auction and especially
during a special rate period.
Ratings and Asset Coverage Risk. While Moody's and S&P assign ratings
of "Aaa" or "AAA" to the Preferred Shares, respectively, the ratings do not
eliminate or necessarily mitigate the risks of investing in Preferred Shares.
A rating agency could downgrade Preferred Shares, which may make the shares
less liquid at an auction or in the secondary market. If a rating agency
downgrades Preferred Shares, the dividend rate on the Preferred Shares will be
the applicable maximum rate based on the credit rating of the Preferred
Shares. See "Description of Preferred Shares" for a description of the asset
maintenance tests the Fund must meet.
The following are general risks of investing in the Fund:
Credit Risks and Realization of Investment Objective. Senior Loans,
like other corporate debt obligations, are subject to the risk of non-payment
of scheduled interest or principal. Such non-payment would result in a
reduction of income to the Fund, a potential reduction in the value of the
Senior Loan experiencing non-payment and a potential decrease in the NAV of
the Fund. Because the primary source of income for the Fund is the interest
and principal payments on the Senior Loans in which it invests, any payment
default by an issuer of a Senior Loan would have a negative impact on the
Fund's ability to pay dividends on the common shares or Preferred Shares, and
could result in the redemption of some or all of the Preferred Shares. As of
July 31, 2003, approximately [ ]% of the Fund's net assets and [ ]% of total
assets consisted of non-performing Senior Loans.
Although, with respect to collateralized Senior Loans, the Fund
generally will invest only in Senior Loans that the Adviser believes are
secured by specific collateral, which may include guarantees, the value of
which exceeds the principal amount of the Senior Loan at the time of initial
investment, there can be no assurance that the liquidation of any such
collateral 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. To the extent that a Senior
Loan is collateralized by stock in the Borrower or its subsidiaries, such
stock may lose all or substantially all of its value in the event of
bankruptcy of the Borrower. The Agent generally is responsible for determining
that the Lenders have obtained a perfected security interest in the collateral
securing the Senior Loan. In the event that the Fund does not believe that a
perfected security interest has been obtained with respect to a collateralized
Senior Loan, the Fund will only obtain an interest in such Senior Loan if the
Agent is a Designated Custodian. Some Senior Loans in which the Fund may
invest are subject to the risk that a court, pursuant to fraudulent conveyance
or other similar laws, could subordinate such Senior Loans to presently
existing or future indebtedness of the Borrower or take other action
detrimental to the holders of Senior Loans, such as the Fund, including, under
certain circumstances, invalidating such Senior Loans. Lenders commonly have
certain obligations pursuant to the Loan Agreement, which may include the
obligation to make additional loans or release collateral in certain
circumstances.
On behalf of the several Lenders, the Agent generally will be
required to administer and manage the Senior Loan and, with respect to
collateralized Senior Loans, to service or monitor the collateral. In this
connection, the valuation of assets pledged as collateral will reflect market
value and the Agent may rely on independent appraisals as to the value of
specific collateral. The Agent, however, may not obtain an independent
appraisal as to the value of assets pledged as collateral in all cases. The
Fund normally will rely primarily on the Agent (where the Fund is an Original
Lender or owns an Assignment) or the selling Lender (where the Fund owns a
Participation) to collect principal of and interest on a Senior Loan.
Furthermore, the Fund usually will rely on the Agent (where the Fund is an
Original Lender or owns an Assignment) or the selling Lender (where the Fund
owns a Participation) to monitor compliance by the Borrower with the
restrictive covenants in the Loan Agreement and notify the Fund of any adverse
change in the Borrower's financial condition or any declaration of insolvency.
Collateralized Senior Loans will frequently be secured by all assets of the
Borrower that qualify as collateral, which may include common stock of the
Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement
may require the Borrower to pledge additional collateral to secure the Senior
Loan, and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation
proceeds pro rata among the Lenders. 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. Lenders that have
sold Participation interests in such Senior Loan will distribute liquidation
proceeds received by the Lenders pro rata among the holders of such
Participations. The Adviser will also monitor these aspects of the Fund's
investments and, where the Fund is an Original Lender or owns an Assignment,
will be directly involved with the Agent and the other Lenders regarding the
exercise of credit remedies.
Senior Loans in which the Fund will invest historically have not been
rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and will not be
listed on any national securities exchange. Although the Fund will generally
have access to financial and other information made available to the Lenders
in connection with Senior Loans, the amount of public information available
with respect to Senior Loans will generally be less extensive than that
available for rated, registered or exchange listed securities. As a result,
the performance of the Fund and its ability to meet its investment objective
is more dependent on the analytical ability of the Adviser than would be the
case for an investment company that invests primarily in rated, registered or
exchange listed securities.
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 in
connection with highly leveraged transactions, the availability of Senior Loan
interests for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions may reduce or eliminate sources of financing
for certain Borrowers. Further, to the extent that legislation or federal or
state regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Adviser, is not indicative of fair value. Were the Fund to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in
such a sale with respect to such Senior Loan interest, the price at which the
Fund could consummate such a sale might be adversely affected.
Limited Secondary Market For Senior Loans. Although it is growing,
the secondary market for Senior Loans is currently limited. Senior Loans, at
present, generally are not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no active
trading market may exist for many of the Senior Loans in which the Fund will
invest. To the extent that a secondary market may exist for certain of the
Senior Loans in which the Fund invests, such market may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods. Senior Loans are thus relatively illiquid, which illiquidity 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. Liquidity relates to
the ability of the Fund to sell an investment in a timely manner. The market
for relatively illiquid securities tends to be more volatile than the market
for more liquid securities. The Fund has no limitation on the amount of its
assets which may be invested in securities which are not readily marketable or
are subject to restrictions on resale. The substantial portion of the Fund's
assets invested in Senior Loan interests may restrict the ability of the Fund
to dispose of its investments in a timely fashion and at a fair price, and
could result in capital losses to the Fund and holders of common shares.
However, many of the Senior Loans in which the Fund expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash, such as when the Fund tenders for its Common Shares, and may
result in the Fund borrowing to meet short-term cash requirements.
Interest Rate Risk. When interest rates decline, the value of a
portfolio invested in Senior Loans may rise. Conversely, when interest rates
rise, the value of a portfolio invested in Senior Loans may decline. Interest
rates are at historical lows and, as a result, it is likely that they will
rise. Because floating or variable rates on Senior Loans only reset
periodically, changes in prevailing interest rates may cause some fluctuations
in the Fund's NAV. Similarly, a sudden and significant increase in market
interest rates may cause a decline in the Fund's NAV. A material decline in
the Fund's NAV may impair the Fund's ability to maintain required levels of
asset coverage.
Investment in Non-US Issuers. The Fund may invest in Senior Loans and
debt securities of borrowers that are organized or located in countries other
than the United States, provided that such Senior Loans and debt securities
are denominated in U.S. dollars and provide for the payment of interest and
repayment of principal in U.S. dollars. Investments in non-U.S. issuers
involves special risks, including that non-U.S. issuers may be subject to less
rigorous accounting and reporting requirements than U.S. issuers, less
rigorous regulatory requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal judgments,
foreclose on collateral, possible restrictions on expatriation and
repatriation of capital and the potential for political, social and economic
adversity.
Leverage. 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 senior securities, must be at least equal, immediately after
any borrowing, to 300% of the aggregate value of borrowings represented by
senior securities. Any lender with respect to borrowings by the Fund may
require additional asset coverage provisions as well as restrictions on the
Fund's investment practices.
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
senior securities, must at least be equal, immediately after the issuance of
any Preferred Shares, to 200% of the aggregate liquidation value of the
Preferred Shares plus the aggregate amount of senior securities representing
indebtedness. The liquidation value of the Preferred Shares is equal their
aggregate original purchase price plus a redemption premium, if any, together
with any accrued and unpaid dividends thereon (on a cumulative basis), whether
or not earned or declared. The Fund seeks an "Aaa" rating by Moody's and an
"AAA" rating from Fitch for the Preferred Shares in connection with such a
rating of the Preferred Shares, asset coverage provisions in addition to and
more stringent than those required by the 1940 Act are imposed. In addition,
restrictions are imposed on certain investment practices in which the Fund may
otherwise engage. The rating agency requirements impose certain minimum issue
size, issuer geographical diversification and other requirements for
determining portfolio assets that are eligible for computing compliance with
their asset coverage requirements. A rating of the Preferred Shares does not
reflect a direct assessment of the credit quality of the Fund's portfolio and
is not an assessment of the investment characteristics of the common shares.
If the Fund's ratings on the Preferred Shares is subsequently lowered or
withdrawn, the Fund would likely be required to pay higher dividends on the
Preferred Shares. See "Description of Preferred Shares."
Investors should note that there are risks associated with issuing
Preferred Shares or borrowing in an effort to increase the yield on the common
shares, including higher volatility of both the NAV and the market value of
the common shares, and that fluctuations in the dividend rates on the
Preferred Shares or interest rates on the borrowing may affect the yield to
the common shareholders. So long as the Fund is able to realize a higher
return after expenses on its investment of the proceeds of the Preferred
Shares offering or of any borrowing than the then current dividend rates on
the Preferred Shares or interest rate on the borrowing, the effect of the
leverage will be to cause the common shareholders to realize a higher current
rate of return than if the Fund were not so leveraged. On the other hand, to
the extent that the then current dividend rates on the Preferred Shares or
interest rate on the borrowing approaches the return on such proceeds after
expenses or the value of portfolio securities otherwise decline, the benefit
of leverage to the common shareholders may be reduced or eliminated and could
even result in a lower rate of return to the common shareholders than if the
Fund were not leveraged. Since any decline in the net asset value of the
Fund's investments is borne entirely by the common shareholders, the effect of
leverage in a declining market would result in a greater decrease in net asset
value to the common shareholders than if the Fund were not so leveraged. Any
such decrease would likely be reflected in a decline in the market price for
common shares. The floating or variable rate nature of Senior Loans in which
the Fund invests helps mitigate against the risks of increased dividend or
interest costs as a result of increasing interest rates. The Adviser may also
seek to manage certain of the risks of financial leverage in anticipation of
changes in interest rates in a number of ways, including extending the length
of the dividend period on any Preferred Shares or interest rate period on any
borrowing so as to fix a dividend or an interest rate for a period of time,
"deleveraging" the Fund by redeeming all or a portion of the outstanding
Preferred Shares or repaying all or a portion of any outstanding borrowing,
entering into certain transactions in an effort to hedge against changes in
interest rates and purchasing securities the terms of which have elements of,
or are similar in effect to, certain hedging transactions in which the Fund
may engage. There can be no assurance that the Adviser can successfully manage
the risks of leverage.
The issuance of Preferred Shares or borrowing by the Fund entails
certain initial costs and expenses and certain ongoing administrative and
accounting expenses. These costs and expenses will be borne by the Fund and
will reduce the income or net assets available to common shareholders. If the
Fund's current investment income were not sufficient to meet dividend
requirements on any Preferred Shares or interest expenses on any borrowing,
the Fund might have to liquidate certain of its investments in order to meet
required dividend or interest payments, thereby reducing the net asset value
attributable to the Fund's common shares. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its common
shares unless, at the time of such declaration, the Fund meets certain asset
coverage requirements (determined after deducting the amount of such dividend
or distribution). Such prohibition on the payment of dividends or other
distributions might impair the ability of the Fund to maintain its
qualification, for federal income tax purposes, as a regulated investment
company. The Fund intends, however, to the extent possible to purchase or
redeem Preferred Shares from time to time or to repay borrowing, which may
involve the payment by the Fund of a premium and the sale by the Fund of
portfolio securities at a time when it may be disadvantageous to do so, to
maintain such asset coverage requirements. Subject to the restrictions of the
1940 Act, the Fund may "releverage" through the reissuance of Preferred Shares
or incurrence of new borrowing, and in connection with which the Fund, and
indirectly the common shareholders, would incur the expenses of such
releveraging.
If there are no preferred shares issued and outstanding, common
shareholders elect all of the Trustees of the Fund. If there are preferred
shares issued and outstanding, holders of any preferred shares, including the
Preferred Shares, elect two Trustees. Under the 1940 Act, upon failure by the
Fund to pay dividends on the Preferred Shares in an amount equal to two full
years' dividends arrearage, the holders of preferred shares, including the
Preferred Shares, are entitled to elect a majority of the Board of Trustees
until all such dividends arrearage has been paid or provided for.
The lenders with respect to any borrowing by the Fund may be entitled
to elect a majority of the Board of Trustees if certain asset coverage
requirements are not maintained. In addition, failure to maintain certain
asset coverage requirements may result in a default under the terms of any
Preferred Shares or borrowing. The terms of any borrowing may entitle holders
of the Preferred Shares or lenders, as the case may be, to elect a majority of
the Board of Trustees in certain other circumstances.
Restrictions imposed on the declaration and payment of dividends or
other distributions to the holders of the Fund's common shares and Preferred
Shares, both by the 1940 Act and by reason of requirements imposed by lenders
and rating agencies, might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax
purposes. While the Fund intends to pay down borrowings and redeem Preferred
Shares in order to permit the Fund to distribute its income as required to
maintain its qualification as a regulated investment company under the Code,
there can be no assurance that such actions can be effected in time to meet
Code requirements. See "Federal Taxation"
Income Risk. The Fund invests primarily in Senior Loans whose
interest rates reset frequently. If market interest rates fall, these interest
rates will be reset at lower levels, reducing the Fund's income.
Non-Diversification. The Fund has registered as a "non-diversified"
investment company so that, subject to its investment restrictions, it will be
able to invest more than 5% of the value of its assets in the obligations of
any single issuer, including Senior Loans of a single Borrower or
Participations purchased from a single Lender. See "Investment Restrictions"
in the SAI. The Fund does not intend, however, to invest more than 5% of the
value of its assets in interests in Senior Loans of a single Borrower. To the
extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to any single corporate,
economic, political or regulatory occurrence.
DESCRIPTION OF COMMERCIAL PAPER ARRANGEMENTS
The Fund has entered into a $700 million revolving credit agreement
with VVR Funding LLC, a Delaware limited liability company whose sole purpose
is the issuance of commercial paper. VVR Funding LLC has the authority to
issue a maximum of $700 million of commercial paper, at a discount, with
maturities of up to 180 days, the proceeds of which are used to make advances
of the Fund. This revolving credit agreement is secured by the assets of the
Fund. For the fiscal year ended July 31, 2003, the average daily balance of
borrowings under the revolving credit agreement was $472,686,578 with a
weighted average interest rate of 1.35%.
The credit agreements governing the revolving credit agreement (the
"Credit Agreements") include usual and customary covenants for their
respective type of transaction, including limits on the Fund's ability to (i)
issue preferred shares, (ii) incur liens or pledge portfolio securities, (iii)
change its investment objective or fundamental investment restrictions without
the approval of lenders, (iv) make changes in any of its business objectives,
purposes or operations that could result in a material adverse effect, (v)
make any changes in its capital structure, (vi) amend the Fund documents in a
manner which could adversely affect the rights, interests or obligations of
any of the lenders, (vii) engage in any business other than the businesses
currently engaged in, (viii) create, incur, assume or permit to exist certain
debt except for certain specified types of debt, and (ix) permit any of its
ERISA affiliates to cause or permit to occur an event that could result in the
imposition of a lien under the Code or ERISA. In addition, the Credit
Agreements do not permit the Fund's asset coverage ratio (as defined in the
Credit Agreements) to fall below 300% at any time (the "Credit Agreements
Asset Coverage Test").
The Credit Agreements limit the Fund's ability to pay dividends or
make other distributions, including with respect to the Preferred Shares, or
purchase or redeem shares, including Preferred Shares, unless the Fund
complies with the Credit Agreements Asset Coverage Test. In addition, the
Credit Agreements do not permit the Fund to declare dividends or other
distributions with respect to the Preferred Shares or purchase or redeem
shares of Preferred Shares (i) at any time that an event of default under a
Credit Agreement for the credit facility program has occurred and is
continuing; or (ii) if, after giving effect to such declaration, the Fund
would not meet the asset coverage ratios set forth in the Credit Agreements.
Under the requirements of the 1940 Act, the Fund must have asset
coverage of at least 300% immediately after any borrowing, including
borrowings under the credit facility program. For this purpose, asset coverage
means the ratio which the value of the total assets of the Fund, less
liabilities and indebtedness not represented by senior securities, bears to
the aggregate amount of borrowings representing indebtedness of the Fund.
The Credit Agreements have specified events of default which permit
the lenders to seek remedies against the assets of the Fund. These events of
default are customary for the types of transaction reflected by the Credit
Agreements and include: (i) cross-default and cross-acceleration events with
respect to the Fund or the Adviser; (ii) a bankruptcy or insolvency event with
respect to the Fund or Adviser; (iii) specified judgments against the Fund or
Adviser; (iv) misrepresentations by the Fund or Adviser to the lenders; (v)
liens by certain governmental agencies against the Fund or Adviser; (vi)
failure for the lenders to have a first priority perfected security interest
in the assets of the Fund; (vii) material modifications of certain specified
transaction documents; (viii) a material reduction in the value of the Fund's
investments; (ix) change of control or change of management in the Adviser;
and (x) failure to comply with terms of the Credit Agreements.
Without preferred shares issued and outstanding, common shareholders
elect all of the Trustees of the Fund. With preferred shares issued and
outstanding, holders of any preferred shares, including the Preferred Shares,
will elect two Trustees. Under the 1940 Act, upon failure by the Fund to pay
dividends on the Preferred Shares in an amount equal to two full years'
dividends arrearage, the holders of preferred shares, including the Preferred
Shares, shall be entitled to elect a majority of the Board of Trustees until
all such dividends arrearage has been paid or provided for.
The lenders with respect to any borrowing by the Fund may be entitled
to elect a majority of the Board of Trustees if certain asset coverage
requirements are not maintained. In addition, failure to maintain certain
asset coverage requirements may result in a default under the terms of any
Preferred Shares or borrowing. The terms of any borrowing may entitle holders
of the Preferred Shares or lenders, as the case may be, to elect a majority of
the Board of Trustees in certain other circumstances. See "Description of
Capital Structure."
NET ASSET VALUE
The net asset value per share of the Fund's common shares is
determined by calculating the total value of the Fund's assets, including
assets attributable to any Preferred Shares outstanding, deducting its total
liabilities, and dividing the result by the number of common shares
outstanding. The net asset value will be computed on each business day as of
5:00 p.m. Eastern time. The Fund reserves the right to calculate the net asset
value more frequently if deemed desirable.
Senior Loans will be valued by the Fund following valuation
guidelines established and periodically reviewed by the Fund's Board of
Trustees. Under the valuation guidelines, Senior Loans and securities for
which reliable market quotes are readily available are valued at the mean of
such bid and ask quotes and all other Senior Loans, securities and assets of
the Fund are valued at fair value in good faith following procedures
established by the Board of Trustees. Senior Loans will be valued by
independent pricing sources approved by the Fund's Board of Trustees, and
values for certain Senior Loans may be based upon pricing models developed,
maintained and operated by those pricing sources or valued by the Adviser by
considering a number of factors including consideration of market indicators,
transactions in instruments which the Adviser believes may be comparable
(including comparable credit quality, interest rate, interest rate
redetermination period and maturity), the credit worthiness of the Borrower,
the current interest rate, the period until next interest rate redetermination
and the maturity of such Senior Loan interests. Consideration of comparable
instruments may include commercial paper, negotiable certificates of deposit
and short-term variable rate securities which have adjustment periods
comparable to the Senior Loan interests in the Fund's portfolio. The fair
value of Senior Loans are reviewed and approved by the Fund's Valuation
Committee and by the Fund's Trustees. To the extent that an active secondary
trading market in Senior Loan interests develops to a reliable degree, the
Fund may rely to an increasing extent on market prices and quotations in
valuing Senior Loan interests in the Fund's portfolio. The Fund and Trustees
will continue to monitor developments in the Senior Loan market and will make
modifications to the current valuation methodology as deemed appropriate.
It is expected that the Fund's net asset value will fluctuate as a
function of interest rate and credit factors. Because of the short-term,
adjustable rate nature of such instruments held by the Fund, however, the
Fund's net asset value is expected to fluctuate less in response to changes in
interest rates than the net asset values of investment companies with
portfolios consisting primarily of traditional longer-term, fixed-income
securities. In light of the senior nature of Senior Loan interests that may be
included in the Fund's portfolio and taking into account the Fund's access to
non-public information with respect to Borrowers relating to such Senior Loan
interests, the Fund does not currently believe that consideration on a
systematic basis of ratings provided by any nationally recognized statistical
rating organization or price fluctuations with respect to long- or short-term
debt of such Borrowers subordinate to the Senior Loans of such Borrowers is
necessary for a determination of the value of such Senior Loan interests.
Accordingly, the Fund generally will not systematically consider (but may
consider in certain instances) and, in any event, will not rely upon such
ratings or price fluctuations in determining the value of Senior Loan
interests in the Fund's portfolio.
Securities other than Senior Loans held in the Fund's portfolio
(other than short-term obligations, but including listed issues) 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 that 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
the securities, or the last quoted bid 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. The value of interest rate swaps
will be determined in accordance with a discounted present value formula and
then confirmed by obtaining a bank quotation.
Short-term obligations held by the Fund that mature in 60 days or
less are valued at amortized cost, if their original term to maturity when
acquired by the Fund was 60 days or less, or are valued at amortized cost
using their value on the 61st day prior to maturity, if their original term to
maturity when acquired by the Fund was more than 60 days, unless in each case
this is determined not to represent fair value. Repurchase agreements will be
valued at cost plus accrued interest. Securities for which there exist no
price quotations or valuations and all other assets are valued at fair value
as determined in good faith by or on behalf of the Trustees.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred
Shares. For the complete terms of the Preferred Shares, you may refer to the
Fund's Certificate filed as an exhibit to the Fund's registration statement on
Form N-2.
The Fund's Declaration of Trust authorizes the issuance of up to
100,000,000 shares of beneficial interest with preference rights, including
the Preferred Shares, having a par value of $0.01 per share, in one or more
series, with rights as determined by the Board of Trustees, by action of the
Board of Trustees without the approval of the common shareholders.
Under the requirements of the 1940 Act, the Fund must, immediately
after the issuance of the Preferred Shares, have an "asset coverage" of at
least 200%. With respect to the Preferred Shares, asset coverage means the
ratio which the value of the total assets of the Fund, less all liability and
indebtedness not represented by senior securities (as defined in the 1940
Act), bears to the aggregate amount of senior securities representing
indebtedness of the Fund, if any, plus the aggregate liquidation preference of
the Preferred Shares.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Fund, the terms of the Preferred Shares may entitle the
holders of Preferred Shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative basis) before any distribution of
assets is made to holders of common shares but after payment is made with
respect to outstanding commercial paper or any other senior obligations of the
Fund. After payment of the full amount of the liquidating distribution to
which they are entitled, the Preferred Shareholders would not be entitled to
any further participation in any distribution of assets by the Fund.
Summary of Auction Procedures
The following is a brief summary of the auction procedures. They are
described in more detail in the SAI. The auction determines the dividend rate
for Preferred Shares, but the dividend rate will not be higher than the
maximum rate. See "Description of Preferred Shares -- Dividends and Dividend
Periods." You may buy, sell or hold Preferred Shares in the auction.
If you own shares of Preferred Shares, you may instruct, orally or in
writing, a broker-dealer to enter an order in the auction. Existing holders of
Preferred Shares can enter three kinds of orders regarding their Preferred
Shares: sell, bid, and hold.
o Sell Order - If you enter a sell order, you indicate that you
want to sell shares of such series at $25,000 per share, without
regard to applicable rate for such series for the next dividend
period.
o Bid - If you enter a bid (or "hold at a rate") order, you
indicate that you want to sell shares of such series at $25,000
per share only if the next rate period's dividend rate is less
than the rate you specify in a bid.
o Hold Order - If you enter a hold order, you indicate that you
want to continue to own such series, without regard to the
applicable rate for shares of such series for the next dividend
period.
You may submit different types of orders for your Preferred Shares,
as well as orders for additional Preferred Shares. All orders must be for
whole shares. All orders you submit are irrevocable. There are a fixed number
of Preferred Shares, and the dividend rate likely will vary from auction to
auction depending on the number of bidders, the number of shares the bidders
seek to buy, and general economic conditions including current interest rates.
If you own Preferred Shares and submit a bid higher than the maximum rate,
your bid will be treated as a sell order. If you do not enter an order, the
broker-dealer will assume that you want to continue to hold Preferred Shares,
but if you fail to submit an order and the rate period is longer than 7 days,
the broker-dealer will treat your failure to submit a bid as a sell order.
If you do not currently own Preferred Shares, or want to buy more
shares, you may instruct a broker-dealer to enter a bid order to buy shares in
an auction at $25,000 per share at or above a specified dividend rate. If your
bid specifies a rate higher than the maximum rate, your order will not be
accepted.
Broker-dealers will submit orders from existing and potential
shareholders to the auction agent. Neither the Fund nor the auction agent will
be responsible for a broker-dealer's failure to submit orders from existing
shareholders and potential shareholders. A broker-dealer's failure to submit
orders for Preferred Shares held by it or its customers will be treated in the
same manner as a shareholder's failure to submit an order to the
broker-dealer. A broker-dealer may submit orders to the auction agent for its
own account provided it is not an affiliate of the Fund.
The auction agent after each auction for Preferred 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
seven-day rate period, or a percentage agreed to by the Fund and the
broker-dealers, in the case of any auction immediately preceding a special
dividend period, of the purchase price of Preferred Shares placed by the
broker-dealers at the auction.
If the number of Preferred Shares subject to bid orders with a
dividend rate equal to or lower than the maximum rate for Preferred Shares is
at least equal to the number of Preferred Shares subject to sell orders, then
the dividend rate for the next rate period will be the lowest rate submitted
which, taking into account that rate and all lower rates submitted in order
from existing and potential shareholders, would result in existing and
potential shareholders owning all the Preferred Shares available for purchase
in the auction.
If the number of Preferred Shares subject to bid orders with a
dividend rate equal to or lower than the maximum rate for Preferred Shares is
less than the number of Preferred Shares subject to sell orders, then the
auction is considered to be a failed auction, and the dividend rate will be
the maximum rate. In that event, existing shareholders that have submitted
sell orders (or are treated as having submitted sell orders) may not be able
to sell any or all of the shares for which they submitted sell orders.
The auction agent will not accept a bid above the maximum rate. The
purpose of the maximum rate is to place an upper limit on dividends of
Preferred Shares and in so doing to help protect the earnings available to pay
common share dividends, and to serve as the dividend rate in the event of a
failed auction (that is, an auction where there are more Preferred Shares
offered for sale than there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding Preferred Shares, that is considered an "all hold" auction and the
dividend rate for the next rate period will be the all hold rate. The "all
hold rate" is 80% of the "AA" Financial Composite Commercial Paper Rate (the
interest equivalent of rates applicable to "AA"-rated securities for time
periods that vary depending on the dividend period).
The auction procedures include a pro rata allocation of shares for
purchase and sale. This allocation process may result in an existing
shareholder continuing to hold or selling, or a potential shareholder buying,
fewer shares than the number of shares in its order. If this happens,
broker-dealers will be required to make appropriate pro rata allocations among
their customers.
Settlement of purchases and sales will be made on the next business
day (which also is a dividend payment date) after the auction date through The
Depository Trust Company. Purchasers will pay for their shares through
broker-dealers in same-day funds to The Depository Trust Company against
delivery to the broker-dealers. The Depository Trust Company will make payment
to the sellers' broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the NYSE is open
for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in New York, New York are authorized or obligated by law to close.
The auctions for each series of Preferred Shares will normally be
held every seven days, and each subsequent dividend period will normally begin
on the following business day.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding Preferred Shares, and three current
shareholders. The three current shareholders and three potential shareholders
submit orders through broker-dealers at the auction:
Current Shareholder A Owns 500 shares, wants to sell all 500 Bid order of 1.5% for all 500
shares if auction rate is less than shares
1.5%
Current Shareholder B Owns 300 shares, wants to hold Hold order--will take the
auction rate
Current Shareholder C Owns 200 shares, wants to sell all 200 Bid order of 1.3% rate for
shares if auction rate is less than all 200 shares
1.3%
Potential Shareholder D Wants to buy 200 shares Places order to buy at or
above 1.4%
Potential Shareholder E Wants to buy 300 shares Places order to buy at or
above 1.3%
Potential Shareholder F Wants to buy 200 shares Places order to buy at or
above 1.5%
The lowest dividend rate that will result in all 1,000 Preferred
Shares continuing to be held is 1.4% (the offer by D). Therefore, the dividend
rate will be 1.4%. Current shareholders B and C will continue to own their
shares. Current shareholder A will sell its shares because A's dividend rate
bid was higher than the dividend rate. Potential shareholder D will buy 200
shares and potential shareholder E will buy 300 shares because their bid rates
were at or below the dividend rate. Potential shareholder F will not buy any
shares because its bid rate was above the dividend rate.
Secondary Market Trading and Transfer of Preferred Shares
The broker-dealers (including the underwriters) expect, but are not
obligated, to maintain a secondary trading market in Preferred Shares outside
of auctions, and may discontinue such activity at any time. There can be no
assurance that a secondary trading market for Preferred Shares will develop
or, if it does develop, that it will provide owners with liquidity of
investment. The Preferred Shares will not be registered on any stock exchange
or on the NASDAQ stock market. Investors who purchase Preferred Shares in an
auction for a special rate period should note that because the dividend rate
on such shares will be fixed for the length of that rate period, the value of
such shares may fluctuate in response to the changes in interest rates, and
may be more or less than their original cost if sold on the open market in
advance of the next auction thereof, depending on market conditions.
An existing shareholder may sell, transfer, or otherwise dispose of
Preferred 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
Preferred 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 shareholder 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.
Dividends and Dividend Periods
General. The following is a general description of dividends and rate
periods for the Preferred Shares. See the SAI for a more detailed discussion
of this topic. The dividend rate for the initial rate period for Preferred
Shares offered in this Prospectus will be the rate set out on the cover of
this Prospectus. For subsequent rate periods, Preferred Shares will pay
dividends based on a rate set at the auction, normally held weekly, but the
rate set at the auction will not exceed the maximum rate. Rate periods
generally will be seven days, and a rate period generally will begin on the
first calendar day after an auction for such series. In most instances,
dividends are also paid weekly, on the business day following the end of the
rate period. The Fund, subject to some limitations, may change the length of
rate periods, designating them as "special rate periods." See "--Designation
of Special Rate Periods."
Dividend Payments. Except as provided below, the dividend payment
date will be the first business day after the rate period ends. The dividend
payment date for special rate periods of more than 7 days will be set out in
the notice designating a special rate period. See "--Designation of Special
Rate Periods" for a discussion of payment dates for a special rate period.
Dividends on Preferred Shares will be paid on the dividend payment
date to holders of record as their names appear on the Fund's record books on
the business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time to holders of record as
their names appear on the Fund's record books on such date, not more than 15
days before the payment date, as the Fund's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current
procedures, is expected to credit in same-day funds on each dividend payment
date dividends received from the Fund to the accounts of broker-dealers who
act on behalf of holders of Preferred Shares. Such broker-dealers, in turn,
are expected to distribute dividend payments to the person for whom they are
acting as agents. If a broker-dealer does not make dividends available to
holders of Preferred Shares in same-day funds, these shareholders will not
have funds available until the next business day.
Dividend Rate Set at Auction. Preferred Shares pay dividends based on
a rate set at auction. The auction usually is held weekly, but may be held
less frequently. The auction sets the dividend rate, and Preferred Shares may
be bought and sold at the auction. [The Bank of New York], the auction agent,
reviews orders from broker-dealers on behalf of existing shareholders that
wish to sell, hold at the auction rate, or hold only at a specified rate, and
on behalf of potential shareholders that wish to buy Preferred Shares. The
auction agent then determines the lowest dividend rate that will result in all
of the outstanding Preferred Shares continuing to be held. The shares in this
offering will trade at auctions starting in the week following this offering.
See "The Auction."
Determination of Dividend Rates. The Fund computes the dividends per
share of each series of Preferred Shares by multiplying the dividend rate
determined at the auction by a fraction, the numerator of which normally is
seven and the denominator of which is 360. This rate is then multiplied by
$25,000 to arrive at the dividend per share. The numerator may be different if
the rate period includes a holiday.
If an auction for any subsequent rate period of Preferred Shares is
not held for any reason other than as described below, the dividend rate on
those shares will be the maximum rate on the auction date for that subsequent
rate period.
Maximum Rate. The dividend rate that results from an auction for
Preferred Shares will not be greater than the "maximum rate." The maximum rate
means the applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such auction determined as set forth below based on
the lower of the credit ratings assigned to the Preferred Shares by Moody's
and S&P:
Moody's Credit Rating Fitch Credit Rating Applicable Percentage
--------------------- ------------------- ---------------------
aa3 or Above AA- or Above 150%
a3 to a1 A- to A+ 160%
baa3 to baa1 BBB- to BBB+ 250%
Below baa3 Below BBB- 275%
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund
fails to pay, in a timely manner, the auction agent the full amount of any
dividend on any Preferred Shares, but the Fund cures the failure and pays any
late charge before 12:00 noon New York City time on the third business day
following the date the failure occurred, no auction will be held for Preferred
Shares of that series for the first subsequent rate period thereafter, and the
dividend rate for Preferred Shares of that series for that subsequent rate
period will be the maximum rate.
However, if the Fund does not effect a timely cure, no auction will
be held for Preferred Shares of that series for the first subsequent rate
period thereafter (and for any rate period thereafter, to and including the
rate period during which the failure is cured and the late charge is paid),
and the dividend rate for Preferred Shares of that series for each subsequent
rate period will be the default rate.
The default rate means 300% of the applicable "AA" Financial
Composite Commercial Paper Rate for a dividend period of fewer than 184 days
and 300% of the applicable Treasury Index Rate for a dividend period of 184
days or more. Late charges are also calculated at the applicable default rate.
Restrictions on Dividends and Other Distributions. When the Fund has
any Preferred Shares outstanding, the Fund may not pay any dividend or
distribution (other than a dividend or distribution paid in shares, or
options, warrants or rights to subscribe for or purchase, common shares) in
respect of common shares or call for redemption, redeem, purchase or otherwise
acquire for consideration any common shares (except by conversion into or
exchange for shares of the Fund ranking junior to the Preferred Shares as to
the payment of dividends and the distribution of assets upon liquidation),
unless (1) it has paid all cumulative dividends on Preferred Shares; (2) it
has redeemed any Preferred Shares that it has called for mandatory redemption;
and (3) after paying the dividend, the Fund meets both asset coverage
requirements described under "Rating Agency Guidelines."
Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on any series of shares of the Fund
ranking, as to the payment of dividends, on a parity with the Preferred Shares
for any period unless full cumulative dividends have been or contemporaneously
are declared and paid on the Preferred Shares through their most recent
dividend payment date. When dividends are not paid in full upon the Preferred
Shares through their most recent dividend payment date or upon any other
series of shares ranking on a parity as to the payment of dividends with
Preferred Shares through their most recent respective dividend payment dates,
all dividends declared upon Preferred Shares and any other such series of
shares ranking on a parity as to the payment of dividends with Preferred
Shares shall be declared pro rata so that the amount of dividends declared per
share on Preferred Shares and such other series of preferred shares shall in
all cases bear to each other the same ratio that accumulated dividends per
share on the Preferred Shares and such other series of preferred shares bear
to each other.
Designation of Special Rate Periods
The Fund may instruct the auction agent to hold auctions and pay
dividends less frequently than weekly. The Fund may do this if, for example,
the Fund expects that short-term rates might increase or market conditions
otherwise change, in an effort to optimize the effect of the Fund's leverage
on common shareholders. The Fund does not currently expect to hold auctions
and pay dividends less frequently than weekly in the near future. If the Fund
designates a special rate period, changes in interest rates could affect the
price received if the shares were sold in the secondary market.
Before the Fund designates a special rate period: (1) at least 7
business days (or 2 business days in the event the duration of the dividend
period prior to such special rate period is less than 8 days) and not more
than 30 business days before the first day of the proposed special rate
period, the Fund must issue a press release stating its intention to designate
a special rate period and inform the auction agent of the proposed special
rate period by telephonic or other means and confirm it in writing promptly
thereafter and (2) the Fund must inform the auction agent of the proposed
special rate period by 3:00 p.m. New York City time on the second business day
before the first day of the proposed special rate period.
Voting Rights
In addition to voting rights described below under "Description of
Capital Structure" and in the SAI under "Investment Restrictions," holders of
preferred shares, including the Preferred Shares, voting as a separate class,
are entitled to elect (1) two Trustees of the Fund at all times and (2) a
majority of the Trustees if at any time dividends on Preferred Shares shall be
unpaid in an amount equal to two years' dividends thereon, and to continue to
be so represented until all dividends in arrears shall have been paid or
otherwise provided for. So long as any of the Preferred Shares are
outstanding, the Fund will not, without the affirmative vote of the holders of
a majority of the outstanding Preferred Shares; (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 parity with the Preferred
Shares or any other series of preferred shares with respect to the payment of
dividends or the distribution of assets on liquidation; (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
Preferred Shares, (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 Paying
Agent and the Auction Agent; or (vi) create, authorize, issue, incur or suffer
to exist any indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness, except the Fund may borrow as may be permitted
by the Fund's investment restrictions; provided, however, that transfers of
assets by the Fund subject to an obligation to repurchase shall not be deemed
to be indebtedness for purposes of this provision to the extent that after any
such transaction the Fund has eligible assets with an aggregate discounted
value at least equal to the Preferred Shares Basic Maintenance Amount as of
the immediately preceding valuation date.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares 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 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 each Rating Agency 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 each Rating Agency of the results of such vote.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares of any series, voting separately from any other series, shall
be required with respect to any matter that materially and adversely affects
the rights, preferences, or powers of that series in a manner different from
that of other series or classes of the Fund's shares of capital stock. 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 series described in this paragraph will in each case be
in addition to a separate vote of the requisite percentage of common shares
and/or preferred shares necessary to authorize the action in question.
Redemption
Mandatory Redemption. In the event the Fund does not timely cure a
failure to (1) maintain a discounted value of its portfolio equal to the
Preferred Shares Basic Maintenance Amount, (2) maintain the 1940 Act Preferred
Shares Asset Coverage, or (3) file a required certificate related to asset
coverage on time, the Preferred Shares will be subject to mandatory redemption
out of funds legally available therefor in accordance with the Declaration of
Trust, the Certificate and applicable law, at the redemption price of $25,000
per share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption. Any such redemption will be limited to the number of Preferred
Shares necessary to restore the required discounted value or the 1940 Act
Preferred Shares Asset Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed
in accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, as the case may be,
pro rata among the Preferred Shares and other preferred shares of the Fund,
subject to redemption or retirement. If fewer than all outstanding shares of
any series are, as a result, to be redeemed, the Fund may redeem such shares
by lot or other method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem Preferred Shares having a
dividend period of one year or less, in whole or in part, on the business day
after the last day of such dividend period upon not less than 15 calendar days
and not more than 40 calendar days prior notice. The optional redemption price
per share shall be $25,000 per share, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date fixed
for redemption. Preferred Shares having a dividend period of more than one
year are redeemable at the option of the Fund, in whole or in part, 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 Preferred Shares by reason of the redemption of Preferred Shares on
such date fixed for the redemption and (ii) the Fund would have eligible
assets with an aggregate discounted value at least equal to the Preferred
Shares Basic Maintenance Amount.
Notwithstanding the foregoing, no Preferred Shares may be redeemed at
the option of the Fund unless all dividends in arrears on the outstanding
Preferred Shares, including all outstanding preferred shares, 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 outstanding
preferred shares pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to holders of all
outstanding preferred shares.
Liquidation
Subject to the rights of holders of any series ranking on a parity
with Preferred Shares with respect to the distribution of assets upon
liquidation of the Fund, whether voluntary or involuntary, the holders of
Preferred Shares then outstanding will be entitled to receive and to be paid
out of the assets of the Fund available for distribution to its shareholders,
before any payment or distribution shall be made on the common shares but
after payments are made on the Fund's commercial paper program and other
senior obligations, an amount equal to the liquidation preference with respect
to such shares ($25,000 per share), plus an amount equal to all dividends
thereon (whether or not earned or declared) accumulated but unpaid to and
including the date of final distribution. After the payment to the holders of
the Preferred Shares of the full preferential amounts provided for as
described herein, the holders of the Preferred Shares as such shall have no
right or claim to any of the remaining assets of the Fund.
Neither the consolidation nor merger of the Fund with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer
by the Fund of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Fund for the
purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES
The Fund is required under Moody's and S&P guidelines to maintain
assets having in the aggregate a discounted value at least equal to the
Preferred Shares Basic Maintenance Amount. Moody's and Fitch have each
established separate guidelines for determining discounted value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of discounted value (as defined by such rating
agency). The Moody's and Fitch guidelines also impose certain diversification
requirements on the Fund's overall portfolio. The Preferred Shares Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation
preference of the Preferred Shares then outstanding, (ii) the total principal
of any senior debt (plus accrued and projected dividends), (iii) certain Fund
expenses and (iv) certain other current liabilities.
The Fund is also required under rating agency guidelines to maintain,
with respect to the Preferred Shares, as of the last business day of each
month in which any Preferred Shares are outstanding, asset coverage of at
least 200% with respect to senior securities which are shares of beneficial
interest in the Fund, including Preferred 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 shares of a closed-end
investment company as a condition of declaring dividends on its common shares)
("1940 Act Preferred Shares Asset Coverage"). Based on the Fund's assets and
liabilities as of December ___, 2003 the 1940 Act Preferred Shares Asset
Coverage with respect to Preferred Shares and assuming the issuance of all
Preferred Shares offered hereby and the use of the proceeds as intended, would
be computed as follows:
Value of Fund assets less
liabilities not constituting $[ ]
senior securities
---------------------------------- = ------------ = [ ]%
Senior securities representing $[ ]
indebtedness plus liquidation
value of the Preferred Shares
In the event the Fund does not timely cure a failure to maintain (i)
a discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (ii) the 1940 Act Preferred Shares Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the Preferred Shares, the Fund will be required to redeem
Preferred Shares as described above under "Description of Preferred
Shares--Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. The Board of Trustees may, without shareholder
approval, amend, alter, add to or repeal any or all of the definitions and
related provisions which have been adopted by the Fund pursuant to the rating
agency guidelines in the event the Fund receives written confirmation from
Moody's or Fitch, or both, as appropriate, that any such change would not
impair the ratings then assigned by Moody's and Fitch to Preferred Shares.
As described by Moody's and Fitch, a preferred share rating is an
assessment of the capacity and willingness of an issuer to pay preferred share
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell Preferred Shares, inasmuch as the ratings do not
comment as to market price or suitability for a particular investor. The
rating agency guidelines described above also do not address the likelihood
that an owner of Preferred Shares will be able to sell such shares in an
auction or otherwise. The ratings are based on current information furnished
to Moody's and Fitch by the Fund and the Adviser, and information obtained
from other sources. The ratings may be changed, suspended or withdrawn as a
result of changes in, or the unavailability of, such information.
The rating agency guidelines will apply to Preferred Shares only so
long as such rating agency is rating such shares. The Fund will pay fees to
Moody's or Fitch, or both, for rating Preferred Shares.
MANAGEMENT OF THE FUND
Board of Trustees
The Fund's Board of Trustees are responsible for the overall
management and supervision of the Fund's business, including the review and
supervision of the duties performed by the Adviser under the Fund's investment
advisory agreement.
The Adviser
The Adviser was incorporated as a Delaware corporation in 1982. The
Adviser is a wholly-owned subsidiary of Van Kampen Investments. Van Kampen
Investments is an indirect wholly-owned subsidiary of Morgan Stanley. The
Adviser's principal office is located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Van Kampen Investments is a diversified asset management company that
administers more than three million retail investor accounts, has extensive
capabilities for managing institutional portfolios and has more than $__
billion under management or supervision as of December, 2003. Van Kampen
Investments has more than 50 open-end funds, more than 30 closed-end funds and
more than 2,700 unit investment trusts that are distributed by authorized
dealers nationwide.
Morgan Stanley is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Investment Advisory Agreement
The investment advisory agreement (the "Advisory Agreement") between
the Adviser and the Fund provides that the Adviser will supply investment
research and portfolio management, including the selection of securities for
the Fund to purchase, hold or sell and the selection of financial institutions
through whom the Fund's portfolio transactions are executed. For the services
provided by the Adviser under the Advisory Agreement, the Fund pays the
Adviser a monthly fee (accrued daily and paid monthly) computed based upon an
annual rate equal to 0.85% applied to the average daily managed assets of the
Fund (which for purposes of determining such fee, shall mean the average daily
gross asset value of the Fund, minus the sum of accrued liabilities other than
the aggregate amount of any borrowings undertaken by the Fund). Because
leverage will increase the amount of total assets, the Fund will pay a greater
amount of advisory fees when leverage is utilized. Under the Advisory
Agreement, the Adviser also furnishes offices and necessary facilities and
equipment, and permits its officers and employees to serve without
compensation as trustees and officers of the Fund if duly elected to such
positions. The Fund pays all other expenses incurred in the operation of the
Fund including, but not limited to, direct charges relating to the purchase
and sale of financial instruments in its portfolio, interest charges, fees and
expenses of legal counsel and independent auditors, taxes and governmental
fees, cost of share certificates, expenses (including clerical expenses) of
issuance, sale or repurchase of any of the Fund's portfolio holdings, expenses
in connection with the Fund's dividend reinvestments, membership fees in trade
associations, expenses of registering and qualifying the common shares of the
Fund for sale under federal and state securities laws, expenses of printing
and distributing reports, notices and proxy materials to existing holders of
common shares, expenses of filing reports and other documents filed with
governmental agencies, expenses of annual and special meetings of holders of
common shares, fees and disbursements of the transfer agents, custodians and
sub-custodians, expenses of disbursing dividends and distributions, fees,
expenses and out-of-pocket costs of Trustees of the Fund who are not
affiliated with the Adviser, insurance premiums, indemnification and other
expenses not expressly provided for in the Advisory Agreement or the
Administration Agreement and any extraordinary expenses of a nonrecurring
nature. The Adviser may in its sole discretion from time to time waive all or
a portion of the advisory fee or reimburse the Fund for all or a portion of
its other expenses.
The Advisory Agreement continues from year to year, unless earlier
terminated as described below, if approved annually (a) by the Trustees of the
Fund or by a majority of the Fund's common shares and (b) by a majority of the
Trustees who are not parties to the agreement or interested persons of any
such party, in compliance with the requirements of the 1940 Act. The Advisory
Agreement may be terminated without penalty upon 60 days written notice by
either party and will automatically terminate in the event of assignment. The
Advisory Agreement provides that the Adviser shall not be liable for any error
of judgment or of law, or for any loss suffered by the Fund in connection with
the matters to which the Advisory Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the Advisory Agreement.
Portfolio Management
Howard Tiffen, Senior Vice President of the Adviser and Vice
President of the senior loan funds advised by the Adviser, is primarily
responsible for the day-to-day management of the Fund. Mr. Tiffen assumed
portfolio management responsibilities for the Fund in December 1999. Mr.
Tiffen also has primary responsibility for the day-to-day management of the
Van Kampen Senior Floating Rate Fund and the Van Kampen Prime Rate Income
Trust, each a continuously offered closed end investment company investing
primarily in Senior Loans and having investment objectives and policies
substantially similar to those of the Fund. Mr. Tiffen has over 25 years of
investment experience and manages, as of [ ], 2003, over $[ ] billion in
senior loan assets for Van Kampen. Prior to joining the Adviser, Mr. Tiffen
was a senior portfolio manager for the senior loan fund of another investment
management company from 1995 to 1999. From 1982 to 1995, Mr. Tiffen held
positions in the lending and capital markets functions at Bank of America, and
its predecessor, Continental Bank. Mr. Tiffen received a bachelor's degree
from Northwestern University, Chicago, Illinois. He also is an associate of
the Chartered Institute of Bankers and a member of the Economic Club of
Chicago.
The Administrator
The administrator for the Fund is Van Kampen Investments (in such
capacity, the "Administrator"). The Administrator's principal business address
is 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Administrator is an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
Administrator maintains offices and regional representatives in major cities
across the nation.
Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative fee, the Administrator will (i) monitor the provisions of the
Loan Agreements and any agreements with respect to Participations and
Assignments and be responsible for recordkeeping with respect to Senior Loans
in the Fund's portfolio; (ii) arrange for the printing and dissemination of
proxies and reports to holders of the Fund's Shares; (iii) in connection with
the issuance of any Preferred Shares by the Fund, calculate, monitor and
provide to any rating agencies rating any Preferred Shares such asset coverage
and liquidity reports as the Board of Trustees deems advisable; (iv) negotiate
the terms and conditions under which custodian services will be provided to
the Fund and the fees to be paid by the Fund in connection therewith; (v)
negotiate the terms and conditions under which dividend disbursing services
will be provided to the Fund, and the fees to be paid by the Fund in
connection therewith and review the provision of dividend disbursing services
to the Fund; (vi) provide the Fund's dividend disbursing agent and custodian
with such information as is required for such parties to effect payment of
dividends and distributions and to implement the Fund's dividend reinvestment
plan; (vii) make such reports and recommendations to the Board of Trustees as
the Trustees reasonably request or deem appropriate; and (viii) provide
certain shareholder services to holders or potential holders of the Fund's
securities.
For the services rendered to the Fund and related expenses borne by
the Administrator, the Fund pays the Administrator a monthly fee (accrued
daily and paid monthly) computed based upon an annual rate equal to 0.20%
applied to the Fund's average daily managed assets (which for purposes of
determining such fee, shall mean the average daily gross asset value of the
Fund, minus the sum of accrued liabilities other than the aggregate amount of
any borrowings undertaken by the Fund). Because leverage will increase the
amount of total assets, the Fund will pay a greater amount of administration
fees when leverage is utilized.
CUSTODIAN AND AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
State Street Bank and Trust Company whose principal place of business is 225
Franklin Street, Boston, Massachusetts 02015-1713. Boston Equiserve, L.P.,
whose principal place of business is Blue Hills Office Park, 150 Royal Street,
Canton, Massachusetts 02021, serves as transfer agent, dividend paying agent
and registrar for the Fund's common shares. The Depository Trust Company will
act as securities depository for the Preferred Shares. The Bank of New York,
whose principal place of business is 100 Church Street, 8th Floor New York,
New York 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the Preferred Shares.
FEDERAL TAXATION
The following federal tax discussion is only a summary of some of the
important tax considerations generally applicable to investments in the Fund.
It is based on the Internal Revenue Code of 1986, as amended (the "Code"),
existing Treasury regulations, rulings published by the Internal Revenue
Service (the "Service"), and other applicable authority, as of the date of
this prospectus. These authorities are subject to change by legislative or
administrative action. For more detailed information regarding tax
considerations, see the SAI. There may be other tax considerations applicable
to particular investors. In addition, income earned through an investment in
the Fund may be subject to state, local and foreign taxes.
Federal Taxation of the Fund
The Fund intends to elect and qualify each year for taxation as a
regulated investment company under Subchapter M of the Code. Provided that the
Fund so qualifies and distributes at least 90% of the sum of its investment
company taxable income and certain other income, it will not be subject to
federal income tax on income distributed timely to its shareholders in the
form of dividends or capital gain distributions. The Fund intends to
distribute all of its investment income and net capital gain each year.
To satisfy the distribution requirement applicable to regulated
investment companies, amounts paid as dividends by the Fund to its
shareholders, including holders of its Preferred Shares, must qualify for the
dividends-paid deduction. In certain circumstances, the Service could take the
position that dividends paid on the Preferred Shares constitute preferential
dividends under Section 562(c) of the Code, and thus do not qualify for the
dividends-paid deduction. If this position were upheld, the Fund could be
subject to tax and/or could fail to qualify to be taxed as a regulated
investment company. The Fund believes, however, that such a position, if
asserted by the Service, would be unlikely to prevail if the issue were
properly litigated.
If at any time the Fund does not meet applicable asset coverage
requirements, it may be required to suspend distributions until the requisite
asset coverage is restored. Any such suspension may prevent the Fund from
qualifying as a regulated investment company or may cause the Fund to pay a 4%
federal excise tax (imposed on regulated investment companies that fail to
distribute for a given calendar year, generally, at least 98% of their net
investment income and capital gain net income plus certain other amounts). The
Fund may call Preferred Shares to maintain or restore the requisite asset
coverage.
If the Fund were to fail to qualify as a regulated investment
company, 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 addition, the Fund's distributions, to the
extent derived from the Fund's current or accumulated earnings and profits,
would be taxable to shareholders as ordinary dividends. Such distributions
generally will be eligible (i) for the dividends received deduction in the
case of corporate shareholders and (ii) for treatment as qualified dividend
income in the case of individual shareholders.
Federal Income Taxation of Holders of Preferred Shares
The Fund believes that the Preferred Shares will constitute stock of
the Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of Preferred Shares that are treated as exchanges
of stock under Section 302(b) of the Code) thus will constitute dividends to
the extent attributable to the Fund's current and accumulated earnings and
profits. Such dividends generally will be taxable as ordinary income to
holders and generally will not qualify for the dividends received deduction
available to corporations or as qualified dividend income available for
reduced rates of taxation in the case of individual shareholders.
Distributions, if any, in excess of the Fund's current and accumulated
earnings and profits will first reduce the tax basis of the Preferred Shares
and, after such basis has been reduced to zero, will constitute capital gains
(assuming such Preferred Shares are held as a capital asset). It is possible,
however, that the Service might take a contrary position asserting, for
example, that the Preferred Shares constitute debt of the Fund. If this
position were upheld, distributions by the Fund to holders of Preferred Shares
would constitute interest, whether or not they exceeded the Fund's earnings
and profits, and would be taxed as ordinary income. The Fund believes,
however, that such a position, if asserted by the Service, would be unlikely
to prevail if the issue were properly litigated.
Distributions of net capital gain that are designated by the Fund as
capital gain dividends will be treated as long-term capital gains in the hands
of holders regardless of the holders' respective holding periods for their
Preferred Shares. The Service currently takes the position that a regulated
investment company that has two or more classes of stock must 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 the
portion of its distributions as capital gain dividends in compliance with this
position.
The sale of Preferred Shares will be a taxable transaction for
federal income tax purposes. Selling holders of Preferred Shares will
generally recognize gain or loss in an amount equal to the difference between
their basis in the Preferred Shares and the amount received in exchange
therefor. If such Preferred Shares are held as a capital asset, the gain or
loss will generally be a capital gain or loss. Similarly, a redemption
(including a redemption resulting from liquidation of the Fund), if any, of
Preferred Shares by the Fund generally will give rise to capital gain or loss
if the redemption is treated as an exchange of stock under Section 302(b) of
the Code. Generally, a holder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. Any loss realized upon a
taxable disposition of Preferred Shares held for six months or less will be
treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder with respect to such shares. Also, any
loss realized upon a taxable disposition of shares of Preferred Shares may be
disallowed if other Preferred Shares are acquired within a 61-day period
beginning 30 days before and ending 30 days after the date the shares are
disposed of. If disallowed, the loss will be reflected by an upward adjustment
to the basis of the shares acquired.
Backup Withholding
The Fund may be required to withhold, for U.S. federal income taxes,
a certain percentage of all dividends and redemption proceeds payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or who fail to make required certifications, or if the
Fund or a shareholder has been notified by the Service that they are subject
to backup withholding. Corporate shareholders 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 the
shareholder's U.S. federal income tax liability if the appropriate information
is provided to the Service.
Other Taxation
Foreign shareholders, including shareholders who are non-resident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30% or such lower rate as may be prescribed by any applicable treaty.
(This U.S. federal tax rate may significantly exceed the effective U.S.
federal tax that would apply if such foreign investors held their share of the
Fund's assets directly rather than indirectly through their investment in the
Fund.) Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general U.S.
federal taxation rules and with respect to the state, local or foreign tax
consequences to them of an investment in Preferred Shares.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the
laws of the Commonwealth of Massachusetts by the Agreement and Declaration of
Trust dated April 7, 1998 (the "Declaration of Trust"). The Declaration of
Trust provides that the Trustees of the Fund may authorize separate classes of
shares of beneficial interest. The Trustees have authorized an unlimited
number of shares of beneficial interest, par value $0.01 per share, all of
which were initially classified as common shares. The Declaration of Trust
also authorizes 100,000,000 shares of beneficial interest with preference
rights, including preferred shares, having a par value of $0.01 per share, in
one or more series, with rights as determined by the Board of Trustees, by
action of the Board of Trustees without the approval of the shareholders. The
following table shows the amount of (i) shares authorized, (ii) shares held by
the Fund for its own account and (iii) shares outstanding, for each class of
authorized securities of the Fund as of October __, 2003.
Amount Held
by Fund
Amount for its Amount
Title of Class Authorized Own Account Outstanding
-------------- ---------- ----------- -----------
Common shares unlimited
Preferred Shares, Series M 0 0
Preferred Shares, Series T 0 0
Preferred Shares, Series W 0 0
Preferred Shares,Series TH 0 0
Preferred Shares, Series F 0 0
Each common share represents an equal proportionate interest in the
assets of the Fund with each other common share in the Fund. Holders of common
shares will be entitled to the payment of dividends when, as and if declared
by the Board of Trustees. The 1940 Act or the terms of any borrowings or
Preferred Shares may limit the payment of dividends to the holders of common
shares. Each whole common share shall be entitled to one vote as to matters on
which it is entitled to vote pursuant to the terms of the Fund's Declaration
of Trust on file with the SEC. Upon liquidation of the Fund, after paying or
adequately providing for the payment of all liabilities of the Fund and the
liquidation preference with respect to any outstanding Preferred Shares, and
upon receipt of such releases, indemnities and refunding agreements as they
deem necessary for their protection, the Trustees may distribute the remaining
assets of the Fund among the holders of the common shares.
The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Fund, requires inclusion of a clause to that effect
in every agreement entered into by the Fund and indemnifies shareholders
against any such liability. Although shareholders of an unincorporated
business trust established under Massachusetts law, in certain limited
circumstances, may be held personally liable for the obligations of the trust
as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote. The Declaration of Trust further provides that obligations
of the Fund are not binding upon Trustees individually but only upon the
property of the Fund and that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Declaration of Trust
protects a trustee against any liability to which he or she 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 or her office.
While there are any Preferred Shares or borrowings outstanding, the
Fund may not declare any cash dividend or other distribution on its common
shares, unless at the time of such declaration, (i) all accrued dividends on
Preferred Shares or accrued interest on borrowings has been paid and (2) the
value of the Fund's total assets (determined after deducting the amount of
such dividend or other distribution), less all liabilities and indebtedness of
the Fund not represented by senior securities, is at least 300% of the
aggregate amount of such securities representing indebtedness and at least
200% of the aggregate amount of securities representing indebtedness plus the
aggregate liquidation value of the outstanding Preferred Shares (the aggregate
original purchase price of the outstanding Preferred Shares plus redemption
premium, if any, together with any accrued and unpaid dividends thereon,
whether or not earned or declared and on a cumulative basis). In addition, the
Fund is required to comply with other asset coverage requirements as a
condition of the Fund obtaining a rating of the Preferred Shares from a
nationally recognized statistical rating organization and as a condition to
borrowing money. This limitation on the Fund's ability to make distributions
on its common shares could in certain circumstances impair the ability of the
Fund to maintain its qualification for taxation as a regulated investment
company. The Fund intends, however, to the extent possible to purchase or
redeem Preferred Shares or to repay borrowings from time to time to maintain
compliance with such asset coverage requirements and may pay special dividends
to the holders of the Preferred Shares in certain circumstances in connection
with any such impairment of the Fund's status as a regulated investment
company. See "Investment Objective and Policies and Special Risk Factors --
Special Risk Considerations" and "Taxation." Depending on the timing of any
such redemption or repayment, the Fund may be required to pay a premium in
addition to the liquidation preference of the Preferred Shares or the
principal amount of the borrowings to the holders thereof. See "Borrowings"
below.
The Fund has no present intention of offering additional common
shares. Other offerings of its common shares, if made, will require approval
of the Fund's Board of Trustees. Any additional offering will not be sold at a
price per common share below the then current NAV (exclusive of underwriting
discounts and commissions) except in connection with an offering to existing
common shareholders or with the consent of a majority of the Fund's
outstanding common shares. The common shares have no preemptive rights.
The common shares trade on the NYSE under the symbol "VVR." The
following table shows for the Fund's common shares for the periods indicated:
(1) the high and low closing prices as shown on the NYSE Composite Transaction
Tape; (2) the NAV per common share represented by each of the high and low
closing prices as shown on the NYSE Composite Transaction Tape; and (3) the
discount from or premium to NAV per common share (expressed as a percentage)
represented by these closing prices. The table also sets forth the aggregate
number of shares traded as shown on the NYSE Composite Transaction Tape during
the respective quarter.
Premium/(Discount)
Price NAV Market Price to NAV
----- --- ------------------- Reported
Calendar Quarter NYSE
Ended High Low High Low High Low Volume
----- ---- --- ---- --- ---- --- ------
September 30, 2003 $ $ $ $ % %
June 30, 2003 $ $ $ $ % %
March 31, 2003 $ $ $ $ % %
December 31, 2003 $ $ $ $ % %
On December__, 2003, the last reported sales price of the Fund's
common shares on the NYSE was $___ and the Fund's NAV was $___, representing a
___% discount of market price to NAV as of that date.
Borrowings
The Fund's Declaration of Trust authorizes the Fund, without prior
approval of the common shareholders, to borrow money in an amount up to 33
1/3% of the Fund's total assets. In this connection, the Fund may issue notes
or other evidence of indebtedness (including bank borrowings or commercial
paper) and may secure any such borrowings by mortgaging, pledging or otherwise
subjecting as security the Fund's assets. In connection with such borrowing,
the Fund may be required to maintain minimum average balances with the lender
or to pay a commitment or other fee to maintain a line of credit. Any such
requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300%. With respect
to any such borrowing, 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 (as defined in the 1940 Act), bears to the
aggregate amount of such borrowing represented by senior securities by the
Fund. Certain types of borrowing may result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. Such restrictions may be more stringent than those
imposed by the 1940 Act. 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 common shareholders, and the terms of any such borrowings may contain
provisions which limit certain activities of the Fund, including the payment
of dividends to common shareholders in certain circumstances. In the event
that such provisions would impair the Fund's status as a regulated investment
company, the Fund, subject to its ability to liquidate its relatively illiquid
portfolio, intends to repay the borrowings. Further, the terms of any such
borrowing may and the 1940 Act does (in certain circumstances) require that
the lenders to the Fund have certain voting rights in the event of a failure
to maintain certain asset coverage requirements. Any borrowing will likely
rank senior to or pari passu with all other existing and future borrowings of
the Fund. See "Investment Objective and Policies and Special Risk Factors --
Special Risk Considerations." The Fund may also borrow up to an additional 5%
of its total assets for temporary purposes. See "Investment Restrictions" in
the SAI.
Conversion to Open-End Fund
The Fund may be converted to an open-end investment company at any
time by an amendment to the Declaration of Trust. The Declaration of Trust
provides that such an amendment would require the approval of (a) a majority
of the Trustees, including the approval by a majority of the disinterested
Trustees of the Fund, and (b) the lesser of (i) 67% or more of the Fund's
common shares and preferred shares, each voting as a class, present at a
meeting at which holders of more than 50% of the outstanding Shares of each
class are present in person or by proxy or (ii) more than 50% of the
outstanding common shares and preferred shares, each voting as a class. If
approved in the foregoing manner, conversion of the Fund could not occur until
90 days after the Shareholders' meeting at which such conversion was approved
and would also require at least 30 days' prior notice to all Shareholders. The
composition of the Fund's portfolio likely would prohibit the Fund from
complying with regulations of the SEC applicable to open-end investment
companies. Accordingly, conversion likely would require significant changes in
the Fund's investment policies and liquidation of a substantial portion of its
relatively illiquid portfolio. Conversion of the Fund to an open-end
investment company also would require the redemption of all outstanding
Preferred Shares and could require the repayment of borrowings, which would
eliminate the leveraged capital structure of the Fund with respect to the
common shares. In the event of conversion, the common shares would cease to be
listed on the NYSE or other national securities exchange or market system.
Shareholders of an open-end investment company may require the company to
redeem their shares at any time (except in certain circumstances as authorized
by or under the 1940 Act) at their NAV, less such redemption charge, if any,
as might be in effect at the time of a redemption. The Fund expects to pay all
such redemption requests in cash, but intends to reserve the right to pay
redemption requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new common shares will be sold at NAV plus a sales
load.
Repurchase of Common Shares
Shares of closed-end management investment companies frequently trade
at a discount to their NAVs but in some cases trade at a premium. In
recognition of the possibility that the Fund's common shares might similarly
trade at a discount, the Fund's Board of Trustees has determined that from
time to time it may be in the interest of common shareholders for the Fund to
take action to attempt to reduce or eliminate a market value discount from
NAV. The Board of Trustees, in consultation with the Adviser, will review on a
quarterly basis the possibility of open market repurchases and/or tender
offers for the common shares and will consider such factors as the market
price of the common shares, the NAV of the common shares, the liquidity of the
assets of the Fund, whether such transactions would impair the Fund's status
as a regulated investment company or result in a failure to comply with
applicable asset coverage requirements, general economic conditions and such
other events or conditions which may have a material effect on the Fund's
ability to consummate such transactions. There are no assurances that the
Board of Trustees will, in fact, decide to undertake either of these actions
or if undertaken, that such actions will result in the Fund's common shares
trading at a price which is equal to or approximates their NAV. In addition,
the Board of Trustees will not necessarily announce when it has given
consideration to these matters. common shares will not be repurchased unless
after such repurchase the Fund would continue to satisfy the 1940 Act asset
coverage requirements with respect to the Preferred Shares or any borrowing
and any asset coverage requirements which may be imposed by any rating service
as a condition of its rating of the Preferred Shares or by any lender with
respect to any borrowing.
Although the Board of Trustees believes that common share repurchases
and tenders generally could have a favorable effect on the market price of the
Fund's common shares, it should be recognized that the acquisition of common
shares by the Fund will decrease the total assets of the Fund and, therefore,
have the effect of increasing the Fund's expense ratio and decreasing the
asset coverage available with respect to the Preferred Shares and any
borrowing. Because of the nature of the Fund's investment objectives and
policies and the Fund's portfolio, the Adviser anticipates potential
difficulty in disposing of portfolio securities in order to consummate tender
offers for the common shares. As a result, the Fund may be required to borrow
money in order to finance repurchases and tenders. Interest on any such
borrowings will reduce the Fund's net investment income. See "Description of
Capital Structure -- Borrowings." Disposition of portfolio securities may
increase the Fund's portfolio turnover rate and will result in related costs
to the Fund.
Even if a tender offer has been made, it is the Trustees' announced
policy, which may be changed by the Trustees, that the Fund cannot accept
tenders or effect repurchases if (1) such transactions, if consummated, would
(a) result in the delisting of the Fund's Shares from the NYSE or other
national securities exchange (the Fund understands that the NYSE would
consider delisting if the aggregate market value of the Fund's outstanding
common shares is less than $5,000,000, the number of publicly held common
shares falls below 600,000 or the number of round-lot holders falls below
1,200) (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
taxable income to be taxed at the Fund level), or (c) result in a failure to
comply with applicable asset coverage requirements; (2) the amount of
securities tendered would require liquidation of such a substantial portion of
the Fund's securities that the Fund would not be able to liquidate portfolio
securities in an orderly manner in light of the existing market conditions and
such liquidation would have an adverse effect on the NAV of the Fund to the
detriment of non-tendering Shareholders; or (3) there is, in the Board of
Trustees' judgment, any (a) material legal action or proceeding instituted or
threatened challenging such transactions or otherwise materially adversely
affecting the Fund, (b) suspension of or limitation on prices for trading in
securities generally on the NYSE, the American Stock Exchange or other
national securities exchange or national market system, (c) declaration of a
banking moratorium by federal or state authorities or any suspension of
payment by banks in the United States or New York State, (d) limitation
affecting the Fund or the issuers of its portfolio securities imposed by
federal or state authorities on the extension of credit by lending
institutions, (e) threatened or actual conditions of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) any other event or condition which would have a material
adverse effect on the Fund or its Shareholders if common shares were
repurchased. The Trustees may modify these conditions in light of experience.
Under the requirements of the 1940 Act, the Fund cannot accept
tenders or effect repurchases of the common shares if, after deducting the
amount of the purchase or tender price, the Fund's total assets, less all
liabilities not represented by senior securities of the Fund, would fall below
200% of the aggregate liquidation value of the Preferred Shares plus the
aggregate amount of senior securities representing indebtedness or the Fund's
total assets, less all liabilities not represented by senior securities of the
Fund, would fall below 300% of the aggregate amount of senior securities
represented by indebtedness. In addition, the Fund may be precluded from
accepting tenders or effecting repurchases at any time dividends on the
Preferred Shares or payment of interest or repayment of principal on any
borrowings are in arrears. Any tender offer made by the Fund for its common
shares will be at a price equal to the NAV of the common shares determined at
the close of business on the day the offer ends. During the pendency of any
tender offer by the Fund, the Fund will calculate daily the NAV of the common
shares and will establish procedures which will be specified in the tender
offer documents, to enable common shareholders to ascertain readily such NAV.
The relative illiquidity of some of the Fund's portfolio securities could
adversely impact the Fund's ability to calculate NAV in connection with
determinations of pricing for tender offers, if any. Each offer will be made
and common shareholders notified in accordance with the requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder.
Should the Fund determine to make a tender offer for its common
shares, a notice describing the tender offer, containing information common
shareholders should consider in deciding whether to tender their common shares
and including instructions on how to tender common shares will be sent to
shareholders of record. Information concerning the purchase price to be paid
by the Fund and the manner in which shareholders may ascertain NAV during the
pendency of a tender offer will also be set forth in the notice. When a tender
offer is authorized to be made by the Fund's Trustees, a common shareholder
wishing to accept the offer will be required to tender all (but not less than
all) of the common shares owned by such Shareholder (or attributed to him for
federal income tax purposes under Section 318 of the Code). The Fund will
purchase all common shares tendered in accordance with the terms of the offer
unless it determines in accordance with the terms of the offer to accept none
of them. Each person tendering common shares will pay to the Fund a reasonable
service charge currently anticipated to be $25.00, subject to change, to help
defray certain costs, including the processing of tender forms, effecting
payment, postage and handling. It is the position of the staff of the SEC that
such service charge may not be deducted from the proceeds of the purchase. The
Fund's transfer agent will receive a fee as an offset to these costs. The Fund
expects that the cost to the Fund of effecting a tender offer will exceed the
aggregate of all service charges received from those who tender their common
shares. Costs associated with the tender will be charged against capital.
Tendered common shares that have been accepted and purchased by the
Fund will be held in treasury and may be retired by the Trustees. Treasury
common shares will be recorded and reported as an offset to Shareholders'
equity and accordingly will reduce the Fund's total assets. If treasury common
shares are retired, common shares issued and outstanding and capital in excess
of par value will be reduced accordingly.
Preferred Shares
Under the 1940 Act, the Fund is permitted to have outstanding more
than one series of preferred shares as long as no single series has priority
over another series as to the distribution of assets of the Fund or the
payment of dividends. Neither holders of common shares nor holders of
preferred shares have pre-emptive rights to purchase any Preferred Shares or
any other preferred shares that might be issued.
The Fund's Declaration of Trust authorizes the issuance of a class of
preferred shares (which class may be divided into two or more series) as the
Trustees may, without shareholder approval, authorize. The Preferred Shares
have such preferences, voting powers, terms of redemption, if any, and special
or relative rights or privileges (including conversion rights, if any) as the
trustee may determine and as are set forth in the Fund's Certificate
establishing the terms of the Preferred Shares. The number of shares of the
preferred class or series authorized is unlimited, and the shares authorized
may be represented in part by fractional shares. Under the Fund's Certificate,
the Trustees have authorized the creation of _____ Auction Rate Cumulative
Preferred Shares, having a par value of $0.01 per share, with a liquidation
preference of $25,000 per share, classified as Series M, T, W, Th and F
Auction Rate Cumulative Preferred Shares.
UNDERWRITING
Citigroup Global Markets Inc. is acting as a representative of the
underwriters named below. Subject to the terms and conditions 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 Preferred Shares set forth opposite the name of
such underwriter.
Underwriters Series M Series T Series W Series TH Series F
------------ -------- -------- -------- --------- --------
Citigroup Global Markets Inc. ...
Total.......................
The underwriting agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to
the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Preferred
Shares if they purchase any of the Preferred 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. 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 Preferred Shares are not sold at the initial offering price, the
representative may change the public offering price and other selling terms.
Investors must pay for any Preferred Shares purchased on or before _____.
The Fund and the Adviser have each agreed that, for a period of 180
days from the date of the underwriting agreement, 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 Preferred
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 Fund anticipates that from time to time certain Underwriters may
act as brokers or dealers in connection with the execution of the Fund's
portfolio transaction after they have ceased to be Underwriters and, subject
to certain conditions, 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 set forth under "Description of Preferred Shares" and in the SAI.
The Fund and the Adviser have agreed to indemnify the Underwriters in
connection with this offering against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended, or to
contribute payments the Underwriters may be required to make for any of those
liabilities. 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 Act 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 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 Act 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 MATTERS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom
(Illinois) and for the Underwriters by Simpson Thacher & Bartlett LLP, New
York, New York. Skadden, Arps, Slate, Meagher & Flom (Illinois) and Simpson
Thacher & Bartlett LLP may rely as to certain matters of Massachusetts law on
the opinion of [_______].
EXPERTS
The financial statements of the Fund at [ ]and the selected per share
data and ratios set forth under the caption "Financial Highlights" for each of
the fiscal years ended [ ] through [ ]have been audited by [ ], independent
auditors, as set forth in their report incorporated by reference in the SAI,
and are included in reliance upon their report given upon [ ]'s authority as
experts in accounting and auditing. The address of [ ] is [ ].
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, DC, a registration
statement under the Securities Act of 1933, as amended, with respect to the
Preferred Shares offered hereby. Further information concerning these
securities and the Fund may be found in the registration statement, of which
this Prospectus constitutes a part, on file with the SEC. The Fund is subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended, and the 1940 Act, and in accordance therewith files other
fund-related reports and information with the SEC. The Fund's registration
statement, reports, proxy and information statements and other information may
be inspected without charge at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, DC 20549, and copies of all or any part thereof may
be obtained from such officer after payment of the fees prescribed by the SEC.
Call 1-800-SEC-0330 for information about the SEC's public reference room.
Such reports and other information concerning the Fund may also be inspected
at the offices of the NYSE located at 20 Broad Street, New York, New York
10005.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page
The Fund
Investment Restrictions
Trustees and Officers
Portfolio Transactions
Investment Management and Other Services
Repurchase Of Shares
Fund Structure
Portfolio Turnover Rate
Additional Information Concerning the Auctions for Preferred Shares
Description of Preferred Shares
Moody's and Fitch Guidelines
Federal Taxation
Glossary
Appendix A: Ratings of Investments
Financial Statements
=============================================================================
$[ ]
VAN KAMPEN SENIOR INCOME TRUST
Auction Rate Cumulative Preferred Shares
[ ] Shares, Series M
[ ] Shares, Series T
[ ] Shares, Series W
[ ] Shares, Series TH
[ ] Shares, Series F
_____________________________
Prospectus
______, 2004
______________
Citigroup
SUBJECT TO COMPLETION, DATED DECEMBER __, 2003
The information in this Statement of Additional Information is not
complete and may be changed. The Fund may not sell these securities until the
registration statement filed with the SEC is effective. This Statement of
Additional Information 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.
VAN KAMPEN SENIOR INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
________, 2003
Van Kampen Senior Income Trust (the "Fund") is a non-diversified,
closed-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of interests in floating or
variable rate senior loans ("Senior Loans") to corporations, partnerships and
other entities ("Borrowers") which operate in a variety of industries and
geographical regions. The Fund's investment adviser is Van Kampen Investment
Advisory Corp. ("Advisory Corp." or the "Adviser").
The Fund is offering [ ] Series M, [ ] Series T,[ ] Series W, [ ]
Series Th and [ ] Series F Auction Rate Cumulative Preferred Shares, par value
$0.01 per share, liquidation preference $25,000 per share (collectively
"Preferred Shares").
This Statement of Additional Information ("SAI") relating to this
offering does not constitute a prospectus, but should be read in conjunction
with the Prospectus relating thereto dated ____ ___, 2003. This SAI does not
include all information that a prospective investor should consider before
purchasing Preferred Shares in this offering, and investors should obtain and
read the Prospectus prior to purchasing such shares. A copy of the Prospectus
may be obtained without charge, by calling (800)341-2929 or by writing to the
Fund at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555
Capitalized terms used in this SAI are defined in the Fund's
Certicifacte of Vote attached hereto as Appendix B.
TABLE OF CONTENTS
Page
The Fund
Investment Restrictions
Trustees and Officers
Portfolio Transactions
Investment Management and Other Services
Repurchase Of Shares
Fund Structure
Portfolio Turnover Rate
Additional Information Concerning the Auctions for Preferred Shares
Description of Preferred Shares
Moody's and Fitch Guidelines
Federal Taxation
Appendix A: Ratings of Investments
Appendix B:Certificate of Vote
Financial Statements
The Prospectus and SAI omit certain information contained in the
registration statement filed with the Securities and Exchange Commission
("SEC"), Washington, D.C. The registration statement may be obtained from the
SEC upon payment of the fee prescribed, or inspected at the SEC's office for
no charge. The registration statement is also available on the SEC's website
(www.sec.gov).
THE FUND
The Fund changed its name from "Van Kampen American Capital Senior
Income Trust" to "Van Kampen Senior Income Trust" in 1998. The Fund's
investment objective is to provide a high level of current income, consistent
with preservation of capital. The Fund seeks to achieve its objective by
investing primarily in a professionally managed portfolio of interests in
Senior Loans to Borrowers which operate in a variety of industries and
geographical regions (including domestic and foreign entities). Senior Loans
in which the Fund invests generally pay interest at rates which are
periodically redetermined by reference to a base lending rate plus a premium.
These base lending rates are generally the prime rate offered by one or more
major United States banks ("Prime Rate"), the London Inter-Bank Offered Rate
("LIBOR"), the Certificate of Deposit ("CD") rate or other base lending rates
used by commercial lenders. The value of the Fund's portfolio may be affected
by changes in the credit quality of Borrowers with respect to Senior Loan
interests in which the Fund invests. No assurance can be given that the Fund
will achieve its investment objective.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment
restrictions are fundamental and cannot be changed without the approval of the
holders of a majority (defined as the lesser of (i) 67% or more of the voting
securities present at a meeting of shareholders, if the holders of more than
50% of the outstanding voting securities are present or represented by proxy
at such meeting, or (ii) more than 50% of the outstanding voting securities)
of the Fund's outstanding common shares. All other investment policies or
practices are considered by the Fund not to be fundamental and accordingly may
be changed without shareholder approval. If a percentage restriction on
investment or use of assets set forth below is adhered to at the time a
transaction is effected, later changes in percentage resulting from changing
market values will not be considered a deviation from policy. In accordance
with the foregoing, the Fund may not:
1. 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; provided that, with respect to 50% of the Fund's assets,
the Fund may invest up to 25% of its assets in the securities of any one
issuer. 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.
2. Purchase any security if, as a result of such purchase, 25% or more of the
Fund's total assets (taken at current value) would be invested in the
securities of Borrowers and other issuers having their principal business
activities in the same industry (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance
companies being treated as separate industries for purposes of this
restriction); provided, that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.
3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that the Fund may borrow up to an additional 5% of its total assets for
temporary purposes, or pledge its assets other than to secure such
issuance or in connection with hedging transactions, when-issued and
delayed delivery transactions and similar investment strategies.
4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective,
through loans of portfolio securities or the acquisition of securities
subject to repurchase agreements.
5. Buy any security "on margin." Neither the deposit of initial or variation
margin in connection with hedging transactions nor short-term credits as
may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.
6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except to the extent that the hedging transactions in which the Fund may
engage would be deemed to be any of the foregoing transactions.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Fund.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under Loan Agreements would be deemed to constitute such control or
participation.
9. Invest in securities of other investment companies, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. The Fund
will rely on representations of Borrowers in Loan Agreements in
determining whether such Borrowers are investment companies.
10. Buy or sell oil, gas or other mineral leases, rights or royalty contracts
except pursuant to the exercise by the Fund of its rights under Loan
Agreements. In addition, the Fund may purchase securities of issuers
which deal in, represent interests in or are secured by interests in such
leases, rights or contracts.
11. Purchase or sell real estate, commodities or commodities contracts except
pursuant to the exercise by the Fund of its rights under Loan Agreements,
except to the extent the interests in Senior Loans the Fund may invest in
are considered to be interests in real estate, commodities or commodities
contracts and except to the extent that hedging instruments the Fund may
invest in are considered to be commodities or commodities contracts.
12. Notwithstanding the investment policies and restrictions of the Fund,
upon approval of the Board of Trustees, the Fund may invest all or part
of its investable assets in a management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
For purposes of investment restriction numbers 1 and 2, the Fund will
consider all relevant factors in determining whether to treat the Lender
selling a Participation and any persons interpositioned between such Lender
and the Fund as an issuer, including: the terms of the Loan Agreement and
other relevant agreements (including inter-creditor agreements and any
agreements between such person and the Fund's custodian); the credit quality
of such Lender or interpositioned person; general economic conditions
applicable to such Lender or interpositioned person; and other factors
relating to the degree of credit risk, if any, of such Lender or
interpositioned person incurred by the Fund.
The Fund generally will not engage in the trading of securities for
the purpose of realizing short-term profits, but it will adjust its portfolio
as it deems advisable in view of prevailing or anticipated market conditions
to accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates.
Frequency of portfolio turnover will not be a limiting factor if the Fund
considers it advantageous to purchase or sell securities. The Fund anticipates
that the annual portfolio turnover rate of the Fund will not be in excess of
100%. A high rate of portfolio turnover involves correspondingly greater
expenses than a lower rate, which expenses must be borne by the Fund and its
shareholders.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction
of the Fund's Board of Trustees and the Fund's officers appointed by the Board
of Trustees. The tables below list the trustees and executive officers of the
Fund and their principal occupations during the last five years, other
directorships held by trustees and their affiliations, if any, with Van Kampen
Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory
Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors
Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc.
("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers." The term "Fund Complex"
includes each of the investment companies advised by the Advisers or their
affiliates as of the date of this Statement of Additional Information. Trustees
serve until reaching their retirement age or until their successors are duly
elected and qualified. Officers are annually elected by the trustees.
INDEPENDENT TRUSTEES
--------------------
Number of
Term of Funds in
Office and Fund
Position(s) Length of Complex
Name, Age and Address Held with Time Principal Occupation(s) Overseen Other Directorships
of Independent Trustee Fund Served During Past 5 Years by Trustee Held by Trustee
---------------------- ---- ------ ------------------- ---------- ---------------
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/
Blistex Inc. since 2003 Executive Officer of Managing General
1800 Swift Drive Blistex Inc., a consumer Partner of funds in
Oak Brook, IL 60523 health care products the Fund Complex.
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of
the Heartland Alliance,
a nonprofit organization
serving human needs
based in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee /Director/
1632 Morning Mountain Road since 1991 Co-founder, and prior to Managing General
Raleigh, NC 27614 August 1996, Chairman, Partner of funds in
Chief Executive Officer the Fund Complex.
and President, MDT
Corporation (now known
as Getinge/Castle, Inc.,
a subsidiary of Getinge
Industrier AB), a
company which develops,
manufactures, markets
and services medical and
scientific equipment.
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/
33971 Selva Road since 1999 Chairman and Chief Managing General
Suite 130 Executive Officer of the Partner of funds in
Dana Point, CA 92629 Allstate Corporation the Fund Complex.
("Allstate") and Director of Amgen
Allstate Insurance Inc., a
Company. Prior to biotechnological
January 1995, President company, and
and Chief Executive Director of Valero
Officer of Allstate. Energy Corporation,
Prior to August 1994, an independent
various management refining company.
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., 90 Trustee/Director/
CAC, llc. since 2003 a private company Managing General
4350 LaJolla Village Drive offering capital Partner of funds
Suite 980 investment and in the Fund
San Diego, CA 92122-6223 management advisory Complex. Director
services. Prior to July of TeleTech
2000, Managing Partner Holdings Inc.,
of Equity Group Stericycle, Inc.,
Corporate Investment TheraSense, Inc.,
(EGI), a company that GATX Corporation,
makes private Arris Group, Inc.
investments in other and Trustee of the
companies. University of
Chicago Hospitals
and Health
Systems. Prior to
May 2002, Director
of Peregine Systems
Inc. Prior to
February 2001, Vice
Chairman and
Director of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser
Communications
Corp., Matria
Healthcare Inc.,
Transmedia
Networks, Inc., CNA
Surety, Corp. and
Grupo Azcarero
Mexico (GAM).
Prior to April
1999, Director of
Metal Management,
Inc.
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/
Heidrick & Struggles since 1995 Heidrick & Struggles, an Managing General
233 South Wacker Drive executive search firm. Partner of funds in
Suite 7000 Trustee on the the Fund Complex.
Chicago, IL 60606 University of Chicago
Hospitals Board, Vice
Chair of the Board of
the YMCA of Metropolitan
Chicago and a member of
the Women's Board of the
University of Chicago.
Prior to 1997, Partner
of Ray & Berndtson,
Inc., an executive
recruiting firm. Prior
to 1996, Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to
1995, Executive Vice
President of ABN AMRO,
N.A., a bank holding
company. Prior to 1992,
Executive Vice President
of La Salle National
Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President 88 Trustee/Director/
11 DuPont Circle, N.W. since 1995 of the German Marshall Managing General
Washington, D.C. 20016 Fund of the United Partner of funds in
States, an independent the Fund Complex.
U.S. foundation created
to deepen
understanding, promote
collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and
Chief Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J. Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/
736 North Western Avenue since 2003 and Chief Executive Managing General
P.O. Box 317 Officer of Pocklington Partner of funds in
Lake Forest, IL 60045 Corporation, Inc., an the Fund Complex.
investment holding Director of the
company. Director of Lake Forest
the Marrow Foundation. Bank & Trust.
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/
423 Country Club Drive since 1995 Investment Planning Managing General
Winter Park, FL 32789 Services, Inc., a Partner of funds in
financial planning the Fund Complex.
company and registered
investment adviser in
the State of Florida.
President of Nelson
Ivest Brokerage Services
Inc., a member of the
NASD, Securities
Investors Protection
Corp. and the Municipal
Securities Rulemaking
Board. President of
Nelson Sales and
Services Corporation, a
marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/ Director/
1126 E. 59th Street since 2003 Honorary Trustee of the Managing General
Chicago, IL 60637 University of Chicago Partner of funds in
and the Adam Smith the Fund Complex.
Distinguished Service Director of Winston
Professor in the Laboratories, Inc.
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the
University of Rochester
and a member of its
investment committee.
Member of the National
Academy of Sciences, the
American Philosophical
Society and a fellow of
the American Academy of
Arts and Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/
2101 Constitution Ave., since 1999 Officer of the National Managing General
N.W. Academy of Partner of funds in
Room 285 Sciences/National the Fund Complex.
Washington, D.C. 20418 Research Council, an Director of
independent, federally Neurogen
chartered policy Corporation, a
institution, since 2001 pharmaceutical
and previously Chief company, since
Operating Officer from January 1998.
1993 to 2001. Director
of the Institute for
Defense Analyses, a
federally funded
research and development
center, Director of the
German Marshall Fund of
the United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of
the Commission on
Behavioral and Social
Sciences and Education
at the National Academy
of Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
INTERESTED TRUSTEES*
--------------------
Number of
Term of Funds in
Office and Fund
Position(s) Length of Complex
Name, Age and Address Held with Time Principal Occupation(s) Overseen Other Directorships
Of Interested Trustee Fund Served During Past 5 Years By Trustee Held by Trustee
--------------------- ---- ------ ------------------- ---------- ---------------
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/
1221 Avenue of the President since 1999 Executive Officer to Managing General
Americas and Chief funds in the Fund Partner of funds in
New York, NY 10020 Executive Complex. Chairman, the Fund Complex.
Officer President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen
Investments since
December 2002. Director
of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002.
President, Director and
Chief Operating Officer
of Morgan Stanley
Investment Management
since December 1998.
President and Director
since April 1997 and
Chief Executive Officer
since June 1998 of
Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief
Executive Officer and
Director of Morgan
Stanley Distributors
Inc. since June 1998.
Chairman since June
1998, and Director since
January 1998 of Morgan
Stanley Trust. Director
of various Morgan
Stanley subsidiaries.
President of the Morgan
Stanley Funds since May
1999. Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan
Stanley Investment
Advisors Inc. and Morgan
Stanley Services Company
Inc. and Executive Vice
President of Morgan
Stanley Distributors
Inc. from April 1997 to
June 1998. Chief
Executive Officer from
September 2002 to April
2003 and Vice President
from May 1997 to April
1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* Trustee Trustee Advisory Director of 90 Trustee/Director/
(57) since 1999 Morgan Stanley. Prior Managing General
1 Parkview Plaza to December 2002, Partner of funds in
P.O. Box 5555 Chairman, Director, the Fund Complex.
Oakbrook Terrace, IL 60181 President, Chief
Executive Officer and
Managing Director of Van
Kampen Investments and
its investment advisory,
distribution and other
subsidiaries. Prior to
December 2002, President
and Chief Executive
Officer of funds in the
Fund Complex. Prior to
May 1998, Executive Vice
President and Director
of Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/
333 West Wacker Drive since 1995 of Skadden, Arps, Slate, Managing General
Chicago, IL 60606 Meagher & Flom Partner of funds in
(Illinois), legal the Fund Complex.
counsel to funds in the
Fund Complex.
_______________
* Such trustee is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its
affiliates.
OFFICERS
--------
Term of
Office and
Position(s) Length of
Name, Age and Address Held with Time Principal Occupation(s)
of Officer Fund Served During Past 5 Years
------------------------ ------------- ---------- -------------------
Stephen L. Boyd (62) Vice President Officer since Managing Director of Global Research Investment
2800 Post Oak Blvd. 1998 Management. Vice President of funds in the Fund
45th Floor Complex. Prior to December 2002, Chief Investment
Houston, TX 77056 Officer of Van Kampen Investments and President and
Chief Operations Officer of the Advisers and Van
Kampen Advisors Inc. Prior to May 2002, Executive
Vice President and Chief Investment Officer of funds
in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of
the Advisers and Van Kampen Advisors Inc. Prior to
December 2000, Executive Vice President and Chief
Investment Officer of Van Kampen Investments, and
President and Chief Operating Officer of the
Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998,
Vice President and Senior Portfolio Manager with AIM
Capital Management, Inc. Prior to February 1998,
Senior Vice President and Portfolio Manager of Van
Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Investment Advisory Corp.
and Van Kampen American Capital Management, Inc.
Stefanie V. Chang (36) Vice President Officer since Executive Director of Morgan Stanley Investment
1221 Avenue of the Americas 2003 Management. Vice President of funds in the Fund
New York, NY 10020 Complex.
Joseph J. McAlinden (60) Executive Vice Officer since Managing Director and Chief Investment Officer of
1221 Avenue of the Americas President and 2002 Morgan Stanley Investment Advisors Inc., Morgan
New York, NY 10020 Chief Stanley Investment Management Inc. and Morgan
Investment Stanley Investments LP and Director of Morgan
Officer Stanley Trust for over 5 years. Executive Vice
President and Chief Investment Officer of funds in
the Fund Complex. Managing Director and Chief
Investment Officer of Van Kampen Investments, the
Advisers and Van Kampen Advisors Inc. since December
2002.
John R. Reynoldson (50) Vice President Officer since Executive Director and Portfolio Specialist of the
1 Parkview Plaza 2000 Advisers and Van Kampen Advisors Inc. Vice President
P.O. Box 5555 of funds in the Fund Complex. Prior to July 2001,
Oakbrook Terrace, IL 60181 Principal and Co-head of the Fixed Income Department
of the Advisers and Van Kampen Advisors Inc. Prior
to December 2000, Senior Vice President of the
Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade
taxable group for the Advisers. Prior to June 1999,
Senior Vice President of the government securities
bond group for Asset Management.
Ronald E. Robison (64) Executive Vice Officer since Chief Executive Officer and Chairman of Investor
1221 Avenue of the Americas President and 2003 Services. Executive Vice President and Principal
New York, NY 10020 Principal Executive Officer of funds in the Fund Complex.
Executive Chief Global Operations Officer and Managing
Officer Director of Morgan Stanley Investment Management
Inc. Managing Director of Morgan Stanley. Managing
Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company
Inc. Chief Executive Officer and Director of Morgan
Stanley Trust. Vice President of the Morgan Stanley
Funds.
A. Thomas Smith III (46) Vice President Officer since Managing Director of Morgan Stanley, Managing
1221 Avenue of the Americas and Secretary 1999 Director and Director of Van Kampen Investments,
New York, NY 10020 Director of the Advisers, Van Kampen Advisors Inc.,
the Distributor, Investor Services and certain other
subsidiaries of Van Kampen Investments. Managing
Director and General Counsel-Mutual Funds of Morgan
Stanley Investment Advisors, Inc. Vice President and
Secretary of funds in the Fund Complex. Prior to
July 2001, Managing Director, General Counsel,
Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services,
and certain other subsidiaries of Van Kampen
Investments. Prior to December 2000, Executive Vice
President, General Counsel, Secretary and Director
of Van Kampen Investments, the Advisers, Van Kampen
Advisors Inc., the Distributor, Investor Services
and certain other subsidiaries of Van Kampen
Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life
Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York
Life. Prior to December 1993, Assistant General
Counsel of The Dreyfus Corporation. Prior to August
1991, Senior Associate, Willke Farr & Gallagher.
Prior to January 1989, Staff Attorney at the
Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer since Director and Managing Director of Van Kampen
1 Parkview Plaza Chief Financial 1996 Investments, the Advisers, Van Kampen Advisors Inc.
P.O. Box 5555 Officer and and certain other subsidiaries of Van Kampen
Oakbrook Terrace, IL 60181 Treasurer Investments. Vice President, Chief Financial Officer
and Treasurer of funds in the Fund Complex. Head of
Fund Accounting for Morgan Stanley Investment
Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and
Van Kampen Advisors Inc.
____________________
Each trustee/director who is not an affiliated person (as defined in
the 1940 Act) of Van Kampen Investments or the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to funds in the Fund Complex. Each fund in the Fund
Complex (except Van Kampen Exchange Fund) provides a deferred compensation
plan to its Non-Affiliated Trustees that allows trustees/directors to defer
receipt of their compensation until retirement and earn a return on such
deferred amounts. Amounts deferred are retained by the Fund and earn a rate of
return determined by reference to the return on the common shares of the Fund
or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, the Fund may
invest in securities of those funds selected by the Non-Affiliated Trustees in
order to match the deferred compensation obligation. The deferred compensation
plan is not funded and obligations thereunder represent general unsecured
claims against the general assets of the Fund. Deferring compensation has the
same economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex (except Van Kampen
Exchange Fund) provides a retirement plan to its Non-Affiliated Trustees that
provides Non-Affiliated Trustees with compensation after retirement, provided
that certain eligibility requirements are met. Under the retirement plan, a
Non-Affiliated Trustee who is receiving compensation from the Fund prior to
such Non-Affiliated Trustee's retirement, has at least 10 years of service
(including years of service prior to adoption of the retirement plan) and
retires at or after attaining the age of 60, is eligible to receive a
retirement benefit per year for each of the ten years following such
retirement from the Fund. Non-Affiliated Trustees retiring prior to the age of
60 or with fewer than 10 years but more than 5 years of service may receive
reduced retirement benefits from the Fund.
Additional information regarding compensation and benefits for
trustees is set forth below for the periods described in the notes
accompanying the table.
Compensation Table
------------------
Fund Complex
----------------------------------------------------------
Aggregate Pension Aggregate Total
Aggregate Pension Estimated Maximum Compensation
Aggregate or Retirement Annual Benefits before
Compensation Benefits Accrued from the Fund Deferral from
from the Fund as Part of Complex Upon Fund Complex
Name (1) (2) Expenses (3) Retirement (4) (5)
------------------------ ---------------- ------------------- --------------------- ----------------
David C. Arch (2) $ 147,500 $ 138,750
J. Miles Branagan $ 60,000 107,000
Jerry D. Choate $ 130,000 107,000
Rod Dammeyer (2) 147,500 138,750
Linda Hutton Heagy 147,500 107,000
R. Craig Kennedy 147,500 107,000
Howard J. Kerr (2) 147,500 138,750
Jack E. Nelson 112,500 107,000
Hugo F. Sonnenschein (2) 147,500 138,750
Wayne W. Whalen 147,500 245,750
Suzanne H. Woolsey 147,500 107,000
__________________
(1) Trustees not eligible for compensation are not included in the
Compensation Table.
(2) The amounts shown in this column represent the aggregate compensation
before deferral with respect to the Fund's fiscal year ended July 31,
2003. Messrs. Arch, Dammeyer, Kerr and Sonnenschein were appointed to
the Board of the Fund on July 23, 2003, and thus have no compensation
from the Fund to report during the fiscal year ended July 31, 2003. The
following Trustees deferred compensation from the Fund during the
fiscal year ended June 30, 2003: Mr. Branagan, $ ; Mr. Choate $ ; Ms.
Heagy, $ ; Mr. Nelson, $ ; and Mr. Whalen, $ . The cumulative deferred
compensation (including interest) accrued with respect to each trustee,
including former trustees, from the Fund as of the Fund's fiscal year
ended July 31, 2003, is as follows: Mr. Branagan, $ ; Mr. Choate, $ ;
Ms. Heagy, $ , Mr. Nelson, $ ; Mr. Kennedy, $ ; Mr. Miller, $ ; Mr.
Rees $ ; Mr. Robinson, $ ; Mr. Rooney, $ ; Mr. Sisto, $ ; and Mr.
Whalen, $ . The deferred compensation plan is described above the
Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of
the trustees for the funds' respective fiscal years ended in 2002. The
retirement plan is described above the Compensation Table. In 2003
efforts have been under way to combine the trustees/directors/managing
general partners of the boards of the various Van Kampen-related funds
in the Fund Complex. Prior to 2003, only Messrs. Whalen and Powers
served as trustees/directors/managing general partners of all of the
various Van Kampen-related funds in the Fund Complex; and during 2003,
other trustees/directors/managing general partners are being elected or
appointed, as appropriate, to most of the respective boards of the
underlying Van Kampen-related funds. The amounts in this column
represent amounts for each trustee based on funds he/she oversaw for
the period mentioned above; and thus it is anticipated that the amounts
will increase in future compensation tables based on the increased
number of funds overseen by such trustees going forward.
(4) For each trustee, this is the sum of the estimated maximum annual
benefits payable by the funds in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The retirement plan is described above the Compensation
Table.
(5) The amounts shown in this column represent the aggregate compensation
paid by all of the funds in the Fund Complex as of December 31, 2002,
before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends,
the amounts shown in this column are presented on a calendar year
basis. In 2003, efforts have been under way to combine the
trustees/directors/managing general partners of the boards of the
various Van Kampen-related funds in the Fund Complex. Prior to 2003,
only Messrs. Whalen and Powers served as trustees/directors/managing
general partners of all of the various Van Kampen-related funds in the
Fund Complex; and during 2003, other trustees/directors/managing
general partners are being elected or appointed, as appropriate, to
most of the respective boards of the underlying Van Kampen-related
funds. The amounts in this column represent amounts for each trustee
based on funds he/she oversaw for the period mentioned above; and thus
it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
The Board of Trustees has three standing committees (an audit
committee, a brokerage and services committee and a governance committee).
Each committee is comprised of trustees who are not "interested persons" of
the Fund (as defined by the 1940 Act) (referred to herein as "Independent
Trustees" or "non-interested trustees").
The Board's audit committee consists of J. Miles Branagan, Jerry D.
Choate and R Craig Kennedy. The audit committee makes recommendations to the
Board of Trustees concerning the selection of the Fund's independent public
auditors, reviews with such auditors the scope and results of the Fund's
annual audit and considers any comments which the auditors may have regarding
the Fund's financial statements, books of account or internal controls.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder
servicing arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Rod
Dammeyer, Howard J. Kerr and Jack E. Nelson. The governance committee
identifies individuals qualified to serve on the Board that are independent as
defined in the 1940 Act and on committees of the Board, advises the Board with
respect to Board composition, procedures and committees, develops and
recommends to the Board a set of corporate governance principles applicable to
the Fund, monitors corporate governance matters and makes recommendations to
the Board, and acts as the administrative committee with respect to Board
policies and procedures, committee policies and procedures and codes of
ethics.
During the Fund's last fiscal year, the audit committee of the Board
held 5 meetings and the brokerage and services committee of the Board held 5
meetings. The governance committee was recently organized and thus, did not
have any meetings during the Fund's last fiscal year.
The non-interested trustees of the Fund select and nominate any other
non-interested trustees of the Fund. While the non-interested trustees of the
Fund expect to be able to continue to identify from their own resources an
ample number of qualified candidates for the Board of Trustees as they deem
appropriate, they will review nominations from shareholders to fill any
vacancies. Nominations from shareholders should be in writing and addressed to
the non-interested trustees at the Fund's office.
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2002, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each trustee of the Fund beneficially owned equity securities of the Fund and
of all of the funds in the Fund Complex overseen by the trustee in the dollar
range amounts specified below.
2002 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
-----------------------------------------------
Independent Trustees
--------------------
Arch Branagan Choate Dammeyer Heagy Kennedy Kerr Nelson Sonnenschein Woolsey
---- -------- ------ -------- ----- ------- ---- ------ ------------ -------
Dollar Range of equity
securities in the Fund
Aggregate dollar range of
equity securities in all
registered investment
companies overseen by
Trustee in the
Fund Complex
Interested Trustees
-------------------
Trustee
---------------------------------------
Merin Powers Whalen
----- ------ ------
Dollar range of equity securities in the Fund
Aggregate dollar range of equity securities in
all registered investment companies
overseen by Trustee in the Fund Complex
As of December , 2003, the trustees and officers of the Fund as a
group owned less than 1% of the shares of the Fund.
The Fund and the Adviser have adopted a Code of Ethics (the "Code of
Ethics") that sets forth general and specific standards relating to the
securities trading activities of their employees. The Code of Ethics does not
prohibit employees from acquiring securities that may be purchased or held by
the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio
transactions of the Fund or other Van Kampen funds, or that such employees
take unfair advantage of their relationship with the Fund. Among other things,
the Code of Ethics prohibits certain types of transactions absent prior
approval, imposes various trading restrictions (such as time periods during
which personal transactions may or may not be made) and requires quarterly
reporting of securities transactions and other reporting matters. All
reportable securities transactions and other required reports are to be
reviewed by appropriate personnel for compliance with the Code of Ethics.
Additional restrictions apply to portfolio managers, traders, research
analysts and others who may have access to nonpublic information about the
trading activities of the Fund or other Van Kampen funds or who otherwise are
involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
PORTFOLIO TRANSACTIONS
With respect to interests in Senior Loans, the Fund generally will
engage in privately negotiated transactions for purchase or sale in which the
Adviser will negotiate on behalf of the Fund, although a more developed market
may exist for certain Senior Loans. The Fund may be required to pay fees, or
forgo a portion of interest and any fees payable to the Fund, to the Lender
selling Participations or Assignments to the Fund. The Adviser 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.
Although the Fund intends generally to hold interests in Senior Loans until
maturity or prepayment of the Senior Loan, the illiquidity of many Senior
Loans may restrict the ability of the Adviser to locate in a timely manner
persons willing to purchase the Fund's interests in Senior Loans at a fair
price should the Fund desire to sell such interests. See "Investment Objective
and Policies and Special Risk Factors."
With respect to investments other than in Senior Loans, the Adviser
will place orders for portfolio transactions for the Fund with broker-dealer
firms giving consideration to the quality, quantity and nature of each firm's
professional services. These services include execution, clearance procedures,
wire service quotations and statistical and other research information
provided to the Fund and the Adviser, including quotations necessary to
determine the value of the Fund's net assets. Any research benefits so
obtained are available for all clients of the Adviser. Because statistical and
other research information only supplements the research efforts of the
Adviser and still must be analyzed and reviewed by its staff, the receipt of
research information is not expected to reduce materially its expenses. In
selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration the fact that
certain firms have sold common shares of the Fund and that certain firms
provide market, statistical or other research information to the Fund and the
Adviser and may select firms that are affiliated with the Fund, the Adviser or
Van Kampen Investments.
If it is believed to be in the best interest of the Fund, the Adviser
may place portfolio transactions with brokers who provide the types of
services described above, even if the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security,
will have to pay a higher price for the security) than would be the case if
the Adviser did not consider the broker's furnishing of such services. This
will be done, however, only if, in the opinion of the Adviser, the amount of
additional commission or increased cost is reasonable in relation to the value
of the services.
If purchases or sales of financial instruments for the Fund and for
one or more other investment companies or clients advised by the Adviser are
considered at or about the same time, transactions in such financial
instruments will be allocated among the several investment companies and
clients, in a manner deemed equitable by the Adviser, to each such investment
company or client, taking into account their respective sizes and the
aggregate amount of financial instruments to be purchased or sold. In this
regard allocations of Senior Loans by the Adviser will be made taking into
account a variety of factors, including the assets of such clients then
available for investment in Senior Loans, such clients' relative NAV and such
clients' investment objectives, policies and limitations. Although in some
cases this procedure could have a detrimental effect on the price paid by the
Fund for the financial instrument or the volume of the financial instrument
purchased by the Fund, the ability to participate in volume transactions and
to negotiate lower commissions, fees and expenses possibly could benefit the
Fund.
Although the Adviser will be responsible for the management of the
Fund's portfolio, the policies and practices in this regard must be consistent
with the foregoing and will be subject at all times to review by the Trustees
of the Fund. The Fund anticipates that the annual portfolio turnover rate will
not exceed 100%.
The Trustees have adopted certain policies incorporating the
standards of Rule 17e-1 issued by the SEC under the 1940 Act, which requires
that the commissions paid to affiliates of the Fund, or to affiliates of such
persons, be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar financial instruments during a
comparable period of time. The rule and procedures also contain review
requirements and require the Adviser to furnish reports to the Trustees and to
maintain records in connection with such reviews. After review of all factors
deemed relevant, the Trustees will consider from time to time whether the
advisory fee will be reduced by all or a portion of the brokerage commissions
given to brokers that are affiliated with the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Adviser
The Adviser was incorporated as a Delaware corporation in 1982. The
Adviser is a wholly-owned subsidiary of Van Kampen Investments. Van Kampen
Investments is an indirect wholly-owned subsidiary of Morgan Stanley. The
Adviser's principal office is located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Van Kampen Investments is a diversified asset management company that
administers more than three million retail investor accounts, has extensive
capabilities for managing institutional portfolios, and has more than $[ ]
billion under management or supervision as of June 30, 2003. Van Kampen
Investments has more than 50 open-end and 30 closed-end funds and more than
2,700 unit investment trusts that are distributed by authorized dealers
nationwide.
Morgan Stanley is a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
Investment Advisory Agreement
The investment advisory agreement (the "Advisory Agreement") between
the Adviser and the Fund will continue in effect from year to year, unless
terminated as described below, if approved annually (a) by the Trustees of the
Fund or by a majority of the Fund's common shares and (b) by a majority of the
Trustees who are not parties to the agreement or interested persons of any
such party, in compliance with the requirements of the 1940 Act. The Advisory
Agreement may be terminated without penalty upon 60 days written notice by
either party (in the case of the Fund, such termination may be effected by the
Board of Trustees or by a majority of the common shares) and will
automatically terminate in the event of assignment. The Adviser may in its
sole discretion from time to time waive all or a portion of the advisory fee
or reimburse the Fund for all or a portion of its other expenses.
In approving the Advisory Agreement, the Board of Trustees, including
the non-interested Trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of the
Fund compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving third party research paid for by Fund assets and the propriety of
such an arrangement and evaluated other benefits the Adviser derives from its
relationship with the Fund. The Board of Trustees considered the extent to
which any economies of scale experienced by the Adviser are shared with the
Fund's shareholders. The Board of Trustees considered comparative advisory
fees of the Fund and other investment companies. The Board of Trustees
reviewed reports from third parties about the foregoing factors. The Board of
Trustees discussed the financial strength of the Adviser and its affiliated
companies and the capability of the personnel of the Adviser. The Board of
Trustees reviewed the statutory and regulatory requirements for approval of
advisory agreements. The Board of Trustees, including the non-interested
Trustees, evaluated all of the foregoing and determined, in the exercise of
its business judgment, that approval of the Advisory Agreement was in the best
interests of the Fund and its shareholders.
The Advisory Agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold or sell and the selection of
financial institutions through whom the Fund's portfolio transactions are
executed. For the services provided by the Adviser under the Advisory
Agreement, the Fund pays the Adviser a monthly fee (accrued daily and paid
monthly) computed based upon an annual rate equal to 0.85% applied to the
average daily managed assets of the Fund (which for purposes of determining
such fee, shall mean the average daily gross asset value of the Fund, minus
the sum of accrued liabilities other than the aggregate amount of any
borrowings undertaken by the Fund). Because leverage will increase the amount
of total assets, the Fund will pay a greater amount of advisory fees when
leverage is utilized. Under the Advisory Agreement, the Adviser also furnishes
offices and necessary facilities and equipment, and permits its officers and
employees to serve without compensation as trustees and officers of the Fund
if duly elected to such positions. The Fund pays all other expenses incurred
in the operation of the Fund including, but not limited to, direct charges
relating to the purchase and sale of financial instruments in its portfolio,
interest charges, fees and expenses of legal counsel and independent auditors,
taxes and governmental fees, cost of share certificates, expenses (including
clerical expenses) of issuance, sale or repurchase of any of the Fund's
portfolio holdings, expenses in connection with the Fund's dividend
reinvestments, membership fees in trade associations, expenses of registering
and qualifying the common shares of the Fund for sale under federal and state
securities laws, expenses of printing and distributing reports, notices and
proxy materials to existing holders of common shares, expenses of filing
reports and other documents filed with governmental agencies, expenses of
annual and special meetings of holders of common shares, fees and
disbursements of the transfer agents, custodians and sub-custodians, expenses
of disbursing dividends and distributions, fees, expenses and out-of-pocket
costs of Trustees of the Fund who are not affiliated with the Adviser,
insurance premiums, indemnification and other expenses not expressly provided
for in the Advisory Agreement or the Administration Agreement and any
extraordinary expenses of a nonrecurring nature. The Adviser may in its sole
discretion from time to time waive all or a portion of the advisory fee or
reimburse the Fund for all or a portion of its other expenses.
The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
Advisory Agreement.
The Trustees are responsible for the overall management and
supervision of the Fund's affairs. The Adviser's activities are subject to the
review and supervision of the Trustees to whom the Adviser renders periodic
reports of the Fund's investment activities.
The Administrator
The administrator for the Fund is Van Kampen Investments.
Other Agreements
Legal Services Agreement. The Fund has entered into a Legal Services
Agreements pursuant to which Van Kampen Investments provides legal services,
including without limitation: accurate maintenance of the Funds' minute books
and records, preparation and oversight of the Funds' regulatory reports, and
other information provided to shareholders, as well as responding to
day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurances and other regular wages
for the employment of personnel, as well as overhead and the expenses related
to the office space and the equipment necessary to render the legal services.
Certain other funds advised by the Adviser are distributed by Distributors
Inc., an indirect affiliate of the Fund, and also receive legal services from
Van Kampen Investments. Of the total costs for legal services provided to
funds distributed by Distributors Inc., one half of such costs are allocated
equally to each fund and the remaining one half of such costs are allocated to
specific funds based on monthly time records.
REPURCHASE OF SHARES
Shares of closed-end management investment companies frequently trade
at a discount to their NAVs but in some cases trade at a premium. In
recognition of the possibility that the Fund's common shares might similarly
trade at a discount, the Fund's Board of Trustees has determined that from
time to time it may be in the interest of common shareholders for the Fund to
take action to attempt to reduce or eliminate a market value discount from
NAV. The Board of Trustees, in consultation with the Adviser, will review on a
quarterly basis the possibility of open market repurchases and/or tender
offers for the common shares and will consider such factors as the market
price of the common shares, the NAV of the common shares, the liquidity of the
assets of the Fund, whether such transactions would impair the Fund's status
as a regulated investment company or result in a failure to comply with
applicable asset coverage requirements, general economic conditions and such
other events or conditions which may have a material effect on the Fund's
ability to consummate such transactions. There are no assurances that the
Board of Trustees will, in fact, decide to undertake either of these actions
or if undertaken, that such actions will result in the Fund's common shares
trading at a price which is equal to or approximates their NAV. In addition,
the Board of Trustees will not necessarily announce when it has given
consideration to these matters. common shares will not be repurchased unless
after such repurchase the Fund would continue to satisfy the 1940 Act asset
coverage requirements with respect to the Preferred Shares or any borrowing
and any asset coverage requirements which may be imposed by any rating service
as a condition of its rating of the Preferred Shares or by any lender with
respect to any borrowing.
Even if a tender offer has been made, the Trustees' announced policy,
which may be changed by the Trustees, is that the Fund cannot accept tenders
if (1) in the reasonable judgment of the Trustees, there is not sufficient
liquidity of the assets of the Fund; (2) such transactions, if consummated,
would (a) 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 taxable
income to be taxed at the Fund level, as more fully described in "Taxation")
or (b) result in a failure to comply with applicable asset coverage
requirements; or (3) there is, in the Board of Trustees' reasonable judgment,
any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) suspension of or limitation on prices for trading securities
generally on any United States national securities exchange or in the
over-the-counter market, (c) declaration of a banking moratorium by federal or
state authorities or any suspension of payment by banks in the United States
or New York State, (d) limitation affecting the Fund or the issuers of its
portfolio securities imposed by federal or state authorities on the extension
of credit by lending institutions, (e) commencement of war, armed hostilities
or other international or national calamity directly or indirectly involving
the United States or (f) other event or condition which would have a material
adverse effect on the Fund or the holders of its common shares if common
shares were repurchased. The Trustees may modify these conditions in light of
experience.
Any tender offer made by the Fund for its common shares will be at a
price equal to the NAV of the common shares determined at the close of
business on the day the offer ends. During the pendency of any tender offer by
the Fund, the Fund will calculate daily the NAV of the common shares and will
establish procedures which will be specified in the tender offer documents, to
enable common shareholders to ascertain readily such NAV. The relative
illiquidity of some of the Fund's portfolio securities could adversely impact
the Fund's ability to calculate NAV in connection with determinations of
pricing for tender offers, if any. Each offer will be made and common
shareholders notified in accordance with the requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, either by publication or
mailing or both. Each offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Tendered common shares that have been accepted and repurchased by the
Fund will be held in treasury and may be retired by the Board of Trustees.
Treasury common shares will be recorded and reported as an offset to
Shareholders' equity and accordingly will reduce the Fund's total assets. If
Treasury common shares are retired, common shares issued and outstanding and
capital in excess of par value will be reduced accordingly.
If the Fund must liquidate portfolio securities in order to
repurchase common shares tendered, the Fund may realize gains and losses.
FUND STRUCTURE
The Fund's fundamental investment policies and restrictions give the
Fund the flexibility to pursue its investment objective through the future
conversion to a fund structure commonly known as a "master-feeder" structure.
If the Fund converts to a master-feeder structure, the existing shareholders
of the Fund would continue to hold their shares of the Fund and the Fund would
become a feeder-fund of the master-fund. The value of a shareholder's shares
would be the same immediately after any conversion as the value immediately
before such conversion. Use of this master-feeder structure potentially would
result in increased assets invested among the collective investment vehicle of
which the Fund would be a part, thus allowing operating expenses to be spread
over a larger asset base, potentially achieving economies of scale. The Fund's
Board of Trustees presently does not intend to effect any conversion of the
Fund to a master-feeder structure. In addition, the Fund's Board of Trustees
presently does not intend to effect any conversion in which (i) the master
fund does not have substantially the same management team, investment
objective, investment policies and investment restrictions as the Fund just
prior to the conversion, (ii) the value of the shareholder's investment in
Fund would not be the same immediately after the conversion as it was
immediately before such conversion or (iii) an increase in the Fund's expense
ratios is expected as a result of the conversion.
PORTFOLIO TURNOVER RATE
The annual rates of the Fund's total portfolio turnover for the
periods ended July 31, 2000, July 31, 2001, July 31 2002 and July 31, 2003,
were [ ]%, [ ]%, [ ]% and [ ]%, respectively. The annual turnover rate of the
Fund is generally expected to be between [50% and 100%], although as part of
its investment policies, the Fund places no restrictions on portfolio turnover
and the Fund may sell any portfolio security without regard to the period of
time it has been held. The annual turnover rate of the Fund also includes
Senior Loans for which the full payment on the Senior Loan has been prepaid by
the borrower. The Adviser believes that prepaid Senior Loans generally
comprise approximately [25% to 75%] of the Fund's total portfolio turnover
each year.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
General
The Certificate provides that the Applicable Rate for each Dividend
Period of shares of each series shall be equal to the rate per annum that the
Auction Agent advises has resulted on the Business Day preceding the first day
of a Dividend Period for each such series (an "Auction Date") from
implementation of the Auction Procedures set forth in the Certificate and
summarized below, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell shares of such
series. Each periodic implementation of the Auction Procedures is referred to
herein as an "Auction." The following summary is qualified by reference to the
Auction Procedures set forth in the Certificate.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
[Deuthsce Bank Trust Company Americas]), which provides, among other things,
that the Auction Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for shares of each series of Preferred Shares
so long as the Applicable Rate for shares of such series is to be based on the
results of the 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 provides for the participation of those
Broker-Dealers in Auctions for shares of a series of Preferred 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 shares of
each series of Preferred Shares. One certificate for all of the shares of each
series of Preferred 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 Preferred Shares contained in the Certificate. The
Fund will also issue stop-transfer instructions to the transfer agent for
shares of each series of Preferred 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 Preferred Shares-Voting Rights"
in the Prospectus, Cede & Co. will be the Holder of all shares of each series
of Preferred 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 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 Agent
Member in shares of each series of Preferred Shares, whether for its own
account or as a nominee for another person.
Orders by Existing Holders and Potential Holders
On or prior to the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares:
(a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of Outstanding shares, if
any, of such series that such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for such shares of such
series for the next succeeding Rate Period of such shares;
(ii) "Bid" -- indicating the number of Outstanding shares, if any, of
such series that such Beneficial Owner offers to sell if the
Applicable Rate for such shares of such series for the next
succeeding Rate Period shall be less than the rate per annum
specified by such Beneficial Owner in such Bid; and/or
(iii) "Sell Order" -- indicating the number of Outstanding shares, if
any, of such that such Beneficial Owner offers to sell without regard
to the Applicable Rate for such shares of such series for the next
succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine whether such
customers desire to submit Bids, in which they will indicate the
number of shares, if any, of such series that they offer to purchase
if the Applicable Rate for shares of such series for the next
succeeding Rate Period is not less than the rate per annum specified
in such Bids.
The communication to a Broker-Dealer of the foregoing information is
herein referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer
is herein referred to as a "Bidder" and collectively as "Bidders." The
submission by a Broker-Dealer of an Order to the Auction Agent shall likewise
be referred to herein as an "Order" and collectively as "Orders," and an
Existing Holder or Potential Holder who places an Order with the Auction Agent
or on whose behalf an Order is placed with the Auction Agent shall likewise be
referred to herein as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then held
by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate
higher than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate
on the Auction Date thereof will be treated as having submitted a Sell Order
to its Broker-Dealer. A Beneficial Owner that fails to submit to its
Broker-Dealer prior to the Submission Deadline for shares of such series an
Order or Orders covering all the Outstanding shares of such series held by
such Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of Outstanding shares of such series held by
such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit
to its Broker-Dealer prior to the Submission Deadline for shares of a series
of Preferred Shares an Order or Orders covering all of the Outstanding shares
of such series held by such Beneficial Owner for an Auction relating to a
Special Rate Period consisting of more than 7 Rate Period Days, such
Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer covering the number of Outstanding shares of such series held by
such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of such series of Preferred Shares subject thereto at a price per share
equal to $25,000. A Beneficial Owner of shares of a series of Preferred Shares
that offers to become the Beneficial Owner of additional shares of such series
of Preferred Shares is, for purposes of such offer, a Potential Beneficial
Owner.
A Potential Beneficial Owner of shares of a series of Preferred
Shares may submit to its Broker-Dealer Bids in which it offers to purchase
shares of a series if the Applicable Rate for the next Rate Period is not less
than the rate specified in such Bid. A Bid placed by a Potential Beneficial
Owner specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of a series of Preferred
Shares specified in such Bid if the rate determined in the Auction is equal to
or greater than the rate specified in such Bid.
As described more fully below under "--Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers 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 of such series
of Preferred Shares subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares of such series
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 a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any shares
of a series of Preferred Shares held by it or its customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of shares of a series of
Preferred Shares held by it, as described in the second preceding paragraph.
For information concerning the priority given to different types of Orders
placed by Existing Holders, see "--Submission of Orders by Broker-Dealers to
Auction Agent" below.
Neither the Fund nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Fund may submit
Orders in an Auction, but only if such Orders are not for its own account.
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 Preferred Share that is fewer than the number of shares of such series
specified in its Order. See "--Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares" below. 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. Each purchase or sale shall be made for settlement on
the Business Day next succeeding the Auction Date at a price per share equal
to $25,000. See "--Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum
Rate will (i) be treated as a Sell Order if submitted by a Beneficial Owner or
an Existing Holder and (ii) not be accepted if submitted by a Potential
Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures
establish the Maximum Rate as a maximum rate per annum that can result from an
Auction. See "--Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate" and "--Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares" below.
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 a series of Preferred 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 Preferred Shares" in the Prospectus and notices from the Fund. The Auction
Agent is not required to accept any such notice for an Auction unless it is
received by the Auction Agent by 3:00 p.m., New York City time, on the
Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 60 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into
an agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. The Fund may remove the
Auction Agent, provided that prior to such removal, the Fund shall have
entered into such an agreement with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for shares of a series of
Preferred 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 shares of such series of Preferred Shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of a series of Preferred 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 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.
Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:00 P.M., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (i.e., the
Submission Deadline), each Broker-Dealer will submit to the Auction Agent in
writing all Orders obtained by it for the Auction to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as
the Existing Holder or Potential Holder, as the case may be, in respect of the
shares of a series of Preferred Shares subject to such Orders. Any Order
submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to the
next highest one-thousandth (0.001) of 1%.
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
Preferred Shares of a series subject to an Auction held by such Existing
Holder, such Orders will be considered valid in the following order of
priority:
(a) all Hold Orders for shares of such series will 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
held by such Existing Holder;
(b) (i) any Bid for shares of such series will be considered valid up
to and including the excess of the number of shares 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 (a) above;
(ii) subject to subclause (i), 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
will 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 will be reduced pro rata to cover the number of
shares of such series equal to such excess;
(iii) subject to subclauses (i) and (ii), 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
(iv) 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 (b) will
be treated as the subject of a Bid for shares of such series by or on
behalf of a Potential Holder at the rate specified therein; and
(c) all Sell Orders for shares of such series will 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 (a) above and valid Bids referred to in clause (b) above.
If more than one Bid of a Potential Holder for shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted will be a separate Bid with the rate
and number of shares of such series therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares, the Auction Agent will assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers (each
such Hold Order, Bid or Sell Order as submitted or deemed submitted by a
Broker-Dealer being herein referred to 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 will determine 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 herein referred to as the "Available
Preferred Shares") and whether Sufficient Clearing Bids have been made in the
Auction. "Sufficient Clearing Bids" will have been made if the number of
Outstanding shares of such series that are the subject of Submitted Bids of
Potential Holders specifying rates not higher than the Maximum Rate for all
Dividend Periods equals or exceeds the number of outstanding shares of such
series that are the subject of Submitted Sell Orders (including the number of
shares of such series subject to Bids of Existing Holders specifying rates
higher than the Maximum Rate).
If Sufficient Clearing Bids for shares of a series of Preferred
Shares have been made, the Auction Agent will determine the lowest rate
specified in such Submitted Bids (the "Winning Bid Rate" for shares of such
series) which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate
number of Outstanding shares of such series which, when added to the number of
outstanding shares of such series to be purchased by Potential Holders, based
on the rates in their Submitted Bids, would equal not less than the Available
Preferred Shares. In such event, the Winning Bid Rate will be the Applicable
Rate for the next Rate Period for all shares of such series.
If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of a series of Preferred Shares are subject to
Submitted Hold Orders), the Applicable Rate for the next Dividend Period for
all shares of such series will be equal to the Maximum Rate. If Sufficient
Clearing Bids have not been made, Beneficial Owners that have submitted or
that are deemed to have submitted Sell Orders may not be able to sell in the
Auction all shares of such series subject to such Sell Orders but will
continue to own shares of such series for the next Dividend Period.
"--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.
If all of the outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, the Applicable Rate for all shares of such
series for the next succeeding Dividend Period shall be the All Hold Rate.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares
Based on the determinations made under "--Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with
the result that Existing Holders and Potential Holders of shares of a series
of Preferred Shares will sell, continue to hold and/or purchase such shares as
set forth below. Existing Holders that submitted or were deemed to have
submitted Hold Orders (or on whose behalf Hold Orders were submitted or deemed
to have been submitted) will continue to hold the shares of such series
subject to such Hold Orders.
If Sufficient Clearing Bids for shares of a series of Preferred
Shares have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher
than the Winning Bid Rate will sell the outstanding shares of
such series subject to such Submitted Sell Order or Submitted
Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate
will continue to hold the Outstanding shares of such series
subject to such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate lower than the Winning Bid
Rate will purchase the number of outstanding shares of such
series subject to such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate
will continue to hold the shares of such series subject to such
Submitted Bid, unless the number of Outstanding Preferred Shares
of such series subject to all such Submitted Bids is greater
than the number of Preferred Shares ("remaining shares") in
excess of the Available Preferred Shares over the number of
Preferred Shares accounted for in clauses (b) and (c) above, in
which event each Existing Holder with such a Submitted Bid will
continue to hold Preferred Shares of such series subject to such
Submitted Bid determined on a pro rata basis based on the number
of Outstanding Preferred Shares subject to all such Submitted
Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to the Winning Bid Rate
for shares of such series will purchase any shares of Available
Preferred Shares not accounted for in clauses (b) through (d)
above on a pro rata basis based on the Outstanding Preferred
Shares subject to all such Submitted Bids.
If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (unless this results because all Outstanding shares
of such series are subject to Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the
Maximum Rate for shares of such series will continue to hold the
Preferred Shares subject to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to or lower than the
Maximum Rate for shares of such series will purchase the number
of Preferred Shares subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate for
shares of such series or a Submitted Sell Order will sell a
number of shares of such series subject to such Submitted Bid or
Submitted Sell Order determined on a pro rata basis based on the
number of Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d)
or (e) of the second preceding paragraph or clause (c) of the next preceding
paragraph, 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 Preferred Shares of a series, the Auction Agent will, in such manner
as, in its sole discretion, it will determine, round up or down to the nearest
whole share the number of Preferred Shares of such series being sold or
purchased on such Auction Date so that the number of shares of such series
sold or purchased by each Existing Holder or Potential Holder will be whole
shares of such series. If as a result of the pro rata allocation described in
clause (e) of the second preceding paragraph, any Potential Holder would be
entitled or required to purchase less than a whole share of a series of
Preferred Shares, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, allocate shares of such series for purchase
among Potential Holders so that only whole shares of such series are purchased
by any such Potential Holder, even if such allocation results in one or more
of such Potential Holders not purchasing shares of such series.
Notification of Results; Settlement
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an
Order for the account of a customer will then be required to advise such
customer of the Applicable Rate for the next Dividend Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, will be required to confirm purchases and
sales with each customer purchasing or selling shares of such series as a
result of the Auction and will be required to advise each customer purchasing
or selling Preferred Shares as a result of the Auction to give instructions to
its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor, as appropriate. The Auction Agent will be required to record each
transfer of shares of a series of Preferred Shares on the registry of Existing
Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited and shares delivered as necessary to effect the purchases and sales
of shares of a series of Preferred Shares as determined in the Auction.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment against delivery by their Agent
Members in same-day funds.
If any Existing Holder selling shares of a series of Preferred Shares
in an Auction fails to deliver such shares, the Broker-Dealer of any person
that was to have purchased such shares in such Auction may deliver to such
person a number of whole shares of such series that is less than the number of
shares of such series that otherwise was to be purchased by such person. In
such event, the number of shares of such series to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares of
such series shall constitute good delivery.
DESCRIPTION OF PREFERRED SHARES
The descriptions of the Preferred Shares contained in this SAI do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration of Trust and the Certificate. A form of the
Certificate is attached as Appendix B to this SAI. A copy of the Declaration
of Trust is filed as an exhibit to the registration statement of which the
Prospectus and this SAI are a part and may be inspected, and a copy thereof
may be obtained, as described under "Further Information" in the Prospectus.
General
The Preferred Shares will rank on a parity with each other and with
shares of any other series of Preferred Shares as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Fund.
Dividends and Dividend Periods
General. Holders of Preferred 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 described under "--Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends so declared
and payable shall be paid to the extent permitted under the Code, and to the
extent available and in preference to and priority over any dividend declared
and payable on the common shares.
On the Business Day next preceding each Dividend Payment Date, the
Fund is required to deposit with the Paying Agent sufficient funds for the
payment of declared dividends. The Fund does not intend to establish any
reserves for the payment of dividends.
Each dividend will be paid by the Paying Agent to the Holder, 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.
Holders will not be entitled to any dividends, whether payable in
cash, property or shares, in excess of full cumulative dividends except as
described under "--Determination of Dividend Rate." No interest will be
payable in respect of any dividend payment or payments which may be in
arrears. See "--Default Period."
The amount of dividends per outstanding share payable (if declared)
on each Dividend Payment Date of each Dividend Period (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) such share was outstanding and for which the Applicable Rate
or the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the liquidation value, and rounding the
amount so obtained to the nearest cent.
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 for
each Series 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.
Dividend Periods after the initial Dividend Period shall either be
Standard Rate Periods (7 days) or, subject to certain conditions and with
notice to Holders, Special Rate Periods.
A Special Rate Period will not be effective unless Sufficient
Clearing Bids exist at the Auction in respect of such Special Rate Period
(that is, in general, the number of shares subject to Bids by Potential
Beneficial Owners is at least equal to the number of shares subject to Sell
Orders by Existing Holders). If Sufficient Clearing Bids do not exist at any
Auction in respect of a Special Rate Period, the Dividend Period commencing on
the Business Day succeeding such Auction will be the Standard Rate Period, and
the Holders of the shares of the affected series will be required to continue
to hold such shares for such Standard Rate Period.
Dividends will accumulate at the Applicable Rate from the Date of
Original Issue and shall be payable on each Dividend Payment Date thereafter.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date.
The Applicable Rate resulting from an Auction will not be greater
than the Maximum Rate. The Maximum Rate is subject to upward but not downward
adjustment in the discretion of the Board of Trustees after consultation with
the Broker-Dealers, provided that immediately following any such increase the
Fund would be in compliance with the Preferred Shares Basic Maintenance
Amount.
The Maximum Rate for the Preferred Shares will apply automatically
following an Auction for such shares in which Sufficient Clearing Bids have
not been made (other than because all Preferred 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 Preferred Shares for a particular Series are subject (or are
deemed to be subject) to Hold Orders.
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 Preferred Shares; provided, however, that no such
designation is necessary for a Standard Rate Period and that any designation
of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in the timely
manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, the Preferred 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 Rate Period, (iv) if the Fund shall have mailed a notice
of redemption with respect to any shares, as described under "--Redemption,"
the Redemption Price with respect to such shares shall have been deposited
with the Paying Agent, and (v) the Fund has confirmed that, as of the Auction
Date next preceding the first day of such Special Rate Period, it has Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount and has consulted with the Broker-Dealers and
has provided notice and a Preferred Shares Basic Maintenance Certificate to
each Rating Agency which is then rating the Preferred Shares and so requires.
If the Fund proposes to designate any Special Rate Period, not fewer
than 7 Business Days (or two Business Days in the event the duration of the
Special Rate Period is fewer than 8 days) nor more than 30 Business Days prior
to the first day of such Special Rate Period, notice shall be (i) made by
press release and (ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Fund proposes to exercise its option to
designate a succeeding Special Rate Period, specifying the first and last days
thereof and (B) that the Fund will, by 3:00 p.m. New York City time, on the
second Business Day next preceding the first day of such Special Rate Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of
either (x) its determination, subject to certain conditions, to proceed with
such Special Rate Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Rate Period in which latter event the succeeding Dividend Period
shall be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of any proposed Special Rate Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Dividend Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of the
Specific Redemption Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise
its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation 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 Rate 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 Rate Period.
Default Period. A "Default Period" with respect to a particular
Series will commence on any date the Fund fails to deposit irrevocably in Fund
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, a
Dividend Default and a Redemption Default are hereinafter referred to as
"Default").
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 Fund in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a
Default Period applicable to that Series and the Applicable Rate for each
Dividend Period commencing during a Default Period, will be equal to the
Default Rate.
Each subsequent Dividend Period commencing after the beginning of a
Default Period shall be a Standard Rate Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of
a new Dividend Period. No Auction shall be held during a Default Period
applicable to that Series.
No Default Period with respect to a Dividend Default or Redemption
Default shall be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Fund) is deposited irrevocably in trust, in same-day funds with the
Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with
an amount equal to the Default Rate applied to the amount of such non-payment
based on the actual number of days comprising such period divided by 360. The
Default Rate shall be equal to the Reference Rate multiplied by three (3).
Restrictions on Dividends, Redemption and Other Payments
Under the 1940 Act, the Fund may not (i) declare any dividend with
respect to the Preferred Shares if, at the time of such declaration (and after
giving effect thereto), asset coverage with respect to the Fund's senior
securities representing indebtedness, including all outstanding senior
indebtedness of the Fund, including the Fund's obligations under any credit
facility program, 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 stock of a closed-end investment company as
a condition of declaring dividends on its preferred stock) or (ii) declare any
other distribution on the Preferred Shares or purchase or redeem Preferred
Shares if at the time of the declaration (and after giving effect thereto),
asset coverage with respect to the Fund's 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 stock of a closed-end investment company as a
condition of declaring distributions, purchases or redemptions of its capital
stock). A declaration of a dividend or other distribution on or purchase or
redemption of Preferred Shares is prohibited unless there is no event of
default under indebtedness senior to the Preferred Shares, if any, and
immediately after such transaction, the Fund would have Eligible Assets with
an aggregated Discounted Value at least equal to the asset coverage
requirements under indebtedness senior to the Preferred Shares.
For so long as the Preferred Shares are Outstanding, except as
otherwise provided in the Certificate, 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, ranking junior to the
Preferred Shares as to dividends or upon liquidation) with respect to common
shares or any other shares of the Fund ranking junior to the Preferred Shares
as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any common shares or other shares
ranking junior to the Preferred Shares (except by conversion into or exchange
for shares of the Fund ranking junior to the Preferred 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 Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred
Shares Asset Coverage would be achieved, (ii) all cumulative and unpaid
dividends due on or prior to the date of the transaction have been declared
and paid in full with respect to the Fund's preferred shares, including the
Preferred Shares, and (iii) the Fund has redeemed the full number of preferred
shares required to be redeemed by any mandatory provision for redemption
including shares of the Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in the Certificate.
For so long as the Preferred Shares are Outstanding, except as set
forth in the next sentence, the Fund will not declare, pay or set apart for
payment on any series of shares of the Fund ranking, as to the payment of
dividends, on a parity with the Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared and paid on
the Preferred Shares through their most recent Dividend Payment Date. When
dividends are not paid in full upon the Preferred Shares through their most
recent Dividend Payment Date or upon any other series of shares ranking on a
parity as to the payment of dividends with Preferred Shares through their most
recent respective Dividend Payment Dates, all dividends declared upon
Preferred Shares and any other such series of shares ranking on a parity as to
the payment of dividends with Preferred Shares shall be declared pro rata so
that the amount of dividends declared per share on Preferred Shares and such
other series of preferred shares shall in all cases bear to each other the
same ratio that accumulated dividend per share on the Preferred Shares and
such other series of preferred shares bear to each other.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem Preferred Shares having a
Dividend Period of one year or less, in whole or in part, 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. Preferred Shares
having a Dividend Period of more than one year are redeemable at the option of
the Fund, in whole or in part, prior to the end of the relevant Dividend
Period, subject to any Specific Redemption Provisions, which may include the
payment of redemption premiums to the extent required under any applicable
Specific Redemption Provisions. The Fund 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 Preferred
Shares by reason of the redemption of Preferred Shares on such date fixed for
the redemption and (ii) the Fund would have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount.
Mandatory Redemption. If the Fund fails as of any Valuation Date to
meet the Preferred Shares Basic Maintenance Amount Test or, as of the last
Business Day of any month, the 1940 Act Preferred Shares Asset Coverage, and
such failure is not cured within five Business Days following the relevant
Valuation Date in the case of a failure to meet the Preferred Shares Basic
Maintenance Amount Test or the last Business Day of the following month in the
case of a failure to meet the 1940 Act Preferred Shares Asset Coverage (each
an "Asset Coverage Cure Date"), the Preferred Shares will be subject to
mandatory redemption out of funds legally available therefor. The number of
Preferred Shares to be redeemed in such circumstances will be equal to the
lesser of (A) the minimum number of Preferred 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 meeting the
Preferred Shares Basic Maintenance Amount Test, and the 1940 Act Preferred
Shares Asset Coverage, as the case may be, in either case as of the relevant
Asset Coverage Cure Date (provided that, if there is no such minimum number of
shares the redemption of which would have such result, all Preferred Shares
then Outstanding will be redeemed), and (B) the maximum number of Preferred
Shares that can be redeemed out of funds expected to be available therefor on
the Mandatory Redemption Date at the Mandatory Redemption Price.
Preferred shares may be subject to mandatory redemption in accordance
with the foregoing redemption provisions notwithstanding the terms of any
Specific Redemption Provision.
The Fund shall effect any required mandatory redemption pursuant to:
(A) the Preferred Shares Basic Maintenance Amount Test, no later than 30 days
after the Fund last met the Preferred Shares Basic Maintenance Amount Test or
(B) the 1940 Act Preferred Shares Asset Coverage, no later than 30 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, all of the required number of
Preferred 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 Preferred Shares on the earliest
practicable date on which the Fund will have such funds available, upon notice
to record owners of Preferred Shares and the Paying Agent. The Fund's ability
to make a mandatory redemption may be limited by the provisions of the 1940
Act or Massachusetts law.
The redemption price per share 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) any
redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the
Fund will file a notice of its intention to redeem with the 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 Auction Agent will use its reasonable
efforts to provide telephonic notice to each Holder of Preferred Shares called
for redemption 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 telephonic 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 sent by the Paying Agent to each
Holder of Preferred 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 Preferred 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 Preferred 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.
If fewer than all of the shares of a series of Preferred 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.
Preferred 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 Holder of all of the Preferred Shares, and the Securities
Depository will determine the number of shares to be redeemed from the account
of the Agent Member of each beneficial owner. Each Agent Member will determine
the number of shares to be redeemed from the account of each beneficial owner
for which it acts as agent. An Agent Member may select for redemption shares
from the accounts of some beneficial owners without selecting for redemption
any shares from the accounts of other beneficial owners. Notwithstanding the
foregoing, if neither the Securities Depository nor its nominee is 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, all rights of the owners of the
shares so called for redemption will cease, except the right of the owners of
such shares to receive the redemption price, but without interest, and such
shares will no longer be deemed to be outstanding for any purpose. 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 Preferred Shares called for
redemption on such date and (ii) such other amounts, if any, to which Holders
of Preferred 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 by the Paying Agent to the Fund upon its request; provided, however, the
Paying Agent shall notify all owners of the shares whose funds are unclaimed
by placing a notice in the Wall Street Journal concerning the availability of
such funds for three consecutive weeks. Thereupon the Paying Agent will be
relieved of all responsibility to the owners of such shares and such owners
may look only to the Fund for payment.
So long as any Preferred 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 person for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
Preferred Shares may be redeemed at the option of the Fund unless all
dividends in arrears on the outstanding Preferred Shares, and all capital
stock of the Fund ranking on a parity with the Preferred 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 Preferred Shares and all shares
ranking in a parity with the Preferred Shares must receive proportionate
amounts.
Except for the provisions described above, nothing contained in the
Certificate limits any legal right of the Fund to purchase or otherwise
acquire any Preferred 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 Preferred Shares
for which Notice of Redemption has been given and the Fund is in compliance
with the 1940 Act Preferred Shares Asset Coverage and has Eligible Assets with
an aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount after giving effect to such purchase or acquisition on the
date thereof. Any shares which are purchased, redeemed or otherwise acquired
by the Fund shall have no voting rights. If fewer than all the outstanding
Preferred 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 Preferred Shares: (1) the Fund must maintain
assets in its portfolio that have a value, discounted in accordance with the
Rating Agency Guidelines, at least equal to the aggregate liquidation
preference of the Preferred Shares plus specified liabilities, payment
obligations and other amounts; and (ii) the Fund must maintain asset coverage
for Preferred Shares of at least 200%.
Preferred Shares Basic Maintenance Amount. The Fund will be required
under Rating Agency Guidelines to maintain, as of each Business Day on which
the Preferred Shares are outstanding, assets having in the aggregate a
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount established by the rating agency or agencies then rating the Preferred
Shares. If the Fund fails to meet such requirement on any Valuation Date and
such failure is not cured by the Asset Coverage Cure Date, the Fund will be
required under certain circumstances to redeem certain of the Preferred
Shares.
"Preferred Shares Basic Maintenance Amount" as of any Valuation Date
means the dollar amount equal to the sum of (i)(A) the product of the number
of Outstanding shares of each Series of Preferred Shares on such date by the
Liquidation Preference (and redemption premium, if any) per share of such
Series; (B) the aggregate amount of dividends that will have accumulated at
the respective Applicable Rates (whether or not earned or declared) to (but
not including) the first respective Dividend Payment Dates for each Series of
Preferred Shares outstanding that follows such Valuation Date; (C) the
aggregate amount of dividends that would accumulate on Outstanding Preferred
Shares from such first Dividend Payment Dates therefor referenced in (B) of
this paragraph through the 45th day after such Valuation Date at the
respective Applicable Rates referenced in (B) of this paragraph; (D) the
amount of anticipated non-interest expenses of the Trust for the 90 days
subsequent to such Valuation Date; (E) the amount of the current outstanding
balances of any indebtedness or obligations of the Trust senior in right of
payment to the Preferred Shares plus interest actually accrued together with
30 days additional interest on the current outstanding balances calculated at
the current rate; and (F) any other current liabilities payable during the 30
days subsequent to such Valuation Date, including, without limitation,
indebtedness due within one year and any redemption premium due with respect
to the Preferred Shares for which a Notice of Redemption has been sent, as of
such Valuation Date, to the extent not reflected in any of (i)(A) through
(i)(E) (including, without limitation, any liabilities incurred for the
purpose of clearing securities transactions) less (ii) the sum of any cash
plus the value of any of the Trust's assets irrevocably deposited by the Trust
for the payment of any of (i)(A) through (i)(F) ("value," for purposes of this
clause (ii), means the Discounted Value of the security, except that if the
security matures prior to the relevant redemption payment date and is either
fully guaranteed by the U.S. Government or is rated P2 by Moody's and A2 by
Fitch, it will be valued at its face value).
The Discount Factors, the criteria used to value the Eligible Assets
in the Fund's portfolio for purposes of determining compliance with the
Preferred Shares Basic Maintenance Amount, and guidelines for determining the
market value of the Fund's portfolio holdings for purposes of determining
compliance with the Preferred Shares Basic Maintenance Amount, are based on
the criteria established in connection with the rating the Preferred Shares.
The Moody's Discount Factor and the Fitch Discount Factor relating to any
asset of the Fund, the Preferred Shares Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Moody's Discount Factor and
Fitch Discount Factor of the Fund's portfolio and certain definitions and
methods of calculation relating thereto may be changed from time to time by
the Fund, without shareholder approval, but only in event that the Fund
receives written confirmation from each Rating Agency which is then rating the
Preferred Shares and which so requires that any such changes would not impair
the "Aaa" credit rating from Moody's or the "AAA" credit rating from Fitch.
A Rating Agency's Guidelines will apply to the Preferred Shares only
so long as such Rating Agency is rating such shares. The Fund will pay certain
fees to Moody's and Fitch for rating the Preferred Shares. The ratings
assigned to Preferred Shares are not recommendations to buy, sell or hold
Preferred Shares. Such ratings may be subject to revision or withdrawal by the
assigning Rating Agency at any time. Any rating of Preferred Shares should be
evaluated independently of any other rating.
Upon any failure to maintain the required Discounted Value of the
Fund's Eligible Assets, the Fund will seek to alter the composition of its
portfolio to reattain the Preferred Shares Basic Maintenance Amount on or
prior to the Preferred Shares Basic Maintenance Cure Date, thereby incurring
additional transaction costs and possible losses and/or gains on dispositions
of portfolio securities.
1940 Act Preferred Shares Asset Coverage. The Fund is also required
to maintain, as of the last Business Day on any month in which the Preferred
Shares are 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 company as a condition of declaring dividends on its common
shares). If the Fund fails to maintain the 1940 Act Preferred Shares Asset
Coverage as of the last Business Day of any month and such failure is not
cured as of the related Asset Coverage Cure Date, the Fund will be required to
redeem certain Preferred Shares.
Voting
All voting rights (as described in the Prospectus under "Description
of Capital Structure" and "Description of Preferred Shares--Voting Rights")
will not apply with respect to Preferred 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 have been deposited in Fund to effect such
redemption.
The Board of Trustees may without shareholder approval, amend, alter
or repeal any or all of the definitions and related provisions required to be
contained in the Certificate or Declaration of Trust by the Rating Agencies in
the event the Fund receives written confirmation from Moody's or Fitch, or
both, as appropriate, that any such amendment, alteration or repeal would not
impair the ratings then assigned by Moody's or Fitch, as the case may be, to
the Preferred Shares.
Restrictions on Transfer
Preferred 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 Preferred Shares through different Broker-Dealers,
advises the Auction Agent of such transfer.
FEDERAL TAXATION
The following discussion is for general information purposes only.
Prospective investors should consult their tax advisors regarding the specific
federal income tax consequences of purchasing, holding and disposing of
Preferred Shares, as well as the effects of state, local and foreign tax laws
and any proposed tax law changes.
The Fund has elected to be, and intends to qualify each year for
treatment as a regulated investment company ("RIC"), under the Internal
Revenue Code of 1986, as amended (the "Code"), in order to reduce or eliminate
federal income tax. Accordingly, the Fund intends to satisfy certain
requirements relating to sources of its income and diversification of its
assets and to distribute a sufficient amount of its investment company taxable
income so as to effect such qualification.
Dividends and other distributions declared by the Fund in October,
November or December of any year and payable to Shareholders of record on a
date in any of those months will be deemed to have been paid by the Fund and
received by the Shareholders on December 31st of that year if the
distributions are paid by the Fund during January of the following year.
Accordingly, those distributions will be taxed to Shareholders for the year in
which that December 31st falls.
To avoid a non-deductible 4% federal excise tax, the Fund must
distribute to its Shareholders by the end of each calendar year substantially
all of its ordinary income and capital gain net income, plus certain other
amounts. Under current law, provided that the Fund qualifies as a RIC, it
should not be liable for any income, corporate excise or franchise tax in the
Commonwealth of Massachusetts.
Income and gains from investments in securities of foreign issuers
may be subject to foreign income, withholding or other taxes, which may reduce
the Fund's yield and/or total return. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes.
Shareholders will not be able to claim any foreign tax credit or deduction
with respect to these foreign taxes.
Certain investments of the Fund may bear original issue discount or
market discount for tax purposes. The Fund will be required to include in
income each year a portion of such original issue discount and may elect to
include in income each year a portion of such market discount. In addition,
the Fund may be required to include in income each year, for federal income
tax purposes, income with respect to these or other investments even though
the collectibility by the Fund of cash payments corresponding to such income
is doubtful. The Fund may have to dispose of investments that it would
otherwise have continued to hold to provide cash to enable it to satisfy its
distribution requirements with respect to such income.
Some of the Fund's investment practices (including those involving
certain risk management transactions) may be subject to special provisions of
the Code that, among other things, may defer the Fund's deduction of certain
losses and affect the holding period of certain securities it holds and the
character of certain gains or losses it realizes. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections to mitigate the effect of
these rules and prevent its disqualification as a RIC.
The Fund will designate distributions made to holders of common
shares and to holders of Preferred Shares, including the Preferred Shares, in
accordance with each class's proportionate share of each item of Fund income
(such as tax-exempt interest, net capital gains and other taxable income).
On a sale or exchange of Preferred Shares, the holder will recognize
taxable gain or loss equal to the difference between the holder's adjusted
basis for the Preferred Shares and the amount realized. Any such gain or loss
will be treated as capital gain or loss if the Preferred Shares are capital
assets in the holder's hands and as long-term capital gain or loss if the
Preferred Shares are held for more than one year. Any loss realized on the
sale or exchange of Preferred Shares held by a Shareholder for six months or
less will be disallowed to the extent the shareholder has received
exempt-interest dividends with respect to those Preferred Shares, and any such
loss that exceeds the disallowed amount will be treated as a long-term capital
loss to the extent of any distribution of net capital gain with respect to
those Preferred Shares. In addition, a loss realized on a sale of Preferred
Shares will be disallowed to the extent the Shareholder acquires other
Preferred Shares within the period beginning 30 days before, and ending 30
days after, the sale.
Investment in Preferred Shares is not appropriate for non-U.S.
investors or as a retirement plan investment.
APPENDIX A--RATINGS OF INVESTMENTS
Description of Moody's Debt Ratings
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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment
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.
Note--Those bonds in the "Aa", "A," "Baa," "Ba" and "B" categories which
Moody's believes possess the strongest credit attributes within those
categories are designated by the symbols "Aa1," "A1," "Baa1," "Ba1" and "B1."
Short-term Notes--The four ratings of Moody's for short-term notes are "MIG
1/VMIG1," "MIG 2/ VMIG2," "MIG 3/VMIG3" and "MIG 4/VMIG4." "MIG 1/VMIG1"
denotes "best quality . . . strong protection by established cash flows."
"MIG2/VMIG2" denotes "high quality" with ample margins of protection.
"MIG3/VMIG3" notes are of "favorable quality . . . but . . . lacking the
undeniable strength of the preceding grades." "MIG 4/VMIG4" notes are of
"adequate quality . . . [p]rotection commonly regarded as required of an
investment security is present . . . there is specific risk."
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of short-term promissory obligations. Prime-1
repayment ability will often be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earning coverage
of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong ability for repayment of short-term promissory 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. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory 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 may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Debt Ratings
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 and takes into
account the currency in which the obligation is denominated. 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
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 features, in addition to the usual long-term rating.
Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue 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 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. (Such differentiation applies when an
entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.
AAA--An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A--An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt 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
to the obligation.
BB, B, CCC, CC and C--Obligations rated "BB", "B", "CCC", "CC" and "C" is
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest degree of speculation. While
such bonds 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. 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--A subordinated debt or preferred stock obligation rated "C" is currently
highly vulnerable to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A "C" rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D--An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-)--The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r--This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit ratings. Examples include:
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
NR--This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
Description of Standard & Poor's Short-Term Credit Ratings
A-1--A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet 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 the
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 interest payments or principal payments 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.
APPENDIX B - FORM OF CERTIFICATE OF VOTE
PART C--OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Included in Part A:
Report of Independent Accountants (1)
Included in Part B:
Statement of Assets and Liabilities (1)
(2) EXHIBITS
(a) (i) Declaration of Trust, dated April 7, 1998(2)
(ii) Form of Certificate of Vote, dated , attached as
Appendix B to the Statement of Additional Information(1)
(b) By-laws(2)
(d) Form of Specimen Certificate of Common Shares of Beneficial
Interest of Registrant(2) (e) Dividend Reinvestment Plan(3)
(g) Investment Advisory Agreement(3)
(h(1)) Form of Underwriting Agreement(1)
(h(2)) Form of Master Agreement Among Underwriters(1)
(h(3)) Form of Master Dealer Agreement(1)
(j(1)) Custodian Agreement(4)
(j(2)) Registrar, Transfer Agency and Service Agreement(4)
(j(3)) Form of Auction Agency Agreement(1)
(k(1)) Administration Agreement(3) (k(2)) Amended and Restated
Legal Services Agreement(4) (k(3)) Form of Broker-Dealer
Agreement(1)
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(Illinois)(1) (n) Consent of (1) (r) Codes of Ethics of
the Fund and the Adviser(1)
(s) Power of Attorney*
---------------
* Filed herewith
(1) To be filed by amendment
(2) Incorporated by reference to the Registrant's initial Registration
Statement on Form N-2 relating to its common shares of beneficial interest,
filed April 4, 1998 (File No. 333-49829).
(3) Incorporated by reference to pre-effective amendment no. 1 to the
Registrant's Registration Statement on Form N-2 relating to its common shares
of beneficial interest, filed May 12, 1998 (File No. 333-49829).
(4) Incorporated by reference to pre-effective amendment no. 2 to the
Registrant's Registration Statement on Form N-2 relating to its common shares
of beneficial interest, filed June 22, 1998 (File No. 333-49829).
ITEM 25: MARKETING ARRANGEMENTS
See Exhibit h(1) to this Registration Statement.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees $
National Association of Securities Dealers, Inc. fees $
Printing and engraving expenses $
Legal fees $
Transfer Agent Fees $
Accounting expenses $
Blue Sky filing fees and expenses $
Miscellaneous expenses $
Total $
==========
* Estimated expenses to be filed by amendment
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At , 2004
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Shares of Beneficial Interest,
par value $.01 per share to be filed by amendment
Preferred Shares of Beneficial Interest,
par avlue $.01 per share to be filed by amendment
ITEM 29: INDEMNIFICATION
Please see Article 5.3 of the Registrant's Declaration of Trust
(Exhibit (a)(i)) for indemnification of officers and trustees. Registrant's
trustees and officers are also covered by a Joint Directors and
Officers/Errors and Omissions Insurance Policy. Section 5 of the proposed
Investment Advisory Agreement between the Fund and the Adviser provides that
in the absence of willful misfeasance, bad faith or gross negligence in
connection with the obligations or duties under the Investment Advisory
Agreement or on the part of the Adviser, the Adviser shall not be liable to
the Fund or to any shareholder of the Fund for any act or omission in the
course of or connected in any way with rendering services or for any losses
that may be sustained in the purchase, holding or sale of any security. The
Underwriting Agreement provides that the Registrant shall indemnify the
Underwriters (as defined therein) and certain persons related thereto for any
loss or liability arising from any alleged misstatement of a material fact (or
alleged omission to state a material fact) contained in, among other things,
the Registration Statement or Prospectus except to the extent the misstated
fact or omission was made in reliance upon information provided by or on
behalf of the Underwriters.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant and the Adviser and any underwriter 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 such Act 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 trustee, officer, or controlling person or the Registrant and the
underwriters in connection with the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such trustee, officer,
controlling person or underwriter in connection with the Preferred Shares
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 such Act and will be governed by the
final adjudication of such issue.
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
For information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and directors of
the Adviser, reference is made to the Adviser's current Form ADV (File No.
801-18161) filed under the Investment Advisers Act of 1940, as amended,
incorporated herein by reference.
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required by Section 31(a) of
the Investment Company Act of 1940 and the Rules thereunder to be maintained
(i) by Registrant will be maintained at its offices, located at 1221 Avenue of
the Americas New York, New York 10020, at State Street Bank and Trust Company,
1776 Heritage Drive, North Quincy, Massachusetts or at Boston Equiserve L.P.,
Blue Hills Office Park, 150 Royall Street, Canton, Massachusetts 02021; and
(ii) by the Adviser, will be maintained at its offices, located at 1221 Avenue
of the Americas New York, New York 10020.
ITEM 32: MANAGEMENT SERVICES
Not applicable
ITEM 33: UNDERTAKINGS
1. Registrant undertakes to suspend offering of its shares until it amends its
prospectus if (a) 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 (b) 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. If applicable:
(a) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to 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 such 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 f a written or oral request, its Statement of Additional Information.
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 the City of New York, and the State of New York
on the 8th day of December, 2003.
VAN KAMPEN SENIOR INCOME TRUST
By: /s/ A. THOMAS SMITH III
-------------------------------------
A. Thomas Smith III, Secretary
Pursuant to the requirements of the 1933 Act, this Registration
Statement has been signed on December 8, 2003 by the following persons in the
capacities indicated:
SIGNATURE TITLE
Principal Executive Officer:
/s/ RONALD E. ROBISON* Executive Vice President and
-------------------------------- Principal Executive Officer
RONALD E. ROBISON
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial
-------------------------------- Officer and Treasurer
John L. Sullivan
Trustees:
/s/ DAVID C. ARCH* Trustee
--------------------------------
David C. Arch
/s/ J. MILES BRANAGAN* Trustee
--------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
--------------------------------
Jerry D. Choate
/s/ ROD DAMMEYER* Trustee
--------------------------------
Rod Dammeyer
/s/ LINDA HUTTON HEAGY* Trustee
--------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
--------------------------------
R. Craig Kennedy
/s/ HOWARD J KERR* Trustee
--------------------------------
Howard J Kerr
/s/ MITCHELL M. MERIN* Trustee and President
--------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
--------------------------------
Jack E. Nelson
/s/ RICHARD F. POWERS, III* Trustee
--------------------------------
Richard F. Powers, III
/s/ HUGO F. SONNENSCHEIN Trustee
--------------------------------
Hugo F. Sonnenschein
/s/ WAYNE W. WHALEN* Trustee
--------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
--------------------------------
Suzanne H. Woolsey
__________________
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. THOMAS SMITH III December 8, 2003
--------------------------------
A. Thomas Smith III
Attorney-in-Fact
INDEX TO EXHIBITS
-----------------
s. Power of Attorney